House and Senate Democrats and staff celebrated the signing into law of the Inflation Reduction Act of 2022 by President Joe Biden on Tuesday, Aug. 16, 2022. "For a while, people doubted whether (this) was going to happen, but we are in a season of substance," said the president. "Today offers further proof that the future of America is bright and the promise of America is real."
The new law is expected to raise $737 billion over 10 years, including $222 billion from a 15% corporate income tax on companies with $1 billion or more in annual profits. The legislation will invest $437 billion in energy security and climate change, fund a three-year extension of Affordable Care Act (ACA) premium reductions, allow Medicare to negotiate lower prices on some prescription drugs, provide $4 billion in new funding for drought recovery in the Western U.S., and reduce the Federal deficit by more than $300 billion according to analysis by the Joint Committee on Taxation (JCT) and Congressional Budget Office (CBO).
- The Inflation Reduction Act (IRA) of 2022 was signed into law by President Biden on Aug. 16, 2022.
- The legislation is designed to tackle climate change, lower healthcare costs for older people, reduce the deficit, and fight inflation.
- Senate Democrats employed the budget reconciliation process, which only requires a majority to pass the legislation, and sent it to the House where it passed 220 to 207 by party-line vote.
- The bill calls for a $437 billion investment to secure $737 billion in revenue for a net deficit reduction of $300+ billion.
- The legislation's impact on inflation is unclear with proponents predicting a modest long-term reduction and opponents saying the spending could even increase inflation.
Inflation Reduction Uncertainty
The White House said the roughly $740 billion package would address inflation in two key ways: by lowering energy and healthcare costs for families and by helping to bring down the deficit. The degree to which these measures will impact inflation is unclear.
Part of the reason for the lack of clarity is that although the law is designed to reduce the federal deficit—a move that reduces the amount of money in the economy and can serve as an inflation hedge—it also includes billions in spending, a factor that can contribute to higher inflation.
Much of the spending will encourage the production of renewable energy products that can not only reduce energy costs but increase supply, which also reduces costs. Measures to directly lower the prices of certain prescription drugs and cap older people's annual healthcare costs are expected to have a tamping effect on inflation. The bill, however, does not directly address some of the major drivers of inflation, such as the cost of food. In its analysis, the Congressional Budget Office (CBO) says the Inflation Reduction Act will have a "negligible" effect on inflation in 2022 and 2023.
Renewable Energy, the Environment, and Climate Change
The legislation invests nearly $370 billion to combat climate change and offers tax credits and funding for renewable energy, electric vehicles, and energy-efficient home improvements, as well as incentives for companies to cut methane emissions.
Tax credits are available to companies for investments in wind, solar, geothermal, nuclear, and hydrogen energy, biofuels, and technology that captures carbon from fossil fuel power plants. Companies will also receive incentives based on worker pay and the U.S. manufacture of steel, iron, and other components.
Consumers can receive tax credits for 30% of the cost of the adoption and use of solar, heat pumps, and wind energy systems through 2032. The credit phases down after 2032. Tax credits of up to $7,500 for the purchase of an electric vehicle are also available, although stipulations about the origin of minerals in vehicle batteries may make obtaining this credit difficult.
Under the Inflation Reduction Act, Medicare will negotiate prices for 10 expensive drugs beginning in 2026 and ramp up to 20 drugs by 2029. This includes a penalty for drug companies that refuse to negotiate. There is also a ceiling drugs cannot rise above. The bill also caps out-of-pocket drug costs at $2,000 a year for Medicare beneficiaries, starting in 2025. These provisions are expected to save the federal government $265 billion over 10 years.
The legislation caps Medicare patients’ insulin costs at $35 a month. It also includes a three-year extension of enhanced financial assistance for people enrolled in the Affordable Care Act. This extra help otherwise would have expired at the end of this year. The provision expands eligibility to allow more middle-class people to receive premium help and increases the amount of help overall.
Tax Increase for Some Corporations
A new minimum tax on large corporations that report $1 billion or more in annual earnings will help fund measures in the new law including those related to climate and healthcare. The 15% minimum tax on income that big corporations report to their shareholders is expected to raise $222 billion over the next decade. This tax would impact about 150 companies according to the Joint Committee on Taxation (JCT).
One proposed change, a modification of the carried interest rules, was not included in the final bill in order to get the support of Sen. Kyrsten Sinema, D-Ariz. These rules impose a lower tax rate on carried interest, which many believe provides an unfair benefit to the ultra wealthy.
New IRS Funding To Boost Collections
The Internal Revenue Service (IRS) will receive $80 billion to ramp up enforcement and make sure wealthy individuals and corporations pay the taxes they owe.
The legislation limits the amount of losses that businesses can deduct from their taxes. This move is expected to raise $52 billion while preventing wealthy individuals from significantly reducing or even eliminating the taxes they pay.
Another goal of the bill is to fund a task for to develop and IRS “direct e-file tax return system” that could compete with commercial products, including some that have been accused of deceptive practices.
A 1% excise tax on stock buybacks will raise $74 million over 10 years. It has become common practice for companies to reward shareholders and boost stock prices through these buybacks. Critics argue that the money would be better spent on worker pay and innovation.
When Will Inflation Reduction Act Benefits Kick In?
Although some healthcare provisions of the Inflation Reduction Act will be available almost immediately, others will take longer to show an impact. Here's the timeline:
- Extension of existing ACA subsidies for three years
- Climate provisions and residential clean energy credits
- Extension of $7,500 credit for the purchase of certain EVs through Dec. 31, 2032
- $80 billion to the Internal Revenue Service to beef up enforcement
- $35 monthly insulin cap for diabetic Medicare beneficiaries
- Penalty for drug companies that raise the price of a drug more than the increase in inflation
- A new $4,000 tax credit on used EVs
- Credits for companies that invest in clean energy manufacturing and energy security
- The new 15% minimum tax on corporations
- New 1% excise tax on stock buybacks
- The highly touted $2,000 cap on annual drug costs for people enrolled in Medicare’s prescription drug benefit
- Provision allowing Medicare to negotiate the price of 10 high-cost drugs
- Medicare drug price negotiation expands to 20 drugs by 2029
The Bottom Line
While the impact on inflation, as well as the results of arguments about the effectiveness of new and continuing programs, remains to be seen, Democrats can promote the measure as a major achievement of the Biden administration
With midterm elections coming in less than three months, Democrats hope to capitalize on the benefits of the new legislation. Republicans, meanwhile, point to a Penn-Wharton study suggesting an inflation reduction factor that is "indistinguishable from zero."