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A First Look At The Inflation Reduction Act

A First Look At The Inflation Reduction Act

September 11, 2022
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The initial assessment by the Congressional Budget Office suggests the Act will have a negligible effect on inflation in 2022, and in 2023 could increase or decrease the current inflation rate by 0.1 percentage point.1


The Inflation Reduction Act will still impact American society, even if inflation is largely unaffected. The legislation addresses health care and prescription drug costs, corporate taxes, and clean energy, and is projected to reduce the federal deficit by more than $100 billion over the next ten years.2

Medicare will finally be allowed to negotiate the price of certain prescription drugs. The expectation is that this will reduce the cost of medications for Medicare recipients -- and according to the Kaiser Foundation, there may be a "spillover" effect that slows price growth in prescription drugs for the privately insured. Starting in 2025, Medicare recipients will also have a $2,000 cap on annual out-of-pocket prescription drug costs. 3

The Affordable Care Act (ACA) medical insurance premiums subsidies, scheduled to expire at the end of 2022, will be extended through 2025. The U.S. Department of Health and Human Services had estimated close to 3 million Americans would lose their health insurance if these subsidies weren’t extended. 4

Corporations with at least $1 billion in income will have a new tax rate of 15% for tax years beginning after December 31, 2022.The non-partisan Joint Committee on Taxation has determined that this provision will apply to about 150 corporations. 5

The Penn Wharton Budget Model projects that the new 15% corporate minimum tax rate will reduce GDP by 0.1 percent in 2031, but will eventually increase GDP by 0.1 percent in 2050. Tax filers in every quintile are expected to bear some of the cost, though 83% of it will be paid by the top quintile of earners and only 12% of those in the lowest quintile would be affected. On average, the lowest quintile would forfeit $5 in wage raises (or $40 when calculated across the 12% affected and not the entire quintile) and the highest 0.1% of earners would see the value of their financial assets reduced by over $61,500. 6

These cost estimates don’t take into account the tax credits in the Act related to health insurance premiums and clean energy subsidies. According to the non-partisan Tax Policy Center, including the extension of the health insurance premium tax credit alone shifts the tax effect to a reduction for all but the top quintile of earners.7

Stock buybacks by corporations will face a 1% excise tax. This rule is effective for repurchases after December 31, 2022, excluding retirement accounts, pensions, and employee-stock ownership plans (ESOPs).8 There is speculation that this provision may contribute to a rise in buybacks through the end of 2022, before the law takes effect, and afterward may induce some corporations to increase dividend payouts.9

The IRS will receive $80 billion in additional funding over the next 10 years. This investment will be targeted toward upgrading software, customer support, and audits of high earners. The Congressional Budget Office estimates a potential revenue increase of $204 billion over the next 10 years from this provision.10

The legislation also includes tax credits for households to offset energy costs, along with investments in clean energy production and tax credits that seek to reduce carbon emissions. The Wilderness Society has described the Inflation Reduction Act as a “breakthrough” on climate policy.2


Citations.

1 - https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf

2 - https://www.forbes.com/advisor/personal-finance/inflation-reduction-act/

3 - https://www.kff.org/medicare/issue-brief/how-will-the-prescription-drug-provisions-in-the-inflation-reduction-act-affect-medicare-beneficiaries/

4 - https://www.hhs.gov/about/news/2022/06/22/fact-sheet-what-happens-premiums-if-extra-help-american-rescue-plan-expires.html

5 - https://www.finance.senate.gov/imo/media/doc/jct_analysis_book_minimum.pdf

6 - https://budgetmodel.wharton.upenn.edu/issues/2022/8/12/senate-passed-inflation-reduction-act

7 - table at https://www.taxpolicycenter.org/model-estimates/hr5376-inflation-reduction-act-passed-senate-august-2022/t22-0028-hr5376-inflation, detailed description of analysis at https://www.taxpolicycenter.org/taxvox/inflation-reduction-act-primarily-impacts-top-1-percent-taxpayers

8 - https://www.natlawreview.com/article/inflation-reduction-act-key-tax-considerations

9 - https://www.cnbc.com/2022/08/19/what-stock-buybacks-are-and-how-a-new-tax-affects-your-portfolio.html

10 - https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf - page 4, footnote c