By Max Link

The federal government churns out economic indicators nonstop, relying on organizations such as the Bureau of Labor Statistics and the National Bureau of Economic Research. For most Americans, however, their primary concern isn’t the dollar-euro exchange rate parity or bond-buying programs by the Federal Reserve. It’s the price of essential goods such as gas and food, as well as employment prospects and subsequent wages. A trip to your neighborhood grocery store tells you all you need to know about the economy; on the way there, you buy gas for over $5 per gallon. A stop at Wendy’s or McDonald’s reveals a mind-boggling $19/hour starting wage. Once you arrive at the store you find an increase in the price of sandwich bread and the sale rack that is all sold out. Every American understands that the economy is experiencing extraordinary price increases, the likes of which have not been seen in 40 years. 

President Biden signed what is (now) known as the Inflation Reduction Act on August 16. This landmark bill signals an important victory for Democrats, who have had little to show for their Congressional majority in the past few years. Senator Brian Schatz (D-HI) even reportedly cried tears of joy after its Senate passage. But what does it mean for most Americans? There is a dizzying array of significant changes packed into the bill, making it hard for people to parse through to what is most relevant. 

The first important takeaway is that the bill will not reduce prices in the near future. Although prices are generally slowing their increase (driven by a falling price of gas and food) anyway, due to the nuances of inflation and the nature of this particular bill, it won’t initiate any immediate relief. It is also a shadow of its initial size. On the campaign trail, the president promised a “Build Back Better” act, or an ambitious domestic policy package to rival the profundity of LBJ’s Great Society or FDR’s New Deal. That proposal, originally over $4 trillion, was pared down over time and rebranded as the Inflation Reduction Act amid these economic conditions. The $430 billion bill is mainly centered around climate, health care, and taxes. 

Climate & the Inflation Reduction Act

Climate. The environmental policies comprise the largest portion of the bill at $370 billion, also marking the most significant response to climate change by America to date. This expenditure is expected to lead to a 40% drop in emissions by 2030 (compared to 2005 emissions). This will be achieved primarily through an energy policy that subsidizes the growth of electrification and clean energy. Starting possibly this year, some consumers will be eligible for electric vehicle rebates, up to $7,500 for a new car and $4,000 for a used one.

It also offers tax credits and rebates for industries and homes to become more energy-efficient through better heating, ventilation, and air conditioning (HVAC) systems. Solar and wind production incentives will also boost the renewable energy industry. Industrial emissions are curbed by a fee for excessive methane pollution. Finally, the bill has provisions to reverse environmental justice concerns through funding for disadvantaged communities to monitor and clean up pollution as well as build climate resilience. 

Health Care & the Inflation Reduction Act

Health care. Back in 2010, the Patient Protection and Affordable Care Act (also known as Obamacare) reduced health care costs by creating a marketplace of different plans and offering subsidies for low and middle-income families. Covid-era policy expanded that to reduce health insurance costs further, capping expenditure at 8.5% of a household’s income. However, this policy was set to expire at the end of this year (with many families expecting a massive increase in insurance costs), so the Inflation Reduction Act extends that price reduction to the end of 2024. 

After years of promising a halt on the nightmarish cost of prescription drugs in the United States, Democrats finally passed a provision to reduce those prices. Medicare can now negotiate the prices of 10 drugs (not yet chosen, eventually an additional 10 drugs) for its patients. This means that Medicare can both achieve lower prices and save money by not paying as much. An original proposal sought to apply negotiation and a $35 insulin cap to private insurers, but those were rejected by the Senate parliamentarian. 

Tax Enforcement & the Inflation Reduction Act

Tax enforcement. The last major portion of the bill is tasked with financing all the rest of it. Proponents of fiscal responsibility will be pleasantly surprised to learn that the $430 billion price tag includes $80 billion to beef up IRS enforcement, resulting in a $203 billion return over a decade. This reduces the price tag by $123 billion! Natasha Sarin (Deputy Assistant Secretary for Economic Policy) and Larry Summers (former Treasury Secretary) released a shocking report in 2019 detailing how the difference between what people in owe in taxes and what they pay will be $7.5 trillion from 2020 to 2029, mostly comprised of evasion by the extremely wealthy. This tax gap represents a massive loss for the federal government, so spending on tax enforcement will pay for itself many times over. 

A 15% minimum corporate tax rate will further raise $222 billion. Although the technical current tax rate is 21%, some companies don’t end up paying nearly that proportion, so the corporate minimum would shore that up. A 1% tax on stock buybacks, where there was previously no tax, raises another $74 billion. Combined with Medicare savings on drugs and a few other components, the bill will return $737 billion, resulting in a $300 billion decrease in the federal budget deficit.

The Inflation Reduction Act is a historic piece of economic legislation meant to combat the climate crisis, reduce health care costs, and improve tax collection. While consumers will still see high price tags and sold-out sale sections in grocery stores, savings will accrue in other areas targeted by the bill for many consumers, such as those looking to buy an electric vehicle, install solar panels on their roof, or if they are a patient on Medicare. Despite reductions over the past year, it will still produce tangible change across American society and move the economy toward a more sustainable future.