Inflation Reduction Act: What's in the climate, health, tax bill Congress just passed

Ben Werschkul

·Washington Correspondent  

Fri, August 12, 2022 at 6:46 PM

In this article:

• 

  Kyrsten Sinema

  United States senator from Arizona
• 

  Chuck Schumer

  American politician
• Joe Manchin

  United States Senator from West Virginia

With a vote of 220 to 207, the U.S. House of Representatives passed the Inflation Reduction Act on Friday. The vote marks the last step before President Biden's desk for a bill that will devote hundreds of billions of dollars over the coming decade towards the fight against climate change, reducing the cost of prescription drugs, and cutting the deficit.

The IRA, as it's known, will also alter the U.S. tax code's treatment of big corporations.

Sens. Chuck Schumer (D-NY) and Joe Manchin (D-WV) surprised the world on July 27 when they released their sweeping bill. On Aug. 4, Sen. Kyrsten Sinema (D-AZ) propelled the deal closer to the finish line when she announced she would support the bill after making a few tweaks.

The IRA is a far cry from some early Democratic ambitions but nonetheless marks a giant win for Biden and Democrats just a few months before November's midterm elections.

Just a few weeks ago, the effort appeared all but dead. Now it's on the cusp of becoming law, marking a historic action on climate change that's projected to save trillions in the coming decades.

Here's what the IRA will do:

About $370 billion for climate change and energy efforts

The centerpiece of the bill is a giant allocation toward climate change and energy efforts. Schumer has noted repeatedly that this bill “will be the largest action on climate change ever passed by the Congress.”

If enacted, it will spread money all around the green economy, from $9 billion toward a program to retrofit homes to $20 billion to manufacture more electric vehicles. Automakers like GM (GM), Tesla (TSLA), and Toyota (TM) are expected to benefit from the money as well as the expansion of a $7,500 EV tax credit included in the deal.

US Senator Krysten Sinema, Democrat of Arizona, speaks during a hearing on the nominations of Shalanda Young to be Director and Nani Coloretti to be Deputy Director of the Office of Management and Budget at the US Capitol in Washington, DC, on February 1, 2022. (Photo by BONNIE CASH / POOL / AFP) (Photo by BONNIE CASH/POOL/AFP via Getty Images)

The bill also has provisions that would impact the energy industry more widely, including new rules around federal land sales that may lead to oil drilling and a fund to permanently extend the Black Lung Disability Trust Fund. That will help many former coal miners in Manchin’s home state of West Virginia. In total, the bill has many provisions that even the oil industry has gotten behind.

Late in the process, according to multiple news reports, Sinema secured an additional $5 billion in the bill to combat droughts around the country. The provision will be welcomed in her home state of Arizona and others in the Southwest that are suffering a drought that, by one measure, is the worst in 12 centuries.

Changes to the health care system

The bill also makes significant changes to the health care system. One key provision will allow Medicare to negotiate for prescription drug prices. Current law prohibits Medicare from intervening in the talks between drug makers and health plan sponsors. The new rules would allow the government to weigh in to push down prices and save consumers — and the government — billions.

The IRA also extends subsidies for health insurance costs that began in the 2010 Affordable Care Act for an additional three years. That provision comes with a price tag of about $64 billion. The subsidies had previously been extended in the American Rescue Plan and are currently set to expire this fall.

Over $300 billion for the deficit

A cherry on top for advocates of the package is that the bill will reduce the deficit by over $300 billion over the coming decade through a series of “pay fors."

Manchin made deficit reduction a must-have portion of the bill to earn his support and noted “it is past time for America to begin paying down our $30 trillion national debt” in announcing his support for the deal.

Meanwhile, questions have been raised about the actual inflation-fighting powers of the bill.

