After the Democratic party spent months crafting a piece of key legislation in the form of a climate, tax, and health care package, President Biden signed The Inflation Reduction Act into law on Tuesday, August 16, 2022. This legislation targets several critical points on the democratic agenda, including tax changes, lowering prescription drug costs, and the largest single American investment to slow global warming.
What’s Inside the New Inflation Reduction Act?
Corporate Tax Hike
The bill includes a new minimum 15% tax on most corporations that make more than $1 billion a year in profits. In previous years, companies such as Amazon paid very little, or no tax. This bill aims to address that. However, some critics argued this proposal would hit manufacturers hard. In response, Democrats have amended the bill to preserve the tax benefits of accelerated depreciation.
This corporate tax hike wouldn’t impact the middle class on their individual tax returns. However, higher corporate taxes can increase costs elsewhere for the end consumer.
In addition to the corporate tax, the bill also imposes a 1% excise tax on stock buybacks.
Affordable and Clean Energy
This legislation marks the largest single investment the federal government has ever made to slow global warming and reduce the demand for fossil fuels. The bill would invest $369 billion over ten years in tax credits incentivizing consumers to switch to electric vehicles and encouraging electric utilities to utilize more wind and solar energy sources.
The $7,500 electric vehicle purchase tax credit would apply to electric cars that are assembled in North America and priced under $55,000 for sedans and under $80,000 for SUVs and trucks.
The bill also includes $60 billion to help disadvantaged areas that are disproportionately impacted by climate change, $27 billion to create America’s first “green bank” to drive investments in clean energy, and the bill forces oil and gas companies to pay as much as $1,500 a ton for methane leaks.
This bill is projected to cut greenhouse gas emissions by roughly 40% below 2005 levels by 2030. While this would certainly be a significant step towards the current administration’s goal of cutting emissions in half by 2030, many scientists have said that a lot more needs to be done to keep the planet from warming to dangerously high global temperatures.
Lower Prescription Drug Costs
The new legislation targets Medicare and lowers prescription drug costs in several ways. Medicare will be allowed to negotiate the price of prescription drugs with pharmaceutical companies for the first time in history. This would save the federal government billions of dollars. The new plan would initially apply to 10 drugs but would expand in 2026 to start including more drugs in the following years.
Critics of this legislation argue that the bill will prevent innovation and development of new treatments by cutting into the profits of pharmaceutical companies.
The new bill also caps out-of-pocket costs that Medicare recipients annually pay for prescription drugs to $2,000 and ensures they have access to free vaccinations.
How Much Does the New Legislation Cost, and Will It Affect the Deficit?
According to the nonpartisan Congressional Budget Office (CBO), the bill would reduce the deficit by $102 billion over a decade. In addition, the CBO estimated that the increase in tax enforcement proposed in the bill would raise an additional $204 billion in revenue over ten years.
Will The Inflation Reduction Act Ease Inflation?
While the title of the bill is the Inflation Reduction Act, the focus of the bill is certainly on climate and clean energy investments. The downstream impact of the new legislation on inflation will be uncertain for many years. Proponents and some economists are touting the bill will help curb inflation and lower costs over the long-term, mainly through lower energy and health care costs, while other sources (including the Penn Wharton Budget Model) and economists expect a minimal or immaterial impact to inflation.
We’re All In
At Prosperity – An EisnerAmper Company, we carefully watch Washington to evaluate how new legislation can impact our clients. If you have any questions about this legislation or anything else, please do not hesitate to reach out to us by using the message box below, or by giving us a call at (410) 363-7211.
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