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The Inflation Reduction Act of 2022: What’s in a Name?

Many of us were surprised, given the seemingly endless partisan gridlock in Congress, when a substantial bill was recently passed and signed into law: the Inflation Reduction Act of 2022. This substantial piece of legislation received final passage in the Senate on August 7, coming about primarily due to last-minute agreements reached with certain Democratic senators. It was signed by President Biden on August 16.

At this particular moment in the US economy, with the influence of inflation as the primary driver of the financial markets, it seems crucial to ask: Will this new law actually do anything to help ease inflation? Because it touches just about every aspect of American lives, the full extent of the Inflation Reduction Act of 2022 is too large to completely cover here, but the highlights are interesting to consider.

The most visible elements of the bill are likely to be the 15% minimum tax on corporations with over $1 billion in revenues. The Congressional Budget Office (CBO) estimates that this provision will generate an estimated $222.2 billion in additional tax revenues that can be used to reduce the federal deficit (in fact, deficit reduction was one of the “sticking points” for some moderate Democrats). The bill also features a 1% excise tax on companies that engage in buying back their own stock (which would raise another $73.7 billion, according to CBO estimates). The law creates no new taxes that directly affect individual taxpayers.

For older Americans, the new law gives Medicare the green light to negotiate collectively on drug prices, plus a $35 cap on Medicare Part D co-payments for insulin treatments. Those Americans who are not yet age 65 will see $64.1 billion in subsidies to expand the Affordable Care Act and counteract rising health insurance premiums.

The bill also includes tax credits for wind, solar, geothermal and nuclear electricity facilities and clean energy rebates for residential buildings and electric cars—basically providing tax subsidies for installing heat pumps and solar panels and purchasing certain brands of cars that don’t run on gasoline (vehicles that cost in excess of $50,000-$80,000 for pickups and SUVs do not qualify for the credit).

But what about inflation? Critics of the new law have cited studies that seem to indicate that the law, despite its name, will actually do little to curb inflation. The non-partisan Committee for a Responsible Federal Budget (CRFB) counters, however, that the law will modestly reduce inflationary pressures in the short term, in part by lowering the federal deficit and thus decreasing the cost of financing federal debt. CRFB further suggests that the components of the law directed at energy infrastructure will be deflationary due to promoting greater efficiencies in production and delivery of energy (energy prices have been a prime driver of higher inflation in recent months). They further state that the provisions addressing prescription drug costs and renewable energy will encourage lower prices at the household level, which would also be deflationary.

Will the new law live up to its name? Time will tell. Reducing the federal deficit is certainly a worthwhile goal, and encouraging more use of clean energy is an aim dear to the hearts of those who are concerned about the environment. But how the new law will play out in the “real world” is, like many things, something we will not fully understand until more events unfold.

Bernhardt Wealth Management remains committed to serving as a dependable traveling companion to those on the journey toward financial independence. We are excited to announce that Gordon’s new book, Buen Camino: What a Hike through Spain Taught Me about Investing and Life, will be launching on September 27th. The book will remind you that although we’re all walking a different path, we’re all headed for a common destination. It will be available soon from your favorite bookseller.

Buen Camino!

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