Inflation Reduction Act of 2022

What Is the Inflation Reduction Act of 2022?

The Inflation Reduction Act of 2022 (H.R. 5376) was designed to reduce the deficit and lower inflation while investing in domestic energy production and lowering healthcare drug costs. The bill became law with President Biden’s signature on Aug. 16, 2022. In essence, the law is a scaled-down version of the Build Back Better Act proposed by the Biden administration in 2021.

The law was expected to raise $739 billion, have a total investment amount of $433 billion, and result in a deficit reduction of more than $300 billion. It allowed Medicare to negotiate lower prescription drug prices and extended the expanded Affordable Care Act (ACA) program for three years through 2025.

The law also established policies to promote and support domestic energy and transmission projects. The goal was to lower consumer costs and help the United States meet long-term emissions goals.

Understanding the Inflation Reduction Act of 2022

According to the White House, the Inflation Reduction Act was going to be “the single largest investment in climate and energy in American history.” Spending was designed to lower energy costs, increase cleaner energy production, and reduce carbon emissions by 40% by 2030.

The law accomplished a long-standing Democratic goal to allow Medicare to negotiate lower drug prices, although there are limits to the number of drugs affected and the time frame involved. Another plus was a $2,000 annual cap on out-of-pocket drug costs. ACA healthcare premiums were also supposed to be lowered for millions of Americans for three years under the law.

A significant funding source for programs in the law was a 15% corporate minimum tax on large corporations that report book income averaging more than a billion dollars per year. The law imposed no new taxes on families who made $400,000 or less annually or on certain small businesses.

What’s in the Inflation Reduction Act?

Revenue and spending were estimated as follows, according to the Congressional Budget Office (CBO), the Joint Committee on Taxation (JCT), and Senate estimates.

Each component of the 725-page bill fell under one of two areas listed in the table: revenue or investments. Since the law raises more revenue than the amount spent, the difference between the two is available for deficit reduction.

Following are highlights of some of the most notable features of the Inflation Reduction Act of 2022:

15% Corporate Minimum Tax

The law introduced a new 15% minimum tax on corporations to help pay for climate and healthcare measures. The tax applies to companies that generate $1 billion in annual earnings. The Joint Committee on Taxation (JCT) estimated that the tax would raise $313 billion in revenue over the next decade.

Exemptions from the tax demanded by Sen. Kyrsten Sinema (then-D-Ariz.) to secure her “yes” vote included:

• Exemption for companies that use accelerated depreciation to help pay for new investments.
• Exclusion of small businesses that are subsidiaries of private equity firms.

Prescription Drug Pricing Reform

The law allowed Medicare to negotiate prices for some drugs for the first time. This is a policy that Democrats have attempted to enact, over objections from the pharmaceutical industry, for many years. The provisions are expected to save $265 billion over 10 years, according to analysis by the CBO.

Specifically, the law let Medicare negotiate lower prices for 10 high-cost drugs beginning in 2026. This jumps to 20 drugs by 2029. Companies that refuse to negotiate will be subject to a sales tax of up to 95% on that drug. The law included a ceiling on the negotiated price of the specified drug. Moderate Democrats, then including Sinema, inserted a requirement that price negotiations only apply to older drugs (nine years for most and 13 years for biologic drugs).

The law capped out-of-pocket drug costs at $2,000 a year for Medicare beneficiaries starting in 2025.

It also capped insulin costs for people on Medicare to $35 a month. The original proposal called for a cap on both Medicare and private insurance patients, but Republicans voted against extending protection to those on private plans.

Other drug cost caps, which mostly apply to Medicare beneficiaries, were also in the law. Those who purchased insurance under private plans were largely excluded from these caps because Senate rules limit how expansive such provisions can be.

A further protection mandated that drug companies that raise prices on Medicare faster than the rate of inflation must pay rebates to the government for the price difference.

Enhanced IRS Tax Enforcement

The Inflation Reduction Act of 2022 allocated $76 billion to increase enforcement by the Internal Revenue Service (IRS). Supporters of the measure hoped that additional employees and better technology would allow the IRS to catch more tax cheats, especially among the ultra-wealthy. The CBO believes this could boost IRS revenue by at least $201 billion over the next decade.

Stock buybacks are subject to an additional tax under this law. A 1% excise tax on buybacks is expected to generate $74 billion by 2031.

To recoup tax revenue lost to private equity, the act imposed a limit on losses that businesses can deduct from their taxes. These measures were designed to prevent wealthy individuals from reducing or even wiping out their income tax liability.

