On August 7th, 2022, the Inflation Reduction Act (IRA) was passed in a 51 to 50 vote by the United States Senate. The legislation is a $739 billion spending package, and places around $369 billion towards energy and climate related funding, making it one of the largest government investments toward tackling the climate crisis in history. But the IRA aims to tackle even more than just climate change, looking also at healthcare, taxes, and the national deficit.
Here are five key objectives of the Inflation Reduction Act:
1 It looks to cut greenhouse gas emissions.
According to 2019 data, the U.S is the second largest contributing country when it comes to greenhouse gas emissions, so in order to meet international climate goals, saying the U.S. needs to reduce its emissions is an understatement. The bill intends to reduce emissions by 1 gigaton (a billion metric tons) by 2030. That’s 10 times the projected climate impact of any piece of legislation in history.
To make this drastic a change, the bill commits to powering homes, businesses, and communities through the implementation of 950 million solar panels, 120,000 wind turbines, and 2,300 grid scale power plants. This intends to cut emissions by 40% by 2030 relative to 2005 numbers. The bill further offers a $180 tax credit per ton of carbon that companies capture.
Many critics have pointed out that the IRA also incentivized the continuation of some fossil fuel industries, and seems to take a more “all-of-the-above” approach to energy than a climate-centric one. That said, the projected emissions reductions in the IRA are still substantial, and many suggest that while the bill isn’t perfect from a climate perspective, it could be a good way to accelerate an energy transition.
2 It aims to make green energy cheaper.
A vast amount of green technology has already been invented and made available to the public. Electric cars, solar panels, and energy efficient appliances like heat pumps, refrigerators, and dishwashers are all viable options. But many families have found them too expensive to purchase. In order to accelerate a clean energy transition, the IRA intends to lower energy costs through rebates and tax credits. Consumers will now receive up to $7,500 in tax credits for new electric vehicles, and $4,000 for used electric vehicles. $14,000 will also be given to families to purchase energy efficient home appliances. The IRA also offers a 30% tax credit to all new solar panel installations, enabling approximately 7.5 million more families to get them on their roofs.
Some may point out that handing all this money to consumers may actually worsen inflation, since if people have more money, the demand for products will go up. While this may be a possibility in the short-term, long-term economic benefits to families could be huge, with the average family who takes advantage of these benefits finding an estimated saving of over $1,000 a year on energy related expenses.
3 It intends to reduce prescription drug prices.
In 2020, health expenditures per capita in the U.S were $11,945, while comparable countries sat around $5,746. On top of that, Americans pay 2-3 times more for prescription drugs than citizens of other countries. With prescription drug prices out of control, the legislation allows Medicare to negotiate prices with manufacturers to acquire lower prices thus reducing the costs for consumers. This should reduce prescription drug prices for 5-7 million Medicare beneficiaries. Further, out-of-pocket costs at the pharmacy are now capped at $2,000, and insulin costs for Medicare beneficiaries will be capped at $35 dollars for a month's supply. The price of insulin has risen dramatically in the United States. An individual currently may pay as much as $1300 per month.
This change has brought critics to the front. Some argue that the government is getting in the way of free market competition, which could lower costs in a more effective way. Others suggest the IRA will cut Medicare benefits and bring money out of the system. Ultimately this legislation will save the government around $250 billion over the next ten years, and the idea is that the legislation will reduce Medicare spending by lowering the price they pay for the drugs administered through the program.
4 It closes tax loopholes.
It is estimated that $160 billion worth of taxes are evaded per year by the top 1% of earners. What’s more, 55 of America’s largest and wealthiest companies got away without paying a cent towards 2020’s federal income tax. To combat this, the IRA intends to allocate $79.6 billion through 2031 to the IRS and related agencies. This $79.6 billion will supplement the current IRS budget allowing it to increase tax enforcement activities, operations support, and taxpayer services.
In addition, a 15% tax on all companies that make more than $1 billion a year, and 1% on all stock buybacks will be implemented. These new enforcements from the IRA will bring an estimated additional $124 billion over the next 10 years.
Business advocacy groups have argued about the 15% tax, saying it will limit economic growth of the country making the U.S. poorer. Many have also voiced concern over the growth of the IRS, suggesting that they may perform more audits as a result. Economists and financial analysts have taken a different approach, often stating that the legislation won’t have a dramatic effect on corporations' earnings, and shouldn’t limit their future investments. The IRA’s tax provisions are specifically targeted toward wealthier Americans, while any family earning below $400,000 per year aren’t expected to see a change in their taxes.
5 It reduces the national deficit.
The United States national deficit in 2021 was $2.8 trillion, and with such a large deficit, the IRA intends to spur a drastic reduction. Through different methods like reducing spending on healthcare and increasing the amount of tax money coming in, the legislation intends to cut the national deficit by $1.5 trillion this year.
Though many opponents of the legislation argue that the bill will increase inflation, some opposing studies have shown that reducing the national deficit will actually reduce inflation over the long term. Immediately, it has been shown that reducing the deficit by a large amount will not cut prices, but supporters of the Inflation Reduction Act suggest that the long-term impact of reducing the deficit could help curb inflation down the road.