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SmartAsset: What Is Inside the Inflation Reduction Act?

President Joe Biden has signed the Inflation Reduction Act into law. This legislation aims to pay down the national debt, lower energy costs and extend affordable healthcare coverage for millions of Americans. Let’s break down what’s in the act, what you could get, who will pay for it and whether it can reduce inflation.

A financial advisor can help you understand how legislation impacts your finances. Find a financial advisor today.

How the Inflation Reduction Act Became Law 

President Biden signed the Inflation Reduction Act into Law on August 16. This happened four days after House Democrats approved the legislation with a 220 to 207 vote on August 12.

The act is the biggest federal investment against climate change, aiming to cut gas emissions in less than a decade by roughly 40%. This legislation will also make changes in healthcare to lower drug prescriptions, cap out-of-pocket expenses and extend coverage.

Senate Democrats first passed the bill with a tie-breaking vote from Vice President Kamala Harris on August 7. Forty-eight Democrats and two Independents who caucus with the Democrats voted in favor, while all 50 Republicans voted against it.

The act took a major step forward after locking in the support of centrist Senators Joe Manchin (D-WV) and Krysten Sinema (D-AZ), who have held out against the Build Back Better Act because of a price tag that was almost three times the cost of the Inflation Reduction Act.

“Rather than risking more inflation with trillions in new spending, this bill will cut the inflation taxes Americans are paying, lower the cost of health insurance and prescription drugs, and ensure our country invests in the energy security and climate change solutions we need to remain a global superpower,” Manchin said in a press release.

Then, after reaching another agreement with Senator Sinema on August 4, Democrats revised the Inflation Reduction Act to drop a provision that would have raised $14 billion by closing the carried interest loophole.

“We have agreed to remove the carried interest tax provision, protect advanced manufacturing, and boost our clean energy economy in the Senate’s budget reconciliation legislation,” Sinema said in a statement.

The revised bill, however, added a 1% excise tax on stock buybacks, which legislators estimated could raise $74 billion (this is over five times more revenue than the carried interest loophole provision).

“The House today passed the historic Inflation Reduction Act that will lower costs for middle-class families, close tax loopholes for the rich and big corporations, take the most significant action ever to fight the climate crisis, and create good-paying jobs,” Senate Majority Leader Chuck Schumer (D-NY) said after the House approved the bill on August 12.

What Is in the Inflation Reduction Act?

The Inflation Reduction Act is a trimmed-down version of the $1.85 trillion Build Back Better Act that was narrowly passed by the House on Nov. 19, 2021 with a 220 to 213 vote.

This would be the second part to President Biden’s infrastructure and social spending legislation. Combined with the Bipartisan Infrastructure Law, the total investment would be roughly $1.9 trillion.

Whereas the Bipartisan Infrastructure Law invests $1.2 trillion on overhauling the nation’s roads and bridges, electric and water systems, and high-speed internet; the Inflation Reduction Act would fund energy production and manufacturing, reduce carbon emissions, lower prescription prices and extend affordable healthcare coverage.

The act would raise $737 billion in revenue. Less than one-third ($222 billion) would come from a 15% corporate minimum tax. Another $265 billion would come from prescription drug pricing reform, $124 billion would be raised through IRS tax enforcement, $74 billion would come from a 1% stock buyback tax and $52 billion would be raised from a deduction limit extension that prevents high income taxpayers from claiming business losses to reduce income.

The Inflation Reduction Act would also invest $369 billion in energy security and climate change, and another $64 billion to extend the Affordable Care Act. The legislation aims to reduce the deficit by more than $300 billion.

What Could You Get From the Inflation Reduction Act?

SmartAsset: What Is Inside the Inflation Reduction Act?

Millions of Americans could benefit from lower drug prescriptions, affordable healthcare coverage and tax rebates and credits.

