Inflation Reduction Act of 2022

by | 28. Apr 2023 - 12:51 | Politics

Aimed to overhaul the U.S. economy as it arises from the Covid-19 pandemic, the act raises over $700 billion in revenue to control inflation, combat climate change, revise the healthcare sector, and make the energy infrastructure and supply chains more resilient. The focus on the U.S. in earlier versions has since been reworked to include other nations as well.

President Joe Biden signed the Inflation Reduction Act (IRA) into law on August 16, 2022, aiming to curb inflation and reduce the federal deficit while promoting clean energy investments in the United States. The IRA is arguably the most significant climate legislation in American history: The act will invest in domestic energy production and manufacturing and aims to reduce carbon emissions by roughly 40 percent by 2030. The IRA has three dominant areas of focus: Healthcare, Energy Security, and Climate Change. The act’s initial focus on investments in the domestic United States economy, however, evoked fears in the European Union about the future of the competitiveness of the European industry.

Build Back Better

Already before his inauguration, President Biden laid the foundation for the Inflation Reduction Act by announcing his “Build Back Better” agenda. The agenda consists of overhauling the neglected domestic US energy infrastructure, modernizing the US auto industry, and making drastic investments into clean energy and sustainability across the entire US economy.

With increasing inflation rates across the world and the Russian invasion of Ukraine and subsequent skyrocketing energy prices, the Biden administration was forced to reform their proposals to include corresponding measures to curb inflation. The “Build Back Better” agenda was reformed into the Inflation Reduction Act after year-long negotiations among the Democrats over the financing and general approach of transitioning to clean energy.

The Act in Detail

The Inflation Reduction Act aims to reshape the US economy as it emerges from the Covid-19 pandemic. In total, the IRA raises over $730 billion in revenue of which the majority will be generated through a newly imposed 15% corporate tax on large companies and the remainder through a combination of reforming prescription drug pricing as well as stricter tax enforcement through the IRA. Of the $730 billion raised, $370 billion are allocated for investments in climate and energy policies projected to cut the US carbon emissions by approximately 40% by 2030, according to Democrats. Approximately $64 billion of the revenue raised will be used to extend the Affordable Health Care Act, while the remaining ~$300 billion will be spent to reduce the US federal deficit to combat inflation. However, the total deficit reduction is questioned by Republicans who argue that the new 15% corporate tax will have the opposite effect of curbing inflation and will increase prices instead. Analysts such as the credit rating agency Moody’s agree that the IRS’s short-term impact will be insignificant but nonetheless expect positive medium and long-term results for the US economy. 

The three packages in detail:

Healthcare Package

The Inflation Reduction Act allocates $64 billion for the healthcare sector, extending the Affordable Care Act program implemented during the height of the Covid-19 pandemic for three years, through 2025. Additionally, the IRA aims to reduce the price of prescription drugs by authorizing Medicare to negotiate prices for certain drugs with pharmaceutical companies which is a major source of the total revenue raised for the IRA.

Climate Change Package

The Inflation Reduction Act (IRA) is the largest climate bill in United States history, with an estimated $369 billion budget for climate spending over the next ten years in the form of subsidies, tax credits, and loans. The Act places the US on a path to reaching its 2030 climate target of cutting carbon emissions by 40%. To achieve this, the IRA provides businesses with tax credits and loans for investments in wind, solar, biogas, and geothermal energies to incentive the deployment and research of lower-carbon and carbon-free energy sources and technologies. Nuclear and hydrogen energy sources are also applicable for tax credits, as well as technologies that capture carbon from fossil fuel power plants such as carbon capture and storage. Fossil fuel companies like ExxonMobil invested millions of dollars already in these new technologies and will thus also benefit from the IRA. Additionally, the IRA contains tax credits for the purchase of used and new EVs (electric vehicles). The early versions of the IRA specified that these tax credits were only applicable for projects and EVs that utilize domestic US suppliers or manufacturers. This has since been extended to other nations such as Japan.

Energy Security Package

By promoting investments in new energy technologies and clean energies, the IRA aims to lower energy costs for individuals and corporations. Additionally to incentivizing new projects, the IRA also provides tax credits for energy-efficiency home improvements. The combination of investing in clean, domestically produced energy as well as incentivizing energy efficiency, the IRA aims to increase the resilience of the US power grid as well as reduce the dependency on fossil fuels considering the Russian invasion of Ukraine and the connected skyrocketing energy prices. Likewise, the reliance on Chinese and Russian rare earth elements is another issue tackled by the IRA. The acts tax credits for domestic manufacturers of “eligible components,” include key rare earth elements to produce magnets used by wind turbines and EVs: Neodymium, dysprosium, and praseodymium.

European Reaction

The IRA was initially focused entirely on the domestic US economy and, hence, the proposed tax credits were only applicable to projects and products that are US-made or consist of US-made components. High energy prices following the Russian invasion of Ukraine were already causing fears of de-industrialization in the EU before the passage of the IRA. With skyrocketing energy costs, manufacturers in the EU risked being forced to make tough decisions on relocation or shutting down operations entirely. The one-sided nature of the initial versions of the IRA further intensified these fears. However, after monthlong negotiations between the U.S. and its trade partners, the tax credits and subsidies have been extended to other countries, and negotiations with the EU are ongoing.

Estimated Revenue Raised and Allocations

15% Corporate Minimum Tax313 billion
Prescription Drug Pricing Reform288 billion
IRS Tax Enforcement124 billion
Carried Interest Loophole14 billion
Energy Security and Climate Change369 billion
Affordable Care Act Extension64 billion

Photo: iStock/bymuratdeniz

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