The Inflation Reduction Act: A Quick Summary

Given that I've heard similar questions from a few people this week about the "Inflation Reduction Act," I thought it might be helpful to share some thoughts on the topic.

Here are a few questions worth asking:

• What's in the bill?

• How will it impact you?

• Will it reduce inflation?

Let's start with how we got here, and then I'll attempt to answer these questions.

The Inflation Reduction Act (IRA) is a rebranded--and scaled-down--version of the $3 Trillion Build Back Better Act proposed in 2021. In contrast, the IRA (this is admittedly a difficult acronym for me to adopt for obvious reasons) is a bill that includes $737 billion in provisions and is estimated to reduce the deficit by about $300 billion. It passed through both chambers of Congress on a pure party-line vote.

What's in the Bill?

There are three primary objectives of the IRA:

• To fight climate change

• To lower the cost of healthcare

• To increase tax revenues

Let's discuss a little of each.

1. Fighting Climate Change:

The IRA essentially offers incentives in the form of tax credits for companies and individuals to adopt green energy. The hope is that by offering these tax credits, the government is encouraging broader adoption and technological innovation that will eventually drive costs down over time, making renewable energy more widely available.

It's important to note that there are also pieces of the bill that subsidize fossil fuels to help ease America's continued transition toward more renewable energy sources.

2. Lowering the Cost of Retiree Healthcare:

The bill's highlights from the consumer's perspective are the changes to Medicare (not private insurance) drug costs. Starting next year, insulin costs will be capped at $35 per month. And in 2025, Part D out-of-pocket maximums will be capped at $2,000 per year. These are both significant changes that will positively impact retirees.

Additionally, this bill corrects some of the flaws of the Medicare Modernization Act of 2003 by allowing Medicare to negotiate drug prices with pharmaceutical companies on some of the most expensive drugs starting in 2026.

It's a natural question of whether these changes will cause premiums to rise? We can't know yet, but anyone who has turned 65 knows that the world of Medicare is intensely competitive, so insurers are incentivized to keep premiums low to be as competitive as possible.

3. Increase Tax Revenues:

There are two primary ways the bill is planning to increase tax revenues. One is raising taxes on large corporations by implementing a 15% minimum tax on companies with $1 billion or more in profits and adding a 1% tax on stock buybacks.

Secondly, the bill significantly increases the budget for IRS tax enforcement. The idea is that additional enforcement of our current tax code will result in more taxes being collected. While not an increase in individual taxes, it will likely result in more tax revenue.

How Will the IRA Impact You?

There are two ways the bill might benefit you. For one, the noted decreases in prescription drug costs and caps on Part D expenditures are significant.

Secondly, you may take advantage of some of the tax credits available for electric vehicles or energy-efficient home improvements.

As for how it may "negatively" impact you, it appears that we are all more likely to be audited thanks to the increase in IRS tax enforcement.

Will the IRA Reduce Inflation?

Maybe, or maybe not.

Drug costs should come down, but it remains to be seen whether premiums will rise to offset the savings there.

On the energy front, from a purely economic perspective, when spending is encouraged (which tax subsidies do), prices typically rise. But over time, technological innovation tends to push prices down.

That said, while the "Inflation Reduction Act" is a clever name, every source I've read seems to agree that this bill's impact on inflation will be negligible. Time will tell.

I hope this sheds some light on the new bill. If you'd like to read further into it, I've attached various sources that I found helpful below.

Sources and Additional Reading:

• The Inflation Reduction Act Bill

• Inflation Reduction Act: Comparing CBO and PWBM Estimates (Penn Wharton)

• How the Inflation Reduction Act might affect you - and change the U.S. (Washington Post)

• Inflation Reduction Act of 2022 (Investopedia)

• Democrats passed a major climate, health and tax bill. Here's what's in it (NPR)

• The Inflation Reduction Act's Impact on Retirees (Morningstar)

• Summary of the Tax Provisions of the Inflation Reduction Act (Arnold & Porter)

• The Inflation Reduction Act: Bidenonomics 2.0 (Noahpinion - paywall)