Below is a breakdown of five things you will get from the Inflation Reduction Act. Note that estimates for how many Americans could benefit come from a White House statement on August 15:

  • Cheaper drug prescriptions. The White House says that Americans pay between two and three times more than citizens from other countries for prescription drugs. The act could cut these costs down for up to seven million Medicare beneficiaries by allowing Medicare to negotiate prescription drug costs.
  • Out-of-pocket spending for prescriptions capped at $2,000. Fifty million Americans with Medicare Part D would have out-of-pocket spending capped at $2,000 annually. For reference, in 2022, the catastrophic threshold that Medicare recipients must pay out-of-pocket before getting most of their prescription costs covered is $7,050.
  • $35 out-of-pocket cap for insulin. Over three million Americans could benefit from this provision. The Mayo Clinic says that “the most commonly used forms of analog insulin cost 10 times more in the United States than in any other developed country.” For people paying over $35 monthly with private insurance, this could mean a maximum savings of $504 annually. As a reference, the House had already added a $35 cap in the 2021 draft of the Build Back Better Act.
  • Affordable healthcare coverage extension. This will allow 13 million Americans to continue saving an average of $800 annually on health insurance premiums, which were set to expire under the Affordable Care Act at the end of 2022. The U.S. Department of Health and Human Services says that these subsidies allowed 14.5 million people to sign up for health insurance coverage. And the White House estimates that three million more could now get health insurance with this law.
  • Tax rebates and credits for energy and climate change. This provision will offer tax rebates up to $7,500 for the purchase of a new clean energy vehicle ($4,000 for a used one). Additionally, taxpayers could get a maximum rebate of $14,000 to buy heat pumps and other energy-efficient appliances (the White House estimates this will save families at least $350 annually). The legislation also includes a credit to lower energy costs (the nonprofit Resources for the Future says households could save up to $220 annually in electricity costs), and more than seven million families could qualify for a 30% tax credit that would save $9,000 over the life of the system (or at least $300 annually).

How Will the Inflation Reduction Act Get Funded?

SmartAsset: What Is Inside the Inflation Reduction Act?

Democrats estimate that they could raise $737 billion from the Inflation Reduction Act. Three provisions including a 15% corporate minimum tax, prescription drug pricing reform and IRS tax enforcement would bring in $611 billion. The revised act also includes an additional stock buyback tax that could raise $74 billion in revenue and an extension of a loss limit deduction that could bring another $52 billion. Together, these would leverage taxes on corporations and the ultra wealthy, save billions in Medicare and enforce the tax code. Though families making under $400,000 would not see any tax hikes and small businesses would also avoid new taxes.

Here are five ways Congress will fund the Inflation Reduction Act:

  • 15% corporate minimum tax rate ($222 billion). The legislation would impose a tax rate of 15% on corporations with at least $1 billion in profits. When compared with the Build Back Better Act, the Committee for a Responsible Federal Budget said on November 18 that it could raise comparably $320 billion.
  • Prescription drug pricing reform ($265 billion). The Inflation Reduction Act would allow Medicare to negotiate drug prices, which the Congressional Budget Office estimates could save Medicare $101.8 billion.
  • IRS tax enforcement ($124 billion). This provision would invest $80 billion in the tax agency over the next decade to strengthen tax enforcement and reduce the growing gap between what taxpayers owe and what the agency is collecting. For reference, a 2021 study estimated that the top 1% of Americans hid more than 20% of their income from the IRS and additional resources would help the agency collect another $175 billion from high-income tax evaders.
  • 1% excise tax on stock buybacks ($74 billion). Democrats added this 1% excise tax on stock buybacks in a revised draft of the Inflation Reduction Act. Stock buybacks happen when a publicly-traded company buys back its own stock to raise the value of its shares. Assuming that the current pace of buybacks does not change, the Tax Foundation says this excise tax will raise $19 billion less than what legislators have projected ($55 billion). And when compared with the Build Back Better Act, the current revenue estimate is roughly half of what the Committee for a Responsible Federal Budget had projected for a similar excise tax ($125 billion) in 2021.
  • Loss limit deduction extension ($52 billion). The Tax Cuts and Jobs Act (TJCA) prevents business owners from reporting more than $250,000 ($500,000 for joint filers) in business losses, which could be deducted from non-business income. The Inflation Reduction Act extends this limit for two more years with the aim of preventing high income taxpayers from deducting paper only losses that could be used to lower income.

