Inflation Reduction Act: How Are You Impacted Financially?

With prices rising at an accelerating rate, you may be wondering how the government plans to tackle this challenge. Recently, you may or may not have heard chatter about the inflation reduction act, which is a budget reconciliation package that includes several crucial issues including healthcare, tax reform, healthcare, and deficit reduction.

According to a summary posted on “democrats.senate.gov,” The Inflation Reduction Act of 2022 will make an unprecedented investment in deficit reduction to combat inflation, invest in domestic energy generation and industry, and reduce carbon emissions by nearly 40% by 2030. The enlarged Affordable Care Act program will be extended for three more years, through 2025, and Medicare will finally be authorized to bargain for the cost of prescription drugs. In other words, the inflation act seeks to lower energy health care costs and reduce government spending.

Bill Highlights:

1. Several tax incentives are included in the bill for people switching to greener energy sources. Especially for people who chose energy sources, including electric vehicles and rooftop solar panels. 
2. By the end of the decade, Democrats predict that these incentives, which will go into effect in 2023, will result in a 40% reduction in greenhouse gas emissions from 2005 levels.
3. Funding for the Internal Revenue Service will increase, with a focus on enhancing customer support and tax enforcement. Additionally, it can lead to a rise in the amount of taxes that are currently due but unpaid.
4. Health insurance subsidies that were due to expire next year will still be available to millions of Americans. Those with conditions like cancer and multiple sclerosis will also have fewer out-of-pocket expenses for prescription pharmaceuticals under the plan.

Bill Snapshot:

Bill Breakdown:

Total Revenue Raised

15% Corporate Tax Minimum: 

For climate and health care measures, the bill introduces a 15% minimum tax on corporations. The tax applies to companies earning $1 billion annually. Over the next decade, the Joint Committee on Taxation (JCT) estimates the tax will generate $222 billion in revenue.  

Prescription Drug Price Reform:

The measure grants Medicare for the first time the ability to bargain prescription prices. Starting in 2026, the Act would let Medicare negotiate lower costs for 10 expensive medications. By 2029, there would be 20 medications available. Companies that are unwilling to bargain will be charged a medicine sales tax of up to 95%. The bill specifies a cap on the agreed-upon price of the relevant medicine. 

For Medicare enrollees, the measure caps out-of-pocket prescription expenses at $2,000 per year beginning in 2025. The government is required to get reimbursements from pharmaceutical companies that increase Medicare prices faster than the rate of inflation as an additional safeguard. Over a ten-year period, the measures are anticipated to save $265 billion.

IRS Tax Enforcement, Stock Buyback Fees, & Loss Limitations:

To boost enforcement, the IRS will receive $80 billion from the Inflation Reduction Act of 2022. Over the next 10 years, the CBO estimates that this would increase IRS revenue by at least $124 billion by adding more staff members and improving technology.

An additional tax will also apply to stock buybacks if the proposal passes. Approximately $74 billion is expected to be generated by a 1% excise tax on stock buybacks by 2031.

To replace tax revenue lost to private equity, the act caps the amount corporations can deduct. Besides generating up to an additional 52 billion in revenue, these measures are intended to prevent wealthy individuals from drastically reducing or eliminating their income taxes.

Investments

Energy, Security, and Climate Change:

The Inflation Reduction Act of 2022 aims to combat climate change and ensure energy security. A few notable provisions of the $369 billion bill include incentives for low- and no-carbon energy sources. Incentives are also available for businesses and individuals who choose eco-friendly energy sources. As well as tax deductions for rooftop solar energy systems, heat pumps, and small wind generators.

Additionally, 30% of the credit will be available until 2032, then it will be phased out. Not to mention, for fiscal 2026, $3 billion will be allocated for environmental justice block grants aimed at addressing pollution and climate change, and $20 million will be allocated for local help on a local scale.

These are just a few but if you would like to know more check out this resource.

Affordable Care Act extension

In accordance with the Inflation Reduction Act, the Senate recently extended additional subsidies for individuals purchasing their own health insurance through Marketplaces for the ensuing three years, through 2022. These short-term subsidies were initially supposed to run for two years, 2021 and 2022, according to the American Rescue Plan Act (ARPA). Middle-class people, many of whom were previously priced out of coverage due to the higher subsidies, are now eligible for coverage, allowing those already qualified to receive greater financial aid.

Western drought resiliency

the Western United States goes through a historic drought, it is essential that we can help protect the Colorado River Basin, prevent climate change, conserve water resources, and combat climate change. The Inflation Reduction Act provides this cash in efforts to secure the future of water in the West.

More specifically, funds will be utilized for projects that conserve water in Lake Mead and Lake Powell as well as compensating farmers who voluntarily lower their water delivery as part of short- or long-term agreements. Additionally, funding will be made available to lessen the environmental impacts of inland water sources like the Salton Sea and the Great Salt Lake drying up.

Conclusion: Will the Inflation Reduction Act work?

Research by the Penn Wharton School of the University of Pennsylvania is frequently cited by opponents of the Inflation Reduction Act of 2022. The Inflation Reduction Act is projected to cut cumulative deficits by $248 billion over the following ten years with no effect on GDP in 2031 by the Penn Wharton Budget Model (PWBM).

Inflation will be “statistically indistinguishable from zero” because of the projected impact, according to Penn Wharton. In a different study, PWBM examined the possibility of making the Affordable Care Act’s subsidies permanent. The estimated deficit reduction over the next ten years drops to $89 billion under this scenario.