• Danielle Uehara

Understanding the Inflation Reduction Act


President Joe Biden signed the historic Inflation Reduction Act of 2022 on August 16, 2022 (The White House/Wikimedia Commons).


On August 16, 2022, President Joe Biden signed the Inflation Reduction Act of 2022. A less ambitious version of Build Back Better, the law includes taxes on the wealthy, changes to Medicare, and investments in clean energy. Intended to help the middle class, the bill will lower healthcare premiums, drug prices, and the budget deficit. Still, Republicans refused to support the bill, citing worries about higher taxes and the overall cost. However, by introducing the bill through the budget reconciliation process, Senate Democrats evaded the Republicans’ filibuster and passed the bill with a party-line vote of 220 to 207.


In total, the act is predicted to invest $437 billion into various projects and raise nearly $737 billion in revenue. However, many are skeptical about whether the act will do everything Democrats say it will. In fact, many conservatives are concerned that taxing corporations will decrease investments and hiring numbers, hurting middle-class workers. Still, Senate Democrats claim that the lower prescription costs and clean energy transition will significantly reduce inflation, making up for the higher taxes. According to the Joint Committee on Taxation (JCT) and the Congressional Budget Office (CBO), the bill may reduce the federal deficit by as much as $300 billion, reducing the amount of money in the economy and thus inflation.


New Taxes


One of the bill's major components is a 15 percent income tax on companies with a $1 billion annual profit. The JCT said this tax will affect about 150 companies and is expected to raise $222 billion over the next decade. In addition, the bill implements new means of taxing wealthy individuals, such as placing a limit on losses a business can deduct from their taxes. This move is expected to raise an additional $52 billion.


Under the bill, there will also be a 1 percent tax on stock buybacks exceeding $1 million. A buyback occurs when a company purchases its own shares, essentially investing in itself. As the company continues to buy its shares, the number of shares owned outside the company is diluted. When this happens, the company can demand that each investor own a larger share of the company, which can lead to horizontal shareholding (a type of monopoly in which investors hold large percentages of companies).


Climate and Energy


About $369 billion of the revenue from these taxes will be invested in climate and clean energy projects. For example, the act will guarantee loans to energy infrastructure projects such as solar panels, wind turbines, and energy grids. The bill will also allow the government to subsidize up to 30 percent of the costs of eco-friendly operations, such as renewable energy, electric vehicles, and home improvement investments. The subsidies are set to phase out after 2032.


In a last-minute addition to the act, $4 billion was added to help reverse the effects of the 22-year-long drought in the Western U.S. Under the act, farmers who voluntarily reduce water consumption under short-term or long-term agreements will receive compensation. The money will also help fund Lake Mead and Lake Powell water conservation projects.


Medicare


Finally, the Inflation Reduction Act includes several revisions to Medicare (government-provided health insurance for people 65 or older). In particular, for the first time, the Secretary of Health and Human Services (HHS) will be able to negotiate prices for several drugs. As a result, drug prices are expected to fall by 25 to 65 percent in the coming years. Moderate Democratic Senator Kyrsten Sinema did propose some requirements for drugs qualifying for price negotiations, such as that they must be approved by the U.S. Food and Drug Administration (FDA) for at least nine years (13 years for biological drugs). Still, in the end, 20 of the 50 most expensive drugs that meet these criteria are up for price negotiations, including medications used to treat cancer, rheumatoid arthritis, and diabetes.


Also included in the bill is a $2000 per year cap for Medicare beneficiaries and a $35 per month insulin price cap, set to go into effect in 2025. In the original proposal, Democrats hoped to place a cap on private insurance patients as well, but Republicans voted against extending the protection beyond Medicare. Despite this, these steps are expected to save Medicare beneficiaries $265 billion over the next ten years.


While controversial, the Inflation Reduction Act of 2022 is undoubtedly a historic bill. It includes several means of taxing the wealthy, historic investments into climate and clean energy, and a major overhaul of the Medicare system. How the bill will affect the economy, inflation, and the lives of the middle class, however, is yet to be seen.