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Inflation Reduction Act of 2022 [See Full Details]

Inflation Reduction Act
Inflation Reduction Act

Inflation Reduction Act of 2022

The Inflation Reduction Act of 2022 (IRA) is a bill passed by the 117th United States Congress in August 2022 that aims to curb inflation by reducing the deficit, lowering prescription drug prices, and investing into domestic energy production while promoting clean energy solutions. It is a budget reconciliation bill sponsored by Senators Chuck Schumer (D-NY) and Joe Manchin (D-WV).

The bill was the result of negotiations on the proposed Build Back Better Act, which had been reduced and comprehensively reworked from its initial proposal after receiving opposition from Manchin.

It was introduced as an amendment to the Build Back Better Act and the legislative text was substituted.

The package, as proposed by Schumer and Manchin, would raise $737 billion and authorize $369 billion in spending on energy and climate change, $300 billion in deficit reduction, three years of Affordable Care Act subsidies, prescription drug reform to lower prices, and tax reform. Some changes were made to the tax provisions after negotiations with Senator Kyrsten Sinema (D-AZ).

If enacted, the bill would represent the largest investment into addressing climate change in United States history.

According to several independent analyses cited by The New York Times, the bill would bring the United States significantly closer to fulfilling the goal of cutting United States net greenhouse gas emissions in half by 2030. It also includes a large expansion of the Internal Revenue Service.

Inflation Reduction Act Background

The Build Back Better Plan was a legislative framework proposed by United States President Joe Biden between 2020 and 2021.

Generally viewed as ambitious in size and scope, it sought to make the largest nationwide public investments in social, infrastructural, and environmental programs since the 1930s Great Depression-fighting policies of the New Deal.

The plan was divided into three parts: one of them, The American Rescue Plan, a COVID-19 relief spending bill, was signed into law in March 2021.

The other two parts were reworked into different bills over the course of extensive negotiations within and among Congressional entities.

The American Jobs Plan (AJP) was a proposal to address long-neglected infrastructure needs and reduce America’s contributions to climate change’s destructive effects;[9] the American Families Plan (AFP) was a proposal to fund a variety of social policy initiatives, some of which (e.g. paid family leave) had never before been enacted nationally in the U.S.

The Build Back Better Act was a bill introduced in the 117th Congress to fulfill aspects of the Build Back Better Plan. It was spun off from the American Jobs Plan, alongside the Infrastructure Investment and Jobs Act, as a $3.5 trillion Democratic reconciliation package that included provisions related to climate change and social policy. Following negotiations, the price was lowered to approximately $2.2 trillion. The bill was passed 220–213 by the House of Representatives on November 19, 2021.

In December 2021, amidst of negotiations and parliamentary procedures, Senator Joe Manchin publicly pulled his support from the bill for not matching his envisioned cost of about $1.75 trillion[citation needed], then subsequently retracted support for his own compromise legislation.

This effectively killed the bill as it needs 50 senators to pass via reconciliation, and all 50 Republican senators opposed it. Continued negotiations between Manchin and Senate majority leader Chuck Schumer over the course of months eventually resulted in the $737 billion Inflation Reduction Act of 2022.

The sudden deal on the Inflation Reduction Act, which was negotiated in secret and announced on July 27, 2022, was widely regarded as a ‘shocker’ as Democrats had voiced that there was little hope for a revival of many of their priorities in addition to Manchin himself being rather pessimistic on the prospect in public.

As the revised bill made its way through the chambers of Congress, the new reality of Biden unexpectedly having a clear path to enacting substantial portions of his domestic agenda into law lead to a wide reevaluation of the success of the Biden presidency thus far and is expected to give the President and his party a boost while campagining for the upcoming midterm election.

Legislative history

The Build Back Better Act, which passed the House on September 27, 2021, was used by the Senate as the legislative vehicle for this legislation. On August 6, 2022 Senate majority leader Chuck Schumer proposed an amendment which would replace the text of the previously passed bill with the text of the Inflation Reduction Act of 2022. This substitute amendment was later adopted.

On August 7, 2022, following the vote-a-rama, an unlimited marathon voting session on amendments, that lasted nearly 16 hours, the Senate passed the bill (as amended) on a 51–50 vote, with all Democrats voting in favor, all Republicans opposed, and Vice President Kamala Harris breaking the tie.

On August 12, 2022, the bill was passed by the House on a 220–207 vote, with all Democrats voting in favor and all Republicans voting against it. The bill is expected to be signed by President Biden.

Provisions

The bill is estimated to raise revenue from:

Prescription drug price reform to lower prices, including Medicare negotiation of drug prices – $265 billion
Imposing a selective 15% corporate minimum tax rate for companies with higher than $1 billion of annual financial statement income – $222 billion
Increased tax enforcement – $203.7 billion[21]
Imposing a 1% excise tax on stock buybacks – $74 billion
It would spend this revenue on:

Addressing domestic energy security and climate change – $369 billion

Deficit reduction – $300 billion

Continuing for three more years the expansion of Affordable Care Act subsidies originally expanded under the American Rescue Plan Act of 2021 – $64 billion

Funding for drought resiliency in western states – $4 billion
Increased funding for the IRS for modernization and increased tax enforcement – $80 billion

As part of the investment into clean energy, the bill would extend the solar investment tax credit for 10 years.

The bill contains provisions which would cap insulin costs at $35/month and out-of-pocket drug costs at $2,000 for people on Medicare.

Several provisions in the initial deal between Schumer and Manchin were changed after negotiations with Sinema: a provision narrowing the carried interest loophole was dropped, a 1% excise tax on stock buybacks was added, manufacturing exceptions were added to the corporate minimum tax, and funding for drought relief for western states was added.

