November 02, 2022
The U.S. Senate passed the “Inflation Reduction Act”, the first major bill passed during the legislative session – and arguably the Democrats’ most important piece of legislation in the Biden era.
Ironically, it’s unlikely to reduce inflation, but it intends to reduce America’s budget deficit by some $300 billion. While that’s a small slice of the nearly $1 trillion deficit expected in 2022 by the Congressional Budget Office, don’t worry – the deficit might only get worse from here… especially after 2024.
But one thing that the Inflation Reduction Act, or IRA, will do besides cut the deficit is fight climate change. It’ll also take a shot at healthcare costs. That’s all made possible through the way that the bill raises its revenue – a 15% Corporate Minimum Tax on companies making more than $1 billion in revenue per year, what the bill’s summary refers to as “Prescription Drug Pricing Reform”, and more resources for the Internal Revenue Service (IRS) to audit. Notably, there are no new taxes on families making less $400,000 or on small businesses.
Revenue generated by the bill trickles down into two categories: energy security and climate change, which will receive an estimated $369 billion of the proceeds; and an extension to the Affordable Care Act (Obamacare) worth over $60 billion.
In the former, energy security and climate change, some $369 billion of the bill’s revenue will go toward lowering energy costs. These costs carry a lot of weight in the supply chain – not only are energy costs a healthy portion of America’s inflation headline inflation figure, the Consumer Price Index (CPI), but energy costs trickle down into every other part of the economy.
Depending on where you live, oil, coal, natural gas, and other energy sources are instrumental in keeping the lights on, transporting goods from point A to point B, and transporting people themselves. The bill aims to lower energy costs by investing in “cleaner production” which reduces carbon emissions by 40% by 2030, according to the bill’s published summary.
In that sense, the bill is the largest bill for energy sustainability – and the largest sum of money made out to tackle the increasing trouble with climate change.
And though less impressive in terms of cost, the $64 billion extension to the Affordable Care Act will enable Medicare to negotiate some drug prices. This could directly impact the price of drugs (namely by making them cheaper.) The extension comes after the ACA brought the national uninsurance rate for Americans to a record-low in Q1 – just 8%.
It now heads to the House where it is largely expected to pass. It will then be sent to President Biden’s desk to sign.
What’s the takeaway from the IRA?
Well, companies building “renewable energy technologies” are likely to be among the winners. The bill extends existing credits for electricity produced from renewable resources and adds at least three new ones: one for investment in energy property, produced from zero-emissions facilities, and for investment in facilities that generate electricity with zero emissions.
That means that clean energy producers, and investors, can expect some lofty tax breaks from their projects… as if making the world less polluted wasn’t already a great enough incentive…
For the working class, though, the proposal expands the electric vehicle tax credit which was formerly capped at a certain amount of vehicles per manufacturer. As long as a vehicle has a 7 kWh battery now, the credit will now apply to any and all EVs through 2032. That means EVs can also expect to be big winners.
The losers? Perhaps America’s largest companies: they can expect a minimum tax, an excise tax on buybacks, and pharmaceutical companies have been singled out by Medicare’s possible new rights to negotiate.
As always, we’ll cover developments with the IRA and other bills which might affect industry.