In his speech announcing the proposed Inflation Reduction Act last week, President Biden called it “a godsend” for American families.
While critics might disagree with that characterization, there are several facets of the law that could reduce specific expenses for some American consumers. Here’s a look at some areas in which consumers could save money if the bill passes, according to the summary released by Senate Democrats last week:
— Energy-efficient purchases. The bill includes a variety of rebates and tax credits to consumers for the purchase of energy-efficient items. These include a $4,000 tax credit for lower- and middle-income individuals to buy used clean vehicles and a tax credit of up to $7,500 to buy new clean vehicles, alongside tax credits on consumer purchases of heat pumps, electric HVAC and water systems, and rooftop solar equipment. The bill would also create a rebate program for low-income households to use for items like energy efficient retrofitting.
— Health insurance expenses. For low-income Americans who purchase health insurance through the Affordable Care Act exchanges, the bill extends and expands premium subsidies, which would have expired in 2023.
— Drug prices for seniors. The bill caps seniors out-of-pocket prescription cost at $2,000 per year and gives Medicare the ability to negotiate drug prices, which could lower the cost of medications.
“As people are struggling with higher prices on fuel and food and in other areas, getting some sort of relief on prescription drug prices and saving money with additional ACA tax credits and energy-efficient purchases are all welcome changes for the average person,” says Eric Bronnenkant, head of tax at Betterment.
The Tax Impact
Though there are no new taxes directly on individuals earning $400,000 or less annually, individuals may be indirectly affected by other tax changes in the bill.
The Inflation Reduction Act requires certain large corporations to pay a minimum income tax of 15% and a 1% tax on stock buybacks. The bill also allocates an additional $80 billion in funding to the Internal Revenue Service for enforcement efforts like conducting audits and uncovering instances of tax fraud.
Some say these changes will have positive implications for individuals, while others say increases to corporate taxes could ultimately hurt workers and consumers.
“All of those things are really good for regular consumers, because they mean that wealthy people, large corporations and tax cheats will have to pay their share, and everyday people don’t have to make up the difference,” says Amy Hanauer, executive director of the Institute on Taxation and Economic Policy, a nonpartisan think tank. “It starts to chip at this incredible inequity in our tax code.”
Will the Inflation Reduction Act Live Up to Its Name?
It’s unlikely the bill will lower general inflation right away, but proponents claim that the increased tax revenue and government savings on prescription drugs will outweigh the costs of the investments in climate change and insurance premiums. Calculations by the Joint Committee on Taxation and the Congressional Budget Office find the bill could reduce the federal deficit by more than $300 billion over time.
An analysis by economists at the Wharton School of the University of Pennsylvania found the inflation would increase by .05% per year through 2024 as a result of the Inflation Reduction Act before falling 0.25 percentage point after that — essentially noting the bill would have little affect on inflation It pegged the total deficit reduction at $248 billion.
Some critics, however, believe the bill will increase prices over time and push inflation up.
“In the short term consumers will see higher taxes on top of the current inflation,” says Peter Earle, a research fellow at the nonprofit libertarian academic think tank the American Institute for Economic Research. “In the medium term, we will see perhaps higher or at least more persistent inflation. Longer term, consumers may expect that their dollar doesn’t go further, their taxes are higher, and less goods and services will be available albeit at higher prices.”
The Inflation Reduction Act is expected to move to the House for a vote on Friday and pass by a narrow Democrat majority before going to Biden’s desk for his signature into law.
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Clarification 08/16/22: Clarified on Aug. 16, 2022: A previous version of this article wasn’t clear that consumers may expect that their dollar (doesn’t go) further in the long term, according to Peter Earle at the American Institute for Economic Research.