Inflation Reduction Act Impact

Economy

The nonpartisan Congressional Budget Office estimated that the bill would have no statistically significant effect on inflation.[27] A preliminary estimate from the Penn Wharton Budget Model also suggested that the bill would have no statistically significant effect on inflation, with very slight increases until 2024 and decreases thereafter.

The nonpartisan Committee for a Responsible Federal Budget analyzed the bill and concluded that the “deficit reduction, along with other elements of the bill, is likely to reduce inflationary pressures and thus reduce the risk of a possible recession.” It further estimates that the bill would reduce the federal deficit by $1.9 trillion over a 20-year period. This figure includes the resulting savings on interest payments.

Senate Democrats touted reactions from several analysts who estimated that the bill would reduce inflation, including the president of the Committee for a Responsible Federal Budget, the chief economist of Moody’s Analytics, and economists Jason Furman, Lawrence Summers, and Joseph Stiglitz.

The Tax Foundation, a fiscally conservative think tank, estimated the bill would result in a loss of 30,000 jobs and a 0.1% reduction in GDP, while resulting in $304 billion of additional revenues, which would go towards deficit reduction

Energy

A preliminary assessment by the Rhodium Group, an independent research provider, estimated it would reduce national greenhouse gas emissions 31–44% below 2005 levels by 2030, compared to 24–35% under current policy.

Furthermore, Rhodium Group projects that the nuclear provisions in the bill are likely to “keep much, if not all” of the nation’s at-risk nuclear reactors, estimated to be 22–38% of the fleet, online through the 2030s.

Modeling from the nonpartisan Energy Innovation group, a firm that provides research on energy policy, has shown that this bill would lead to the creation of 1.4 million to 1.5 million additional jobs and increase the GDP 0.84–0.88% in 2030. According to the findings, the bill is estimated to enable the reduction of greenhouse gas emissions by 37–41% below 2005 levels in 2030, compared to 24% without the bill.

This estimate of the greenhouse gas emission reduction lines up with the figure provided by the bill’s authors which is a 40% reduction in carbon emissions relative to 2005 levels.

Modeling from the nonpartisan research institution Resources for the Future showed the bill would decrease retail power costs by 5.2 to 6.7 percent over a ten-year period, resulting in savings of $170–220 per year for the average U.S. household. The modeling also indicated that the bill would result in decreased electricity price volatility.

Taxes

Excerpts from the nonpartisan Joint Committee on Taxation (JCT) indicated that the legislation might lead to increased payments on personal taxes for Americans of all incomes (an increase in $16.7 billion for taxpayers earning less than $200,000 a year, $14.1 billion for taxpayers earning between $200,000 and $500,000, and $23.5 billion for taxpayers earning over $500,000). This calculation was based on the assumption that companies would indirectly pass on parts of the minimum corporate tax to employees, an assumption that was criticized by Steven M. Rosenthal, a senior fellow at the nonpartisan Tax Policy Center (TPC).[39] Economist William G. Gale, who is also co-director of the TPC, comments that it is important to consider that the calculations by the JCT did not take into account the provisions in the bill that would extend premium tax credits for health plans for low- and middle-income taxpayers, provide households with tax credits for making their property more energy-efficient, and lower the price of prescription drugs.

The Treasury has estimated additional funding for the Internal Revenue Service will enable the hiring of an estimated 87,000 IRS employees. Treasury Secretary Janet Yellen directed IRS Commissioner Charles Rettig to not use the new funding allocated in the bill to increase the rate of audits of those making less than $400,000 a year above historical levels, and would instead focus on “high-end noncompliance.”

Reactions

Senator Joe Manchin (D-WV) issued a statement for his support of the bill. President Joe Biden also stated his support for the proposed bill.

On August 4, Senator Kyrsten Sinema (D-AZ) issued a statement indicating that she would support the bill after striking a deal with fellow Democrats to change several tax provisions.

Congressional Republicans have voiced unanimous opposition to the bill, claiming the legislation would do little to combat inflation or exacerbate it. Senate Minority Leader Mitch McConnell (R-KY) denounced the legislation as “reckless spending” and Ranking Member of the Senate Budget Committee Lindsey Graham (R-SC) called it “insanity”. Analysis by independent organizations, including the United States Congressional Joint Committee on Taxation and the nonpartisan Committee for a Responsible Federal Budget, found that the legislation would reduce the budget deficit by the end of the decade and have little impact on federal spending.

Public organizations

Darren Woods, the CEO of oil and gas energy giant ExxonMobil, called the bill “a step in the right direction” and endorsed its provisions related to oil and gas.

Multiple coal industry groups, including the West Virginia Coal Association, criticized the bill for “[obviating] any need to innovate coal assets” and doing “nothing for coal or coal generation”.

Cycling organizations criticized the bill for removing the incentives for electric bicycles in the original Build Back Better Act, having a better energy-per-incentive ratio and reaching a wider demographic, than for electric cars remaining in the IRA22.

Jean Su, the energy justice program director at the Center for Biological Diversity, called the legislation “a backdoor take-it-or-leave-it deal between a coal baron and Democratic leaders in which any opposition from lawmakers or frontline communities was quashed.” The Climate Justice Alliance criticized the IRA, saying that “the strengths of the IRA are outweighed by the bill’s weaknesses and threats posed by the expansion of fossil fuels and unproven technologies such as carbon capture and hydrogen generation.” Siqiniq Maupin, the executive director of Sovereign Iñupiat for a Living Arctic, called the bill “genocide”.

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