Explainer: Inflation Reduction Act

Sep 2

On Aug 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. The Act is a comprehensive bill designed to address inflation, climate change, healthcare costs, and the tax code.

Inflation and Economy

The Inflation Reduction Act aims to reduce inflation and its effects over a longer period rather than immediately. It aims to accomplish this in a couple of different ways:

Create a 1% tax on company stock buybacks - that is, taxes on stocks companies buy back from shareholders.
Companies making over a billion dollars in income annually will have to pay a minimum tax of 15%, regardless of any loopholes or deductions.
Give the IRS $80 billion to investigate and enforce unpaid taxes, among other things. The nonpartisan Congressional Budget Office (CBO) estimates this will total federal deficit by $102 billion from 2022 - 2031. The Act specifically targets tax payers who make over $400,000 annually in income.

Economists are mixed about the IRA’s overall impact on inflation and the deficit, but many agree that while the IRA may not immediately lower inflation, it will lower energy and health costs for many families to relieve some financial strain.

Energy Change and Climate Change

With a $370 billion investment, the Act is one of the biggest legislations created to combat climate change. While it is a step down from the previous investments in Build Back Better, the IRA offers considerable credits and rebates to encourage renewable energy adoption.

Some car buyers may be able to redeem rebates for buying electric vehicles as soon as this year. The U.S. Treasury will need to write regulations on income verification, but car buyers could receive rebates up $7,500 for new vehicles and $4,000 for used ones depending on income. The Administration also still needs to specify which vehicles could qualify for rebates.
Through rebate programs and credits, homeowners can receive money back for investing in more renewable energy for their homes. The Act will direct $4.8 billion in each state to establish rebate programs. This includes up to $1,750 for heat pump water heaters and $8,000 for heat pumps for HVACs. This program is meant to run until September 30th, 2031.
The IRA also authorizes a 30% tax credit for residential solar panel or solar battery system installations until December 31, 2034. Similar to the rebate program above, each state will need to design its own rules and regulations before the credits will be available.

Senate Democrats claim that these climate investments will be enough to reduce climate emissions by 40% from 2005 levels, when emissions peaked. This falls a bit short of the United Nations’ goal to reduce greenhouse gas emissions by 45% by 2030; however it would still by a significant decrease.

Healthcare

In 2021, Congress created healthcare subsidies for Affordable Care Act premiums through COVID-19 spending bills, staving off an increase in price. Households no longer had to pay more than 8.5% of their income on health insurance. This change enabled around 7 million more people to receive free healthcare under the Affordable Care Act (2010). These subsidies were originally set to expire at the end of 2022, but the Inflation Reduction Act extends them through 2025.

The Inflation Reduction Act also enables Medicare to negotiate the price of prescription drugs, which could lead to significant cost reductions for a small subset of drugs (10 most-used drugs by 2025, increasing to 20 over time). Pharmaceutical companies will also be required to issue rebates to Medicare beneficiaries if they try to raise the price of a drug higher than inflation. The Act also caps insulin at $35 per month for Medicare and Medicaid receivers.

The bill originally included lower drug costs for those on private health insurance as well, but the Senate Parliamentarian struck out those portions, and the provisions didn’t have enough Senate votes to keep them in the final version of the bill.