August 3, 2022 | Reading Time: 5 minutes

The Editorial Board explains the Inflation Reduction Act

“I struggle to find enough superlatives to describe this deal.”

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Last week, US Senator Joe Manchin and Majority Leader Chuck Schumer unexpectedly announced the reconciliation bill that had been declared dead was back. US Senator Kyrsten Sinema and various conservative Democrats could still decide to blow it up. But if all goes well, it could be voted on in the next couple of weeks. 

What’s in the $485 billion Inflation Reduction Act of 2022 (IRA22)? The measure addresses three major Democratic priorities: 

Climate, health care and taxes. 

Clean energy
The $385 billion in climate provisions is the part of the proposal that has perhaps most excited the Democratic base. The Atlantic quotes Sam Ricketts of Evergreen Action enthusing, “I struggle to find enough superlatives to describe this deal.”

It’s easy to get discouraged when you contemplate the crises that our government refuses to confront. But for all its failures, IRA22 also offers much reason for hope. 

The majority of the climate spending centers on $260 billion in tax credits. These replace former and clumsy green energy incentives that couldn’t be used by public utilities and couldn’t be used to incentivize newer forms of non-carbon energy.

The new tax credits provide public and private companies with subsidies for producing renewable energy and for creating renewable technologies like solar panels. 

Researchers who analyzed an earlier version of this plan judged it to be extremely cost-effective. They believe it could create $1.5 trillion in economic surplus, while cutting 5 billion tons of carbon from the atmosphere by 2050.

The IRA22 also includes around $80 billion in incentives for car and home-owners. 

A $7,500 rebate for new EV purchases for family vehicles could cut carbon emissions substantially, since personal transportation produces about 17 percent of US carbon pollution

The proposal also includes $27 billion for a federal green bank — a fund that can be used to invest in clean energy. The green bank provides money for low-income households to purchase heat pumps, solar cells and electric cars. States, tribes and municipalities can also compete for grants for green energy projects. 

Fossil fuel production
That’s the (substantial!) climate upside of the bill. 

The less pleasing aspect is an expansion in carbon fuel production. In the name of energy independence, Manchin and his industry lobby buddies demanded oil and gas leasing in the Gulf of Mexico and off the Alaskan coast. 

The bill also prevents the federal government from leasing land for solar or wind unless it has also leased territory to oil and gas developers. 

These carve outs, in technical language, suck. 

However, climate advocates in general see these concessions as a small price to pay for what is in other respects easily the most substantial effort to fight global warming in US history.

The IRA22 includes $100 billion for healthcare.

The largest chunk of that is $65 billion to expand ACA subsidies. 

Tax credits that help some 13 million low-income Americans buy health insurance were set to lapse at the end of this year. That could cause premiums to increase by hundreds of dollars per person in January. Many people would be notified of the upcoming increase just weeks before the election.

The IRA22 extends the subsidies for three years into 2025. That will enable millions of people to retain their health care. It also pushes the next funding cliff out past 2024, so Democrats won’t have to struggle with it right before another election.

The other major health care provision in the bill addresses prescription drug prices.

IRA22 caps out-of-pocket spending on prescription drugs for Medicare beneficiaries at $2,000 per year. 

Currently, Medicare recipients continue to pay 5 percent out of pocket for scripts after total charges reach $7,050 per year. 

That 5 percent doesn’t sound like much, but for those with medication costing thousands of dollars, or with large numbers of prescriptions, it can become a major financial burden.

The bill would also restrict increases on prescription drug price increases for Medicare patients and for patients with private insurance. Manufacturers that increased prices faster than inflation would have to pay a rebate. 

Finally, the bill gives the government the ability to negotiate prices of high-cost drugs for Medicare recipients. Only a few drugs would be subject at first, but it would gradually increase to 20 by 2029. 

The exact savings here depend on the drugs that are selected and what the prices end up being. But the CBO estimates the provision could save the government $101.8 billion. The inflation rebate provision could add another $100.7 billion in savings.

The IRA22 saves another $120 billion through repeal of a complicated Trump era drug rebate rule.

IRA22 substantially increases taxes on the wealthy. 

Most analyses treat this as a funding mechanism. But taxing the rich is important in its own right to control runaway inequality and prevent the powerful from seizing control of the country’s institutions and political processes.

The biggest tax increase is a 15 percent corporate minimum tax.

Trump cut the US corporate tax rate from 35 percent to 21 percent in 2017. Many corporations use write-offs and tax shelters to pay even less than that. Some pay nothing at all. 

The new tax would end that. 

It imposes a minimum of 15 percent on all corporations with over $1 billion in profits. This should raise $313 billion in revenue over a decade.

Another big chunk of revenue is expected to come from improved enforcement. The bill spends $80 billion to beef up the IRS.

Of that, $45 billion would go toward enforcement. Some $25 billion would go toward operations support. Another $4.75 billion would go to IT modernization, and $3 billion to taxpayer services.

The IRS budget has been systematically cut by the Congress for more than a decade. Republicans in particular have seen starving the agency as a way to protect their wealthy base. As a result, the IRS hasn’t had the funds they’ve needed to pursue tax cheats. 

The tax gap between what is owed and what is collected may be as high as $1 trillion a year.

IRA22 estimates that the additional funds for tax enforcement will result in revenue of $124 billion.

The bill also closes the carried interest loophole, which allows private equity and hedge funds to pay tax on their income at a lower capital gains rate rather than at the rate normally paid by wage earners. This should raise $14 billion.

Inflation reduction 
Overall, the bill is designed to lower the deficit by $300 billion over 10 years. Schumer and Manchin believe that raising  taxes and increasing revenue should have an anti-inflationary effect.

Manchin also argues that moving away from fossil fuels will help the US avoid inflationary spirals. And the drug price controls should keep health care costs down.

Will the bill actually fight inflation? Probably not in the short term. The name is more of a gimmick than anything. But if a gimmick gets Manchin on board, so be it.

What’s missing?
There are a lot of things that aren’t in this bill. 

Progressives had hoped to expand Medicare to cover vision, hearing and dental benefits during this Congress. Biden wanted to spend $400 billion on universal preschool and affordable childcare

Neither are in the final package.

The IRA22 also doesn’t renew the expanded child tax credit. The program lifted millions of children out of poverty in 2021 before it was allowed to expire in 2022. Allowing such a vital, successful program to evaporate is a tragedy.

Perhaps most disturbing, IRA22 includes zero spending on COVID mitigation.

The pandemic continues to kill more than 400 people a day, 2,800 people a week. New variants continue to develop, cases remain high and the healthcare system is facing staffing shortages

But funds for vaccine development and distribution have dried up, and the Congress has largely abandoned the issue.

It’s easy to get discouraged when you contemplate the crises that our government refuses to confront. But for all its failures, IRA22 also offers much reason for hope. 

Its prescription drug benefits and ACA subsidies provide real, material help for seniors, independent small businesspeople and the less affluent. Its tax provisions address growing inequality for the first time in decades. And its climate measures finally take real strides toward preserving the planet for future generations. 

If the Congress can pass this, it will be a real victory for the Democrats, the country and the planet.

Noah Berlatsky writes about the political economy for the Editorial Board. He lives in Chicago. Find him @nberlat.

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