What’s In the Inflation Reduction Act? Big Climate, Tax Wins
By Elliot Goldbaum, Pegah Jalali, and Caroline Nutter
What’s in the Inflation Reduction Act?
This week, the U.S. Senate passed the Inflation Reduction Act. If it becomes law, it will make big investments in the fight against climate change and close tax loopholes for people making over $400,000 a year and some large, rich corporations. A House vote is expected this week.
The Inflation Reduction Act comes after nearly two years of negotiations, stalled legislative efforts, and other barriers to more expansive and transformative economic legislation. It addresses fewer issue areas than Congressional leaders and the Biden administration—not to mention advocacy groups like the Colorado Fiscal Institute—were hoping for, but taken as a whole, it is a significant investment in a stable climate future and clean energy jobs, will provide people savings on health care costs, and it’s paid for with fair tax changes that ask wealthy people and rich corporations to pay closer to their fair share.
Additionally, the legislation includes policies like deficit reduction designed to help curb inflation. (Interestingly, a recent New York Times newsletter went into the economics of inflation and climate change, and the two are much more linked than one might think).
Fighting climate change by drastically reducing pollution
The Inflation Reduction Act contains several provisions that will reduce pollution, create jobs in the clean energy energy industry, and do so equitably and justly. The legislation will reduce the type of pollution that contributes to climate change by 40% by 2030.
Among the provisions included in the legislation:
- $20 billion in consumer incentives to purchase electric appliances, rooftop solar, and other improvements designed to make homes more energy efficient and less reliant on fossil fuels. People who earn low incomes and communities facing the greatest barriers to these types of improvements will see a substantial amount of the benefits.
- $60 billion in clean energy manufacturing incentives to create jobs that pay well and will be critical in advancing a clean energy future.
- $70 billion to decarbonize the transportation, manufacturing, construction, and agriculture industries.
- $60 billion in environmental justice priorities to drive investments to communities that have historically been the most likely to experience negative environmental impacts from industrial facilities.
- $20 billion to support sustainable agriculture projects.
- $4 billion for drought resliency in the Western U.S.
- Tax credits and grants to support biofuel production, designed to power the air travel of the future.
- Reduce methane emissions created during natural gas extraction. Reducing methane emissions earlier is considered one of the most cost effective ways to prevent catastrophic increases in global temperatures.
- Increases the royalty rate for oil and gas development leased on federal lands, ends noncompetitive leasing on federal lands, raises minimum bids and rental rates for oil and gas companies leasing federal lands,
Additionally, despite the need to transition to clean energy, some concessions were made to ensure the passage of the overall package, including requiring onshore oil and gas leasing and tying it to clean energy development. The Inflation Reduction Act also removes authority from the Secretary of the Interior to raise royalty rates on federally leased lands for 10 years. Finally, though an initial draft of the bill included reforms to the oil and gas bonding system, this provision was ultimately removed. Those bonding reforms are still badly needed to stop the practice of oil and gas companies abandoning wells without cleaning them up (also known as orphaned wells).
Saving people money on health care costs
In addition to the historic climate provisions, the Inflation Reduction Act includes provisions designed to reduce health care costs for people across the country. Most of the cost saving measures center around reducing the cost of prescription drugs, especially for Medicare patients. Among the most important short-term policies was to extend the subsidies authorized under the American Rescue Plan Act last year. According to an analysis by the Center on Budget and Policy Priorities, failing to extend these provisions would have caused insurance premiums to skyrocket for many middle class families.
Provisions in the Inflation Reduction Act related to health care:
- Authorizes the Secretary of Health and Human Services to negotiate the prices of certain drugs with pharmaceutical companies.
- Requires rebates on certain medications if drug companies raise prices faster than the rate of inflation.
- Caps the amount of money a Medicaid Part D patient must spend out of pocket on prescription drugs at $2,000 per year.
- Extends the Affordable Care Act subsidies authorized in 2021 that allowed more people to purchase subsidized plans on state health insurance marketplaces.
Taxing wealthy people and rich corporations closer to their fair share
While not as ambitious as the tax plan laid out in previous federal legislative proposals, the Inflation Reduction Act has several provisions that will be used to pay for the climate, health, and deficit reduction policies in the bill. Additionally, the bill authorizes investments in Internal Revenue Service nforcement of existing tax laws.
- A 15% corporate minimum tax will raise an estimated $273 billion. Prior to Senate passage of the Inflation Reduction Act, Sen. Ron Wyden released research showing that over 100 companies with average profits of $8.7 billion paid a 0% effective tax rate in 2019.
- A 1% excise tax on stock buybacks will raise an estimated $73 billion. The Economic Policy Institute found that corporate stock buybacks increased by 50% after the passage of the Tax Cuts and Jobs Act in 2017, and soared to $580 billion in 2018.
- $80 billion in spending for increased enforcement of existing tax laws by the IRS is anticipated to raise an additional $203 billion in revenue.
- An extension of the limitation on the amount of losses businesses can deduct on their income taxes from 2026 to 2028 will raise an estimated $52 billion in revenue.
Additionally, the Inflation Reduction Act will be used to reduce deficits. Current estimates show the bill will reduce the federal deficit by over $300 billion.
What does the Inflation Reduction Act mean for us?
The Inflation Reduction Act will go a long way towards reducing carbon emissions that are causing climate change. In addition to buying us some time to come up with more substantial climate policies, the legislation is estimated to create 9 million jobs.
For health care consumers, especially older people and others who are on Medicaid Part D, the legislation will mean reduced costs on prescription drugs. And for those who get their health insurance through state exchanges, the bill will help them avoid potentially huge increases in premiums.
Finally, we will all benefit from a fairer tax code. Rich corporations have been racking up huge profits in recent years, and by closing tax loopholes that mostly benefit them and people who make over $400,000 a year, Congress is sending a message that the tax code should be fairer for working people.
Unfortunately, many important policies that were discussed in previous iterations of federal budget legislation did not make it into the Inflation Reduction Act. Permanently expanding the Child Tax Credit and the monthly advance payments that helped families afford rising costs, offering child care and preschool to families of young children, investing in the growing care economy and ensuring care workers can be paid what they deserve, a $15 federal minimum wage, and other policies would all benefit our country and our economy and help fight economic challenges like inflation and labor shortages. We also still have a lot of work to do on climate, despite the big wins in the Inflation Reduction Act.
However, given the many barriers to passage, this is an important piece of legislation that will address several important issues simultaneously, and provide avenues for an equitable economy and a just climate future.
