The Inflation Reduction Act: What’s inside lawmakers’ once-in-a-generation stab at solving climate change

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Overview (360 Climate spending deal)

By Maggie Severns - Influence Reporter

The Senate pulled an all-nighter over the weekend to pass a bill that represents the first time Congress has taken up one of Washington’s most vexing policy issues: climate change.

The Inflation Reduction Act, which passed the Senate in a 51-50 vote Sunday afternoon, would create the biggest investment in climate change that the country has ever seen: more than $300 billion toward addressing warming temperatures and extreme weather plaguing the U.S. and Europe this summer. While experts warn more action is needed, the deal represents the first time Washington lawmakers are putting significant money into the climate. The House is expected to take up the bill this week, where it is expected to pass, and President Joe Biden is expected to sign it into law shortly thereafter.

The legislation would also bring down prescription drug prices and create a corporate minimum tax — all big changes Democrats have sought in Congress since Biden took office, but previously failed to reach agreement on. It represents the culmination of months of debate among Democrats.

If the legislation becomes law, as is expected, it will give Democrats a legislative achievement to run on going into the tumultuous midterm elections. It would also allow Biden to say he delivered on his promise to address climate change.

Grid breaks down the most important parts of the Inflation Reduction Act below.

Economy Lens

Raising revenue through tax enforcement and taxing stock buybacks

By Matthew Zeitlin - Domestic Economics Reporter

The tax policy provisions of the Inflation Reduction Act are a far cry from the initial ambitions of Democratic lawmakers. Gone are the headline increases of the corporate tax rate and any effort to raise the income taxes of wealthy individuals. The legislation necessary to implement a painstaking multinational agreement for a minimum rate of corporate taxation, which Treasury Secretary Janet Yellen negotiated, is not in this bill either.

And yet, when balanced against provisions to shore up Affordable Care Act subsidies and make the most aggressive and expansive investment in clean energy in American history, it still manages to reduce the federal deficit by around $300 billion over the next 10 years, according to preliminary numbers put out by Senate Democrats.

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How? There are three major revenue provisions in the bill, two of which affect taxation. Of the $739 billion of revenue raised over the next 10 years, more than $300 billion of it is estimated to come from a 15 percent minimum tax on corporations with over $1 billion in annual profits and $124 billion from increased tax enforcement.

While the headline corporate tax rate is 21 percent, many large American companies such as Amazon, FedEx and Oracle pay a tax rate below 21 percent, let alone 15. This is because the corporate tax system also includes a number of deductions and credits for things like research and development and even green energy investments that can bring corporate income taxes down.

That is a net figure; the plan would raise IRS funding by around $80 billion and produce $200 billion in new revenue, the CBO estimated. Summers, a longtime advocate for closing the “tax gap” — the difference between what taxpayers owe according to the letter of the law and what they end up paying — was more optimistic (from the perspective of the federal budget, not from the perspective of large taxpayers). He said that the IRS provisions could “increase revenues by over a trillion dollars.”

One of the major changes to the bill came over the weekend when, at the insistence of Sen. Kyrsten Sinema, the Arizona Democrat, the bill was stripped of its attempt to modify the treatment of what is known as “carried interest” — the ability of managers of investment funds to pay the lower capital gains rates on investment profits for capital contributed by outside investors. While the original provision would not have fully eliminated the ability of investment managers to pay the lower rate, it would have narrowed it and was estimated to raise $14 billion. Instead, the bill includes a 1 percent tax on stock buybacks, which is estimated to raise around $75 billion over 10 years.

This wasn’t the last change to the bill that Sinema negotiated — the corporate tax provisions were adjusted so that they wouldn’t apply to companies owned by private equity firms, and the lost revenue was made up by limiting deductions on taxes paid by companies whose profits show up on individuals’ tax returns.

Climate Lens

Rewiring the U.S. energy sector to cut climate emissions

By Dan Vergano - Science Reporter

“This is a historic victory for the United States and the planet,” said Hawaii Democrat Brian Schatz in a statement after the Senate vote. “We have met the ambition this crisis requires, and passed the biggest climate action in American history.”

Middle- and low-income people would be eligible for a $7,500 tax credit to buy an electric car or $2,000 credits for more efficient heat pumps for their homes. Homeowners could receive $150 for a “home energy audit” telling them where they could make the most improvements for efficient heating, cooling and appliance use. Communities affected by air pollution would be eligible for grants from a $60 billion environmental justice fund.

In return, oil drillers will receive new sales of federal leases in the Gulf of Mexico and on federal lands, and natural gas pipelines would see faster permitting, a demand meant to placate fossil-fuel state senators like Joe Manchin, the central figure in the deal. The pipeline permit agreement comes in a side promise made by the administration and has been mentioned by Manchin in connection with the delayed Mountain Valley Pipeline, which will carry shale gas from his state, West Virginia, to the East Coast.

Overall, climate advocates have praised the deal, seeing any trade-offs for turning the energy sector toward clean technologies as a win. “This is the big gorilla, the one we had to have to set the economy on the path to a low-carbon future,” said Christina DeConcini, director of government affairs at the World Resources Institute. “It was the best-kept secret in Washington, D.C., and we are thrilled to cross our fingers and toes for it to happen, which looks likely.”

Health Lens

New tactics for prescription drug prices

By Jonathan Lambert - Public Health Reporter

Meanwhile, Medicare’s huge buying power could mean big price drops for certain drugs covered by the program; the new legislation would gradually make specific drugs subject to price controls over the next several years. “The short-term impact may not be all that dramatic, since the first-year negotiated prices would be available in 2026,” said Juliette Cubanski, deputy director of the Program on Medicare Policy at the Kaiser Family Foundation. But over time, “it will translate into big savings for the Medicare program and out-of-pocket costs for Medicare beneficiaries,” she said.

The bill also extends the pandemic-related tax subsidies for health insurance coverage under the Affordable Care Act through 2025, pumping $64 billion into the program. Those subsidies, which were due to expire at the end of this year, help reduce health insurance premium costs for the 13 million people who buy insurance through public marketplaces. Had those subsidies not been extended, 8.9 million people would have to pay about $400 more each year, on average, in health insurance premiums.