Energy Security and Climate Change Investment

The largest investment made by the Inflation Reduction Act of 2022 was for energy security and climate change. It totaled $369 billion and consisted of the following:

Business Incentives and Tax Credits

• Incentives for businesses to deploy lower-carbon and carbon-free energy sources
• Tax credits for energy production and investments in wind, solar, and geothermal energies
• Tax credits for investment in battery storage and biogas
• Tax credits for investments in nuclear energy, hydrogen energy coming from clean sources, biofuels, and technology that captures carbon from fossil fuel power plants
• Bonuses for companies based on worker pay and the manufacture of steel, iron, and other components in the U.S.

Business and Consumer Incentives

• Incentives for companies and consumers for making cleaner energy choices
• Tax credits for residential clean-energy costs, including rooftop solar, heat pumps, and small wind energy systems. The credit is 30% through 2032, after which it phases down.
• Electric vehicle tax credits of up to $7,500 on new EVs and $4,000 on used EVs
• Tax credit for energy efficiency in commercial buildings
• Grants and loans to help companies reduce emissions of gas methane from oil and gas
• Fees levied on producers with excess methane emissions
• $27 billion toward additional incentives for clean-energy technology

Use of Public Lands

• New requirements to hold lease sales that opened up new oil and gas production
• Reinstatement of a recent offshore oil and gas lease sale that was struck down on environmental grounds
• Requirement that the Interior Department hold at least two more offshore oil and gas lease sales, one within 30 days of the enactment of the law and the other by Sep. 30, 2023.
• Minimum royalties increased for companies that extract oil and gas on public lands and waters
• Added royalties for public land and water extraction of gas that is later burned off or released as waste instead of sold as fuel

Miscellaneous Provisions

• $3 billion for environmental justice block grants—community-led programs that address harms from climate change and pollutants, including $20 million for technical assistance at the community level, through fiscal 2026
• $3+ billion for air pollution monitoring in low-income communities, with $117 million going to communities in close proximity to industrial pollutants
• Excise tax increase from $0.097 to $0.164 per barrel on imported petroleum and crude oil products to fund the cleanup of an increase in industrial disaster sites
• Permanent extension of the tax on coal production that funds the Black Lung Disability Trust Fund, which finances claims from workers with the condition

Affordable Care Act (ACA) Extension

The law extended financial assistance to help people enrolled in the ACA through 2025. Without this action, extra assistance would have stopped at the end of 2022. The provision also expanded eligibility to allow more middle-class people to receive premium help. The extension of ACA help is estimated by the CBO to cost $64 billion.

Western Drought Resiliency

A last-minute addition to the Inflation Reduction Act includes $4 billion in new funding for the drought scorching the Western U.S. The law calls for the Bureau of Reclamation to address the 22-year drought impacting that part of the country.

Funds will be used to compensate farmers who voluntarily reduce their water deliveries under short-term or multiyear agreements and projects that conserve water in Lake Mead and Lake Powell. Funding will also be available to mitigate the environmental effects of shrinking inland water sources such as the Salton Sea and the Great Salt Lake.

Additional Congressional Budget Office (CBO) Estimates

The CBO estimates that because prescription drug savings would be larger than new spending, net spending would be reduced by nearly $15 billion through 2031. This includes savings of almost $40 billion in 2031.

Net taxes would go down by about $2 billion per year once the Inflation Reduction Act of 2022 was fully phased in, according to the CBO’s estimates. The CBO also took into account what it called the “spillover” effects of higher wages resulting from lower healthcare premiums under the ACA.

Overall, the CBO estimated $790 billion in offsets to fund roughly $485 billion of new spending and tax breaks. Because the law attempts to reduce deficits, proponents believe it will also help reduce inflation and serve as a risk-reduction measure against a recession.

Penn Wharton Budget Model

One study often cited by critics of the Inflation Reduction Act of 2022 was conducted by the Wharton School at the University of Pennsylvania. The Penn Wharton Budget Model (PWBM) estimated that the Inflation Reduction Act would reduce cumulative deficits by $248 billion over the next decade with no impact on gross domestic product (GDP) in 2031.

The anticipated impact on inflation, according to the PWBM, will be “statistically indistinguishable from zero.” The PWBM conducted an alternative scenario in which the Affordable Care Act subsidies were made permanent. Under this scenario (which is not currently part of the law), the 10-year deficit reduction estimate falls to $89 billion.

The Bottom Line

The Inflation Reduction Act of 2022 is most controversial regarding the subject of the measure’s title: inflation. There is no real consensus on how much—or even if—the law will ever reduce inflation.

There is little debate that the law will reduce the deficit, albeit with some variation in the amount of the deficit reduction. The part of the law that deals with prescription drug costs is far less than Democrats hoped for, but all agree that it is at least a good start.

While raising taxes on corporations and the rich is generally popular, some conservatives have expressed concern that these measures will discourage investments and hiring on the part of affected companies.