President Joe Biden is set to sign the Inflation Reduction Act, a mammoth piece of legislation meant to reduce the cost of health care and combat climate change.
Senator Joe Manchin and Senate Majority Leader Chuck Schumer shocked Washington late last month when they announced they had reached an agreement for a framework of the spending bill that ultimately passed the House and Senate last week.
The legislation is significantly pared down from Democrats’ proposed Build Back Better spending package – which would have included everything from child care; an expanded child tax credit; hearing and dental coverage coverage for Medicare; and home care for elderly people and people with disabilities. It’s a sign that Mr Manchin, the conservative Democrat from West Virginia’s, has some nervousness about increase spending and inflation.
Indeed, the legislation is dubbed the Inflation Reduction Act of 2022 as a reflection of how it will reduce prices in the next few years.
Similarly, it still faces an uphill battle. Senate Minority Leader Mitch McConnell told Reuters on Thursday that Republicans would oppose the legislation “as hard as we can”. Many aspects of the bill will need to be cleared with the Senate parliamentarian to see if it passes the rules to be included for budget reconciliation. Similarly, Senator Kyrsten Sinema of Arizona, a conservative Democrat who has been allergic to tax increases, removed the closing of a tax loophole many Democrats--and even some on Wall Street--consider a giveaway to the rich.
Budget reconciliation allows for legislation to pass with only 51 votes and avoid a filibuster as long as it’s related to spending and taxation. Democrats only have 50 Senators, meaning every one needs to be on board and Vice President Kamala Harris would serve as the tie-breaking vote.
Here’s what’s in the legislation – and a few things that are out.
Prescription drug pricing:
The legislation would allow for Medicare to negotiate drug prices starting in 2023. Medicare patients would have their out-of-pocket costs capped at $2,000 annually and would have the option to break that down into monthly payments. Vaccines would also become free for senior citizens, who are the only population for whom vaccines were not already free.
In the one-page summary, Democrats said they expect that the prescription drug part of the legislation would raise $288bn.
Increased IRS enforcement
Another important stream of revenue for the legislation comes from a pledge to increase money to allow the Internal Revenue Service to improve taxpayer compliance. Roughly $3.1bn will be spent on taxpayer services; $45bn will be spent on enforcement; $25bn on operations support; and $4,75bn on modernisation. A one-page summary said that “no use of the funds is intended to increase taxes on any taxpayer with taxable income below $400,000.”
Corporate minimum tax
Senators Ron Wyden, the chairman of the Finance Committee, and Elizabeth Warren have previously floated the idea of a corporate minimum tax to ensure that corporations don’t use loopholes to get away with paying below 15 per cent. The legislation from Mr Manchin and Mr Schumer would impose a 15 per cent minimum tax on corporations with a profit of at least $1bn. Democrats estimate the tax would raise $313bn in a decade. The tax was slightly weakened during the vote-a-rama after Senate Minority Whip John Thune proposed an amendment that would have exempted subsidiaries of private equity that Senator Kyrsten Sinema supported and would have been paid for by extending a cap on state and local tax deductions that passed under the Trump tax cuts of 2017. That would have killed the bill in the House as many Democrats from New York and New Jersey oppose the cap. But Senator Mark Warner included an amendment that removed the SALT cap language while still keeping the private equity carve-out.
Continued subsidies for Obamacare
When Democrats passed the American Rescue Plan Act last year, they included subsidies that would help people buy their own health insurance through the marketplaces enacted through the Affordable Care Act. According to the Kaiser Family Foundation, the subsidies increased the amount of financial aid for people who were already eligible to receive subsidies and increased who else was eligible to include many middle class families during the Covid-19 pandemic. But the subisidies were only available for two more years and they were set to expire. The Inflation Reduction Act would extend them for three more years.
Climate change provisions
Democratic senators faced perhaps no greater obstacle with Mr Manchin, who hails from coal-heavy West Virginia, than dealing with climate change. A one-page summary from Mr Schumer estimated the legislation would reduce emissions by roughly 40 per cent in ten years and would spend $369bn in climate change mitigation and energy security in the same amount of time. At the same time, the legislation would reinstate lease sales for drilling in the Gulf of Mexico and in Alaska. At the same time, it would provide a $4,000 tax credit for low-income families to buy used clean-energy vehicles; 10 years of tax credits to make homes run on clean energy; a $1bn grant program to make affordable housing more energy efficient; and $9bn to help low-income people to electrify home appliances and retrofit for energy efficiency.
What got left out
Closing the carried interest loophole
Currently, partners at private investment funds are allowed to have their income taxed as capital gains, which has a rate lower than general income tax. This includes partners at hedge funds, private equity and venture capital firms. Mr Manchin said in his statement that the US tax code “should focus more on closing unfair loopholes like carried interest”. Democrats estimated the amount will raise about $14bn in a decade. But Senator Kyrsten Sinema, who has opposed tax increases, opposed closing the carried interest loophole and Democrats crapped it from their final package to get her on board.
A cap on insulin for private insurance patients
Democrats had hoped to cap the price of insulin in the Inflation Reduction Act for both Medicare patients and people on private insurance. But Senate Parliamentarian Elizabeth MacDonough found that the cap on insulin for private insurance did not pass the “Byrd Rule”, which the parliamentarian uses to determine if legislation is related to the budget and therefore if it could be passed through budget reconciliation. Democrats kept it in the legislation but during the Senate’s “vote-a-rama,” Republicans raised a point of order, which meant the cap would have needed 60 votes to stay in the bill. Seven Republicans voted to keep the cap in--ranging from moderates like Alaska’s Lisa Murkowski to conservatives like Josh Hawley--but that was three votes shy of the 60 votes needed. However, the cap on insulin prices for Medicare recipients remained in the bill.
Under the original proposed legislation, pharmaceutical companies would have been required to reimburse Medicare if they raised the price of drugs higher than the rate of inflation. But Ms MacDonough issued guidance saying that did not pass Byrd Rule muster.