You should note that Democrats dropped another provision that proposed raising $14 billion by closing the carried interest loophole. The current law allows investment funds holding assets for more than three years to benefit from a lower long-term capital gains tax.

For reference, the House Ways and Means Committee presented a similar proposal on September 13, 2021 that would have extended the holding period for long-term capital gains from three to five years. This provision had also been included in the Build Back Better Act.

Will the Inflation Reduction Act Reduce Inflation?

SmartAsset: What Is Inside the Inflation Reduction Act?

Democrats say that the legislation will bring down inflation, which is currently over 9%. One way it aims to do this is by cutting budget deficits, which will therefore lower demand in the economy. Some economic experts believe that budget deficits can increase inflation rates when the Federal Reserve releases more money into the economy.

One early study from the Penn Wharton Budget Model (PWBM), however, shows “little confidence” that this approach will have any impact on inflation.

While the research-based organization at the University of Pennsylvania says that the Inflation Reduction Act “would reduce cumulative deficits by $248 billion” over a 10-year budget window, it would also “slightly increase inflation until 2024” and then decrease it thereafter.

Moody’s Analytics similarly concurs that the legislation will do very little to lower inflation in the short-term, but it will become “more meaningful later in the decade.”

The credit rating agency says that the act would “modestly reduce inflation over the 10-year budget horizon,” with an average “reduction in CPI inflation of 3.3 basis points” per year.

Democrats also say that the Inflation Reduction Act will focus on increasing supply to help bring down prices. And this would be done by lowering energy costs, subsidizing more clean energy production and reducing carbon emissions.

Moody’s does, however, support that climate change provisions in the act could “become an increasing headwind to inflation later in the decade.” The agency concludes that energy provisions “could reduce the typical American household’s spending on energy by an estimated more than $300 per year in today’s dollars.”

And this could be the biggest deterrent against inflation in the future.

“Lower property and casualty insurance rates for businesses and homeowners and flood insurance for households due to the reduction in emissions and physical risk also lean against inflation,” Moody’s said in its legislation report.

Bottom Line

SmartAsset: What Is Inside the Inflation Reduction Act?

President Biden says that the Inflation Reduction Act will lower healthcare costs for millions of Americans and is “the most important investment that we’ve ever made in our energy security.” The legislation aims to reduce inflation by paying down the national debt, lowering energy costs and extending affordable healthcare coverage. The president signed the $740 billion act into law on August 16.

Tips for Beating Inflation

  • financial advisor could help you create a financial plan to protect your retirement savings and investments from inflation, market volatility and other financial challenges. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • If you’re struggling to keep up with loan or credit card payments, you can take steps to protect your credit score and speak with your bank directly to see whether you can defer loan payments or waive certain fees.
  • And, if you’re falling behind on your retirement goals, here are six ways to beat inflation and other savings and investing tips.
  • But, if you can afford it, investing in index funds during a recession is a safe option. Though if you’re looking for a slightly more aggressive approach, check out some free investment classes to learn more.

Photo credit: ©iStock.com/Prostock-Studio, ©iStock.com/dragana991, ©iStock.com/Geber86, ©iStock.com/miniseries, ©iStock.com/drnadig

Arturo Conde, CEPF® Arturo Conde is an editor at SmartAsset and a bilingual freelance journalist. He writes for NBC News and WhoWhatWhy. His articles have been published in Fusion, Univision, City Limits and the NACLA Report on the Americas.
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