It’s a deal set to raise over $800 billion in the coming decade for everything from fighting climate change to extending Obamacare. And it’s projected to bring down the deficit to boot.
Sens. Chuck Schumer (D-NY) and Joe Manchin (D-WV) surprised the world on July 27 when they released a sweeping, 725-page bill known as the Inflation Reduction Act (IRA) — instantly resuscitating a key Democratic agenda item aimed at bringing down costs for the middle class.
The compromise comes after President Joe Biden’s expansive “build back better” plan stalled in Congress and appeared to be dead for good. While the so-called IRA may be a far cry from some early Democratic ambitions — and it still has plenty of hurdles before it becomes law — the deal marks a potentially giant win for Biden and Democrats just a few months before midterm elections.
On Wednesday, White House Council of Economic Advisers Member Jared Bernstein said the deal brings “huge opportunities for investment” to the U.S. economy.
While Republicans are expected to line up en masse against the proposal, the bill has gained the support of former Treasury Secretary Larry Summers, who notably predicted the Biden administration’s post-pandemic stimulus efforts would stoke inflation.
“This bill is fighting inflation and has a whole lot of collateral benefits as well,” said Summers, who reportedly helped shape the deal.
Here’s what’s it will do.
The centerpiece of the bill is a giant allocation toward climate change and energy efforts. Schumer has noted repeatedly that this bill “will be the largest action on climate change ever passed by the Congress.”
If enacted, it will spread money all around the green economy from $9 billion towards a program to retrofit homes to $20 billion to manufacture more electric vehicles. Automakers like GM (GM), Tesla (TSLA), and Toyota (TM) are expected to benefit from the money as well as the expansion of a $7,500 EV tax credit included in the deal.
Approximately $385 billion in total will fund clean manufacturing, agriculture efforts, and other sectors.
Advocates for the package say it will reduce U.S. carbon emissions by roughly 40% by 2030. The news has climate activists who had largely given up on the chances of action from Washington D.C. this year ecstatic about the u-turn. As one example, Evergreen Action Executive Director Jamal Raad said in a statement that the bill could “mitigate the worst impacts of climate change, reduce energy costs for working families, and save countless lives.”
The bill also has provisions that would impact the energy industry more widely including new rules around federal land sales for oil drilling and a fund to permanently extend the Black Lung Disability Trust Fund. That will help many former coal miners in Manchin’s home state of West Virginia.
The bill also makes significant changes to the health care system.
One key provision will allow Medicare to negotiate for prescription drug prices. Current law prohibits Medicare from intervening in the talks between drug makers and health plan sponsors. The new rules would allow the government to weigh in to push down prices and save consumers — and the government — billions.
The bill also would add an inflation cap on drug prices to stabilize monthly costs and cap out-of-pocket drug expenses through new rules on rebates. All told, budget experts expect the combined changes will bring $320 billion into the U.S. Treasury in the coming decade.
The IRA also extends subsidies for health insurance costs that began in the 2010 Affordable Care Act for an additional three years. That provision comes with a price tag of about $64 billion.
The subsidies had previously been extended in the American Rescue Plan and are currently set to expire this fall. If the bill doesn’t pass, millions of Americans could see price increases in the fall.
And a cherry on top for advocates of the package is that the bill will reduce the deficit by around $300 billion over the coming decade through a series of “pay fors” (more on that below).
Summers cited deficit reduction as the key reason he expects the bill will reduce inflation.
“It reduces demand, because it will bring down the budget deficit over time, because, unlike what we did a year and a half ago [in the American Rescue Plan], we’re raising more revenue than we’re increasing spending,” Summers noted recently on CNN.
Sen. Manchin made deficit reduction a must-have portion of the bill to earn his support and noted “it is past time for America to begin paying down our $30 trillion national debt” in announcing his support for the deal.
A question was raised about the overall inflation-fighting powers of the bill Friday when the Penn Wharton Budget Model, which Manchin is known to track closely, released its first estimate of the bill and found little inflation impact. It “would very slightly increase inflation until 2024 and decrease inflation thereafter,” the estimate stated.
To pay for it all, in addition to health care savings, the bill makes three changes to the tax code.
There is a new minimum corporate tax that would apply to corporations that have made over $1 billion in book profits in recent years. That idea is projected to raise $313 billion.
The deal also will put aside billions to help the IRS chase down tax dodgers. Experts predict a hefty return on investment there: the $80 billion added to the IRS budget is expected to bring in $203 billion in taxes.
Finally, the deal would remove the so-called “carried interest loophole,” which wealthy money managers can use to pay lower taxes on their capital gains — potentially adding another $14 billion to U.S. coffers.
On Friday, the carried interest effort found an unlikely ally in hedge fund billionaire Bill Ackman. He tweeted that the current rules are “a stain on the tax code,” adding that it “is an embarrassment and it should end now” for good measure.
On Friday on Yahoo Finance, investor Kevin O’Leary contended the new minimum corporate tax could make the U.S. less competitive. “That’s not a good move because you want to keep our economy competitive,” he said.
But from the perspective of Democrats in Washington, the overall tax effort will “begin to restore fairness to the tax code,” as Biden put it Tuesday.
He and others note that the minimum tax would target the biggest companies in America, including the 55 members of the Fortune 500 that paid no federal income tax in 2020.
Ben Werschkul is a writer and producer for Yahoo Finance in Washington, DC.
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