The Inflation Reduction Act—Explained
In brief:
The Inflation Reduction Act (IRA) is a streamlined version of US President Biden’s “Build Back Better” ambitions, optimized to get the approval of all Democrats and to be passed, mostly intact, using a process called “reconciliation.”
It includes more than $400 billion in new spending—about $370 billion of which is aimed at “green economy” issues—and will raise an estimated $739 billion, which should help the bill pay for itself while also reducing the federal deficit by something like $300 billion.
It was passed by the Senate (August 7) and House (August 12), and is scheduled to be signed into law by President Biden the week of August 15 (with a celebration commemorating the achievement scheduled for September 6).
What’s in the IRA?
The bill will primarily provide new monetary resources and upgrades to health care, tax, and climate-related laws, infrastructure, and systems.
Health care:
Medicare (the US's national health insurance program, which covers about 70 million people across its various programs as of 2022) will be able to negotiate drug prices with pharmaceutical companies, which is something Republicans have blocked for years but which will now be allowed for a handful of the most-prescribed drugs, expanding to ten drugs in 2026, and eventually 20 drugs.
The idea is to allow Medicare to negotiate bulk-discounts on drugs (it's by far the biggest drug-buyer in the country) much like Walmart negotiates lower prices on the products it supplies, which in turn should save both the government and patients a whole lot of money.
The IRA will also re-up a cap on the amount of money an individual or family might have to pay each year in healthcare spending, and it'll continue to qualify about 7 million people for free healthcare insurance—policies that would otherwise have expired at the end of 2022 (they'll now sunset at the end of 2025).
Taxes:
The IRA will provide about $80 billion in support for the (aging, dilapidated, consistently underfunded) Internal Revenue Service (usually called the IRS, which is responsible for collecting taxes in the US) over the course of the next decade, to help it upgrade its systems and—ostensibly at least—go after wealthy tax-avoiders who can usually avoid scrutiny because this agency can't afford to throw enough lawyers at them to make them to pay what they owe (or track down all their shell companies and other means of avoiding paying taxes).
This is expected to increase tax revenue a fair bit: it's estimated that hundreds of billions of dollars that should be paid in taxes each year (primarily by people making more than $10 million a year) are not being collected, but could be if the IRS had proper funding.
The IRA also implements a 15% minimum tax for corporations with profits of more than $1 billion a year. Such companies should currently pay a 21% tax rate, but most do not because of easily exploitable loopholes, so the IRA closes some of those loopholes and establishes a tax-floor that will apply no matter what (this should also bring in more money each year).
Climate:
The IRA is by far the largest investment in clean energy and climate-related issues in US history. It earmarks not quite $370 billion in new spending for these sorts of expenditures and programs over the next decade, mostly in the form of tax credits and rebates.
It also provides funding for carbon emission reductions at existing industrial sites and levies new fines for methane leaks (which is primarily an issue for fossil fuel companies).
Those tax credits and rebates are meant to help people and businesses who want to add solar panels or other green assets to their homes (like replacing their air conditioners with heat pumps) do so, while electric vehicle tax credits (of up to $7,500) will help folks afford new and used EV vehicles—though as written, this credit won't apply to most vehicles on the US market, today, as price- and location of manufacture-requirements only cover to about 30% of currently available EV and plug-in hybrid models (of which there are 72 in total).
The ambition behind those stringent EV rules is to incentivize folks to buy electric vehicles while also incentivizing vehicle manufacturers to move more of their production infrastructure to the US, putting more EVs on the road while also reinforcing the US’s capacity to develop and build the vehicles, the batteries, and other components themselves.
The aforementioned carbon emission-reduction technologies are also meant to serve as nudges for companies operating coal power plants to install filters that capture some of the emissions generated by those plants.
This is considered to be a positive move in the sense that such filters reduce the amount of CO2 (and other pollutants) churned into the atmosphere by these plants, but are less ideal in that they allow these plants to keep operating, rather than aiming for outright replacement with cleaner options.
