In what is undoubtedly one of the biggest wins to date for the Biden Administration, the U.S. Senate voted to approve the Inflation Reduction Act (IRA) 2022. The bill contains numerous carryovers (and has some major omissions) from Biden’s Build Back Better Act that was stonewalled in the Senate late last year. After a marathon debate in the Senate that ended in a deadlock broken by Vice President Harris’ vote, the bill heads to the House, where it will likely be approved.
“Today, Senate Democrats sided with American families over special interests, voting to lower the cost of prescription drugs, health insurance, and everyday energy costs and reduce the deficit, while making the wealthiest corporations finally pay their fair share,” President Biden said in a statement.
The IRA contains some of the most sweeping climate legislation the U.S. has ever seen and aims to lower drug prices, decrease the deficit, extend Affordable Care Act subsidies, and revamp the current tax code to better reflect the dichotomy of rich and poor America. There’s plenty to like about the bill. Here’s what it will do.
The Act Decreases Prescription Drug Prices
When Medicare Program Part D was introduced in 2003, it explicitly banned the government from negotiating drug costs. The IRA removes that restriction. Medicare will have the ability to negotiate drug prices with pharmaceutical companies. The act aims to lower the costs of 10 medications, gradually increasing to 20 medications by the end of the decade.
What specific medications will be targeted is currently unknown. We don’t know yet how many Medicare recipients will benefit, what the ultimate price decrease will be, or how these negotiations will affect the prices of newly developed medications or medications for non-Medicare recipients.
The bill, according to The Washington Post, also “caps seniors’ drug costs under Medicare to $2,000 per year, forces drug companies to pay a rebate if they increase prices faster than the rate of inflation in Medicare, and provides free vaccines for seniors.”
The Act Increases Climate Protections
More than anything else, the IRA is a climate bill — the first major climate bill in U.S. history. It includes massive credits for corporate and public utility renewable energy, rebates for electric cars and renewable energy at home, cash incentives to cut methane production, and the establishment of a Green Bank to leverage funds toward sustainable energy and infrastructure projects.
Here’s what consumers can expect:
- A 30% tax credit for home green energy solutions like solar, wind, or geothermal generators through 2032. The credit caps at $1,200 annually but can be used year after year for ongoing improvements.
- The 30% credit can be used for the purchase of upgraded appliances but is capped at $600 for some HVAC units and water heaters, $600 for windows or skylights, $250 for one exterior door, and $500 for more than one exterior door.
- Covers the cost of home energy audits up to $150 and $600 for electrical panel upgrades.
- Extends the $7,500 tax credit for the purchase of a new electric vehicle (EV). The credit can be reduced if certain metals aren’t processed in a Free Trade Agreement territory or in the U.S. (There are concerns that this could exclude many, many EVs right now before production can meet demand.)
- Establishes a credit of $4,000 or 30% of the prices of a used EV, whichever is less.
- Provides credits for the purchase of EVs for commercial use.
If passed into law, analysts expect the IRA to result in a 31% to 44% reduction in emissions by 2030.
The bill also provides incentives for target industries such as agriculture, steel, and shipping to reduce emissions.
Somewhat paradoxically, to secure the support of Democratic black sheep Joe Manchin, some concessions were made regarding fossil fuels. As such, the bill allows fast-track approval for pipelines and oil drilling projects in the Gulf of Mexico and Alaska. According to the Washington Post, the law includes “a permitting reform bill that would make it easier for developers to override environmental objections when building pipelines, natural gas export facilities, and other energy infrastructure.”
There’s also plenty more in the bill — money for firefighting efforts and climate resiliency, etc. — that will affect the average American’s life, to be sure, but won’t be as directly impactful as, say, a $7,500 federal tax credit for an EV.
The Act Extends Affordable Care Act Subsidies
During the height of the COVID-19 pandemic, an aid plan provided subsidies for middle-income Americans who wished to take part in the Affordable Care Act insurance exchange.
These subsidies allowed roughly 13 million Americans access to affordable or no-cost health insurance. However, they are set to expire soon, resulting in skyrocketing health insurance premiums for many who took advantage of the pandemic-era program.
The IRA extends those subsidies for three years, lasting through the 2024 election and into 2025.
The Act Taxes The Rich
Though it may sound like a progressive rallying cry, the IRA is designed to decrease the deficit and pay for a number of federal programs by increasing taxes on corporate entities like Amazon that earn at least $1 billion per year and Americans who earn over $400,000 per year, which should result in hundreds of billions in additional revenue. Taxes will not increase for small companies or families who earn less than $400,000.
The bill imposes a new 15% minimum tax on the profits corporations report to investors, not just what is reported to the IRS.
Will The IRA Actually Help Inflation?
Will the bill really help Americans who are struggling to make ends meet amid record-high inflation?
In short, at least not immediately. The bill’s name is a bit of a misnomer. There isn’t much the federal government can do to address inflation in the day-to-day. That’s the job of the Federal Reserve, which acted earlier this summer to address a looming recession. The Federal Reserve raised interest rates, which may seem counterintuitive, but will result in less borrowing and less spending, which will, in theory, decrease demand and ultimately lower prices across the board.
In other words, the IRA won’t do anything overnight. But it will eventually bring down some costs.
The IRA will generate $739 billion without raising any taxes on people making less than $400,000 a year, prescription drug costs will be lowered, and the costs of energy will also decrease. These will drive down costs for consumers overall. That being said, the Congressional Budget Office — which does economic analysis of major spending bills — found that the legislation would “have little to no impact on inflation this year,” per The New York Times.
Without sounding too dire, things might stay bumpy for the regular Joe’s out there for a while. But over time, some of the changes implemented in the IRA will help level out the economy.