Investing News

The Inflation Reduction Act, a scaled-down version of the Build Back Better Act, passed the Senate over the weekend and now heads to the House where it is expected to pass before going to President Biden for his signature as soon as the end of this week.

The legislation, according to Senate Democrats, will make a “historic down payment on deficit reduction to fight inflation, invest in domestic energy production and manufacturing, and reduce carbon emissions by roughly 40 percent by 2030.” It’s also designed to reduce healthcare costs for older Americans. Republicans are less generous, describing the legislation as a giant tax increase and major spending bill. Here are the bill’s major provisions, as passed by the Senate.

Key Takeaways

  • The Inflation Reduction Act (IRA) of 2022, passed the Senate on Aug. 9, 2022.
  • The legislation is designed to tackle climate change, lower healthcare costs for older people, reduce the deficit, and fight inflation.
  • Senate Democrats employed the budget reconciliation process, which only requires a majority to pass legislation.
  • The bill calls for a $433 billion investment to secure $739 billion in revenue for a net deficit reduction of $300+ billion, according to Senate Democrats.
  • The legislation will next be taken up by the House, where it is expected to pass before going to President Biden for his signature to become law.

Taking on Climate Change

The legislation calls for a more-than-$300-billion investment in energy and climate reform. This would be the largest federal investment in clean energy in U.S. history. By comparison, the Build Back Better Act called for a $555 billion investment in climate change.

Measures in the bill would invest $60 billion for renewable energy infrastructure, including additional wind turbines and the manufacture of solar panels. Individuals would receive tax credits on the purchase of electric vehicles and steps taken to make homes more energy efficient.

Democrats say these actions would reduce greenhouse gas emissions by 40% by 2029. The Biden administration has set a target of 50% reduction by then.

Lowering Prescription Drug Prices

The current legislation will reduce the prices of some prescription drugs by allowing Medicare to negotiate the prices of certain high-cost prescription drugs. Negotiations will be limited to 10 drugs in 2026 and 20 in 2029.

Capping the price of insulin at $35 per month was nixed by the Senate parliamentarian because it would apply only to Medicare recipients and not private insurance. Democrats responded by including private insurance. Republicans effectively killed the measure by blocking private insurance.

The bill does include a cap of $2,000 out-of-pocket prescription drug costs for Medicare recipients, effective in 2025 and a three-year extension of healthcare subsidies in the Affordable Care Act (ACA) that was originally part of pandemic relief in 2021.

Tax Increase for Some Corporations

The IRA legislation creates a 15% alternative minimum tax (AMT) on corporations that make $1 billion or more in annual income. This measure is expected to raise $313 billion in additional revenue.

The current corporate tax rate is 21%. According to Democrats, however, “some 200 or more large corporations use tax loopholes to avoid paying that rate and actually pay below 15%.” The corporate AMT would impose a mandatory 15% minimum tax on adjusted income for corporations with profits in excess of $1 billion.

Companies would be allowed to claim net operating losses and tax credits against the AMT as well as a tax credit against regular corporate tax for AMT paid in prior years, to the extent the regular tax liability in any year exceeds 15% of the corporation’s adjusted financial statement income. The measure would be effective for taxable years beginning after December 31, 2022.

Deficit Reduction and Inflation

The bill is named the Inflation Reduction Act for a reason. It spotlights what Democrats believe is a primary taxpayer concern, inflation. Reducing the deficit, Democrats claim, will help lower inflation. Republicans say the new spending in the bill will make inflation worse.

The Congressional Budget Office says in its analysis that the IRA will have a “negligible” effect on inflation in 2022 and into 2023.”

The Bottom Line

As with most legislation, the long-term effects of the Inflation Reduction Act are not known. The non-partisan Congressional Budget Office (CBO), for example, anticipates a net deficit reduction of $102 billion over the next decade. The Committee for a Responsible Federal Budget (CRFB) calls for a $305 billion reduction and Senate Democrats also predict a total deficit reduction of more than $300 billion. A Penn Wharton Budget Model (PWBM) study found a $248 billion deficit reduction.

Since the IRA represents a scaled-down version of Build Back Better, its goals are modest compared to the massive legislation first proposed by the Biden administration. In the back and forth over deficit reduction and inflation estimates, it’s notable that the IRA represents the first time in years that reconciliation has been used for deficit reduction. Also, notable and not much discussed: The IRA is the largest deficit reduction bill since the Budget Control Act of 2011. These two aspects represent a significant development.

Articles You May Like

3 Ultra-Speculative Stocks for Thrill-Seeking Traders
Faraday Future Stock Is a Ticking Time Bomb Ahead of Reverse Split
3 Reasons Investors Should Stay on the Sidelines With Palantir Stock
3 Spinoff Stocks You Should Buy Now: July 2024
3 AI Stocks That Could Be Multibaggers in the Making: July Edition