Speaker of the House Nancy Pelosi (D-CA) talks to reporters ahead of the vote on the Inflation Reduction Act of 2022 at the U.S. Capitol on August 12. (Chip Somodevilla/Getty Images)

The Penn Wharton Budget Model delivered a blow to the effort by predicting it would slightly increase inflation until 2024 and then decrease it afterwards. In total, the group says it has little confidence it will impact inflation at all in either direction.

The Committee for a Responsible Federal Budget pushed back directly against Penn Wharton while acknowledging that the Inflation Reduction Act wouldn't drastically cut inflation.

"This bill is not going to get us from 9% inflation down to the 2% to 3% [the target range for the Fed],” Marc Goldwein, a senior director at the committee, recently told Yahoo Finance Live. Goldwein, who supports the bill, argued that it aims to "make the Federal Reserve's job just a little bit easier so that they can fight inflation with fiscal policy moving in the same direction."

To pay for it all, in addition to health care savings, the bill makes three changes to the tax code.

There is a new minimum corporate tax that would apply to corporations that have made over $1 billion in book profits in recent years. That idea was initially projected to raise $313 billion, but a change from Sinema around rules about depreciation that manufacturers had loudly complained about is expected to lower the returns by about $40 billion.

The deal also will put aside billions to help the IRS chase down tax dodgers. Experts predict a hefty return on investment: The $80 billion added to the IRS budget is expected to bring in $203 billion in taxes.

Finally, the deal will add a new 1% excise tax on stock buybacks. That provision, another late addition to gain Sinema's support, will reportedly bring in $73 billion to the U.S. Treasury. Removed from the deal was a plan to lessen the so-called “carried interest loophole,” which wealthy money managers can use to pay lower taxes on their capital gains.

Democrats pass a major climate, health and tax bill.

Senate Democrats, after weeks of negotiations to revive the core of their election-year agenda, passed a spending bill which would attempt to tackle climate change, the high cost of prescription drugs and lower the deficit by roughly $300 billion.

The measure devotes more than $300 billion to addressing climate change and energy reform, the largest federal investment in climate change in U.S. history. It will make it easier and cheaper to get electric cars and to heat and cool homes without fossil fuels—Environmental Protection Agency administrator Michael Regan says families will save an average of $500 a year on energy costs—while also creating new jobs in these fields.

It extends for three years the subsidies for healthcare under the Affordable Care Act that Congress originally passed during the pandemic. 

It will invest about $300 billion toward reducing the deficit.

The money for these programs will come from several places. The bill will lower the cost of certain prescription drugs by enabling the government to negotiate the prices of expensive drugs for Medicare, a policy most nations already have. It also caps the cost of insulin at $35 a month for people on Medicare (Republicans stripped out of the bill a similar protection for those on private insurance). 

It makes corporations making $1 billion or more in income pay a 15% minimum tax, and it will tax stock buybacks at 1%.

And it will invest more than $100 billion in enforcing the existing tax laws on the books, laws that are increasingly ignored as the IRS has too few agents to conduct audits of large accounts. 

Senate Democrats passed the measure by using the process of budget reconciliation, which covers certain revenue measures and which cannot be filibustered. Although the pieces of the measure have bipartisan support in the country, every Republican voted against the bill; Senate minority leader Mitch McConnell (R-KY) called it an “economic disaster” that will exacerbate inflation (the nonpartisan Congressional Budget Office disagrees). 

Republicans used reconciliation to pass their own signature measure in December 2017: the Tax Cuts and Jobs Act of 2017. This law cut the corporate tax rate from about 35% to 21% with the now-traditional Republican expectation that such a cut would spur economic growth, although the Congressional Budget Office estimated the measure would add about $2 trillion to the national debt over ten years. The Tax and Jobs Act did not increase employment or wages as the Republicans expected; those actually dipped slightly as corporations used the tax cuts primarily to buy back their stock, making it more valuable. That measure was the signature piece of legislation during the Trump administration. 

