“What’s In the Inflation Reduction Act?”

This past Sunday, August 7^th the Senate voted to pass the $430 Billion “Inflation Reduction Act” which some are more correctly naming the Climate and Healthcare Bill.  Of course, with inflation running hot so far in 2022, constituent approval for something named for reducing inflation seemed to be more attractive.  Go figure.  Perhaps not surprisingly, the Senate voted exactly on party lines with all 50 democrats approving the bill and all 50 republicans opposing.  Vice President Harris then casted the tie-breaking vote in favor of the bill.  The bill will now go to Congress where democrats are urging there to be no changes to the legislation before approval and final presidential sign off.  Putting aside whether you agree with this bill or not, I thought it would be useful to understand some of the larger sections of this legislation.  What is actually included in this Inflation Reduction Act?

$360 Billion Towards Climate Change

More than $360 billion would be invested in energy and climate reform, the largest federal clean energy investment in U.S. history.  The bill has support from many environmental and climate activists but is short of the $555 billion that Democrats had originally called for.

This portion of the bill takes on transportation and electricity generation, and it includes $60 billion for growing renewable energy infrastructure in manufacturing like solar panels and wind turbines.  It also includes several tax credits for individuals on things like electric vehicles and making homes more energy efficient.

The bill would, according to Democrats, lower greenhouse gas emissions by 40%, based on 2005 levels, by the end of the decade, which is short of the 50% Biden had originally aimed for.

“It puts us within a close enough distance that further executive action, state and local government efforts and private sector leadership could plausibly get us across the finish line by 2030,” said Jesse Jenkins from Princeton University, who leads the REPEAT Project analyzing the impact of government climate actions.

Prescription Drug Cost Reduction

On health reforms, the bill takes on making prescription drugs more affordable — but there are some limits. The bill includes a historic measure that allows the federal health secretary to negotiate the prices of certain expensive drugs each year for Medicare.

But this won’t impact every prescription drug or every patient, and it won’t take effect quickly. The negotiations will take effect for 10 drugs covered by Medicare in 2026, increasing to 20 drugs in 2029.

The portion of the bill that tried to cap at $35 per month the price of insulin — a drug that is incredibly expensive in the U.S. compared to other countries — was ruled out of order by the Senate parliamentarian, who ruled the cap could apply on Medicare, a government program, but not on private insurance. So, Democrats split the measure between Medicare and private insurance — but Republicans ultimately blocked the measure for private insurance.

The parliamentarian also ruled that a measure that was in the bill to force drug companies to offer rebates if prescription prices outpaced inflation was not totally in line with the rules for budget reconciliation; she said that it could apply to Medicare patients but not those with private insurers.

The bill puts a cap of $2,000 on out-of-pocket prescription drug costs for people on Medicare, effective in 2025.

There’s also a three-year extension on healthcare subsidies in the Affordable Care Act originally passed in a pandemic relief bill last year, estimated by the government to have kept premiums at $10 per month or lower for the vast majority of people covered through the federal health insurance exchange.

While some of these changes could eventually help with rising inflation, the fact that they will take years to play out will mean that they have very little effect on inflation in the next 12 to 24 months.

Tax Reform

As many know, corporations tend to find ways to avoid paying taxes despite their significant profits under generally accepted accounting principles.  This is usually due to the fact that their taxable profits are usually significantly lower than their true book income thanks to deductions and credits under the IRS code.  This bill would require companies with at least $1 Billion in annual income to apply a minimum 15% tax rate on their book income.  Since this eliminates some of the loopholes companies are currently using, the bill is projected to raise an additional $313 Billion in revenue with this change.

Additionally, Democrats have now included a 1% excise tax on stock buybacks which have exploded in recent years.  This change would take affect in 2023 so there is speculation that when this legislation is passed we could see a significant number of stock buybacks between now and the end of 2022.  While this has the potential to increase tax revenue, critics are saying that tax would have a sweeping affect across the entire market hurting smaller players just as much as institutional investors. 

Regardless of whether you support or oppose the “Inflation Reduction Act” it’s important to know how our government plans to spend the country’s money.  Assuming the House passes the bill by the end of this week, these changes could be signed into law as early as next week.