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What is the Inflation Reduction Act?
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The Inflation Reduction Act of 2022 is a landmark United States federal law that aims to lower healthcare costs, address climate change, and raise taxes on large corporations. Signed into law by President Joe Biden on August 16, 2022, the act represents a significant investment in clean energy and healthcare affordability.
The legislation addresses several key areas, including prescription drug pricing reform, clean energy tax credits, and deficit reduction.It’s a complex bill, and its effects are still unfolding, but it represents the most substantial federal investment in climate and energy programs in U.S. history.The name itself is somewhat debated, as economists disagree on the extent to which it will directly reduce inflation in the short term.
According to the Congressional Budget Office (CBO), the Inflation Reduction Act is projected to reduce the federal deficit by $300 billion over the next ten years.https://www.cbo.gov/publication/58693
Key Provisions of the Inflation Reduction act
The Inflation Reduction Act contains a wide range of provisions,but some of the most significant include allowing Medicare to negotiate prescription drug prices,extending Affordable care Act (ACA) subsidies,and providing tax credits for clean energy technologies.
Specifically, the act authorizes Medicare to negotiate the prices of certain high-cost prescription drugs, starting with a limited number of drugs in 2026 and expanding over time. This is intended to lower healthcare costs for seniors. The law also extends enhanced premium tax credits for health insurance purchased through the ACA marketplaces, preventing premium increases for millions of Americans. Furthermore, it offers substantial tax credits for investments in renewable energy sources like solar and wind power, and also for electric vehicles.
On November 15,2023,the Centers for Medicare & Medicaid Services (CMS) announced the first 10 drugs selected for Medicare price negotiation under the Inflation Reduction Act. https://www.cms.gov/newsroom/press-releases/cms-announces-first-10-drugs-selected-medicare-drug-price-negotiation
How Does the Act Address Climate Change?
The Inflation Reduction Act allocates approximately $369 billion to address climate change and energy security, making it the largest climate investment in U.S. history.These funds are directed towards a variety of programs aimed at reducing greenhouse gas emissions and accelerating the transition to a clean energy economy.
The act provides tax credits for renewable energy production, energy efficiency improvements, and the purchase of electric vehicles.It also invests in technologies like carbon capture and storage, as well as programs to reduce methane emissions. A significant portion of the funding is directed towards environmental justice initiatives, aiming to address the disproportionate environmental burdens faced by disadvantaged communities. The goal is to reduce U.S. emissions by roughly 40% below 2005 levels by 2030.
The Department of Energy announced in December 2023 that it would provide $7 billion in funding for regional clean hydrogen hubs, a key component of the Inflation Reduction Act’s climate strategy. https://www.energy.gov/doe/articles/biden-harris-administration-announces-7-billion-kickstart-clean-hydrogen-hubs
What are the Tax Implications of the Act?
The Inflation Reduction Act raises revenue through a 15% minimum tax on corporations with over $1 billion in profits and increased IRS tax enforcement.These provisions are intended to ensure that large corporations pay their fair share of taxes and to close tax loopholes.
The corporate minimum tax applies to companies with average annual financial statement income exceeding $1 billion over a three-year period. The increased IRS funding is aimed at improving tax collection and reducing tax evasion. The Joint Committee on Taxation estimates that the corporate minimum tax will generate approximately $35 billion per year. The increased IRS enforcement is projected to raise an additional $124 billion over ten years.
According to the Treasury Department, the Inflation Reduction Act is expected to result in no tax increase for families making $400,000 or less per year. https://home.treasury.gov/policy-issues/inflation-reduction-act
Criticisms and Controversies Surrounding the Act
Despite its passage, the Inflation Reduction Act has faced criticism from both sides of the political spectrum. Some Republicans argue that the act will increase inflation and harm the economy, while some Democrats believe it doesn’t go far enough to address climate change or lower healthcare costs.
Critics on the right contend that the corporate minimum tax will discourage investment and lead to job losses. They also argue that the act’s spending provisions will exacerbate inflationary pressures.Progressive groups, on the other hand, argue that the act’s climate provisions are insufficient to meet the urgency of the climate crisis and that the prescription drug pricing reforms don’t go far enough to lower costs for patients. there have also been legal challenges to the act, particularly regarding the constitutionality of the corporate minimum tax.
In February 2024, the U.S. Chamber of Commerce filed a lawsuit challenging the corporate choice