In contrast, in the past 18 months, Democrats have rebuilt the economy after the pandemic shattered it, invested in technology and science, expanded the North Atlantic Treaty Organization (NATO) to stand against Russia’s invasion of Ukraine, eliminated al-Qaeda leader Ayman al-Zawahiri, pulled troops out of Afghanistan, passed the first gun safety law in almost 30 years, put a Black woman on the Supreme Court, reauthorized the Violence Against Women Act, addressed the needs of veterans exposed to toxic burn pits, and invested in our roads, bridges, and manufacturing. And for much of this program, they have managed to attract Republican votes.

Now they are turning to lowering the cost of prescription drugs—long a priority—and tackling climate change, all while lowering the deficit. 

Washington Post columnist E.J. Dionne noted accurately today that what these measures do is far more than the sum of their parts. They show Americans that democracy is messy and slow but that it works, and it works for them. Since he took office, this has been President Joe Biden’s argument: he would head off the global drive toward authoritarianism by showing that democracy is still the best system of government out there.

At a time when authoritarians are trying to demonstrate that democracies cannot function nearly as effectively as the rule of an elite few, he is proving them wrong. 

The Inflation Reduction Act is close to passage.

 

This new bill, announced by Senator Joe Manchin (D-WV) and Senate majority leader Chuck Schumer (D-NY) on July 27, will invest $386 billion into addressing climate change and new energy development, and $100 billion in new health care spending, including extending subsidies for the Affordable Care Act. The measure will raise about $790 billion in savings and revenue over a decade. It will save money by enabling Medicare to negotiate the prices for certain prescription drugs and by beefing up funding for the IRS to enforce existing tax laws. It also will raise revenue by requiring corporations to pay a minimum tax of 15%. The measure is projected to raise about $50 billion a year for 9 years, which will be used to reduce the federal deficit by $300 billion.Last night, Arizona senator Kyrsten Sinema, the last Democratic holdout on the bill, said she would support it if leaders added drought money for Arizona and removed the carried interest loophole that lowers taxation for certain wealthy hedge fund managers. The carried interest loophole would have raised $14 billion, but Democrats instead added a 1% tax on stock buybacks, which is expected to make up that money.

The measure is expected to pass the House but can make it through the Senate only because Democrats will pass it under the system known as reconciliation, which cannot be filibustered. Republicans are dead set against the measure, although all of its pieces are widely popular. Indeed, the Inflation Reduction Act seems to reflect the sort of government the Republicans constructed during the Civil War: one that answered to the American people, and one in which the government is making an effort to distribute the costs of that government among people according to their ability to pay.

Republicans stand united against the Inflation Reduction Act.

Today’s Republicans, echoing Republican rhetoric since the 1980s, Senate minority leader Mitch McConnell (R-KY) has taken the position that taxes do not build the country, but destroy it. He says that Democrats “want to pile on giant tax hikes that will hammer workers and kill many thousands of American jobs.”

And yet, in the Wall Street Journal, Princeton economics professor Alan S. Blinder, who served as vice chair of the Federal Reserve from 1994 to 1996, points out that the proposed tax changes “are tiny compared with the Trump tax cuts,” which “slashed the top corporate tax rate from 35% to 21% and allowed more items to be expensed.”

What is at stake in this contest is the same issue Republicans grappled with in the 1860s, guaranteeing that “the burdens [of taxation] will be more equalized on all classes of the community, more especially on those who are able to bear them.” Now, though, it is the Democrats taking up that cause.

The Senate will work on the bill this weekend.

The introduction of the Inflation Reduction Act caps what has turned out to be a spectacular week for the Biden administration. Jobs numbers out today showed not the downturn that many expected, but instead the addition of 528,000 new jobs, restoring the U.S. job numbers to where they were before the pandemic and putting unemployment at 3.5%, the lowest rate in 50 years. The United States Chips and Science Act (CHIPS) and the Promise to Address Comprehensive Toxics Act (PACT) have both passed Congress. The president authorized and troops achieved the killing of al-Qaeda leader Ayman al-Zawahiri. And gas prices have hit a 50-day low.