Does the Inflation Reduction Act reduce inflation?
Maybe eventually? But probably not meaningfully in the short term.
The general consensus seems to be that while these climate investments will save the US (and Americans) a lot of money over the next several decades, most of these benefits won’t be visible in the numbers (or most people’s bank accounts) for years.
It’s almost certainly a wonderful investment, then, but the “inflation”-focused title is probably mostly a branding exercise for Democrats as we head into November’s midterm election cycle.
Importantly: the IRA is unlikely to make inflation worse because it more than pays for itself—not representing a flood of new money into the economy (which can be inflationary), but instead pulling hundreds of billions of dollars out of the economy (mostly from the super-wealthy and the largest corporations) to pay down the US’s deficit (which tends to, over time, be de-inflationary).
What are the expected climate outcomes?
Independent analyses of the bill suggest that its new policies will help reduce the US’s emissions to somewhere between 31% and 44% (most estimates say ~40%) below 2005 levels by 2030.
That’s still short of President Biden’s stated goal of 50-52% below 2005 levels by 2030, but substantially better than the ~27% the US would likely hit with existing policies and trends.
How does this compare to the original Build Back Better plan?
The IRA is nowhere near as sprawling in scope and price tag as the Build Back Better Act (which was pitched by Biden while he was running for president and early on in his term in office) would have been.
The final version of the BBBA would have allocated around $2.2 trillion for a slew of things (down from about $3.5 trillion in the original), including $555 billion for clean energy and climate change provisions, $400 billion for childcare and preschool funding, $200 billion in tax credits for folks with kids, and hundreds of billions for housing, home care, ACA credits, and investments in education, Medicare, and equity-related provisions.
The IRA is a greatly trimmed and shrunken permutation of the same, thus reduced primarily to ensure everything could be passed via reconciliation (and thus, would only require all Democrats in the Senate to support it) and so that Senator Joe Manchin would be on board (which mostly meant incentivizing fossil fuel interests to go green, rather than punishing them for failing to do so, and ensuring that the Act paid for itself rather than adding to the deficit).
How do various interests feel about all this?
There’s a lot of complaining by pretty much everyone because nobody got exactly what they wanted from the IRA; which some are arguing means it was a true collaborative, democratic effort.
Many on the Left wanted more spending on these sorts of things, while folks on the Right generally wanted significantly less, or no spending at all.
Fossil fuel companies, interestingly, generally supported this (in part because it replaced punishments for not going green with incentives to do so), and folks involved in healthcare and taxes and most other impacted industries and agencies are mostly joyous.
The Democrats, as a party, are generally celebratory—as this was seen as a dead issue for a long while, before it popped back up, zombie-like, and was then passed relatively quickly—while the Republicans are not happy, in part because it’s being seen as a feather in the Democrats’ electoral cap in the months leading up to an important midterm election.
A lot of businesses are seeing this as a good opportunity to invest in green infrastructure, and though some larger corporations don’t like the idea of a stronger IRS, others seem to like the idea of greater predictability each tax season.
Many individuals (based on polls and surveys conducted so far) seem to be keen to check out their EV-buying options and maybe invest in renewable energy for their homes. Renewable energy-related stocks have also seen a flood of new investment since the Senate approved the bill.
Folks who get their insurance via the ACA or Medicare would also seem to have a lot to be happy about, here, though there’s not a lot of data on this (other than anecdote) at the moment.
Some further reading:
For Older Americans, Health Bill Will Bring Savings and ‘Peace of Mind’ / The New York Times
Automakers scramble to decode new U.S. EV tax credits / Reuters
Inflation Reduction Act may have little impact on inflation / The Associated Press
House passes Inflation Reduction Act, sending climate and health bill to Biden / The Washington Post
Climate Bill’s Success Hinges on Timely Renewable-Projects Build-Out / The Wall Street Journal
The Inflation Reduction Act could push climate change tech into the future / The Washington Post
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