Biden signs a historic climate bill. So what will it actually do?
| Washington
On Tuesday, President Joe Biden signed into law the Inflation Reduction Act, among the most significant legislative achievements of his presidency. It represents a historic investment in measures aimed at combating climate change, lowering the cost of some prescription drugs, and raising enough revenues to cut the deficit rather than adding to it.
According to a summary by Senate Democrats, the bill will invest $437 billion over the next decade, nearly 85% of which go to climate and energy security provisions. To pay for them, it will raise an estimated $737 billion in revenues through a new corporate minimum tax, prescription drug pricing reform, stepped-up IRS enforcement of tax rules, and an excise tax on stock buybacks. The surplus $300 billion would then be put toward cutting the deficit. That represents about 1% of the national debt, which has topped $30 trillion for the first time.
Democrats’ revenue estimates may be overly optimistic; the nonpartisan Congressional Budget Office estimates that the bill will not meaningfully cut inflation and will only reduce the deficit by $100 billion. But others, such as former Clinton Treasury Secretary Lawrence Summers, believe the bill’s IRS reform provisions will generate far more revenue than the CBO estimates.
Why We Wrote This
The Inflation Reduction Act will allocate billions to combat climate change, while lowering the cost of some prescription drugs and cutting the deficit, although some analysts say it will not meaningfully impact inflation.
On Tuesday afternoon, President Joe Biden signed into law the Inflation Reduction Act, among the most significant legislative achievements of his presidency. It represents a historic investment in measures aimed at combating climate change, lowering the cost of some prescription drugs, and raising enough revenues to cut the deficit rather than adding to it. The bill is a slimmed-down version of last year’s failed $3.5 trillion Build Back Better bill, which would have significantly expanded the social safety net and made even bigger investments in climate and clean energy initiatives.
According to a summary by Senate Democrats, the bill will invest $437 billion over the next decade, nearly 85% of which go to climate and energy security provisions. To pay for them, it will raise an estimated $737 billion in revenues through a new corporate minimum tax, prescription drug pricing reform, stepped-up IRS enforcement of tax rules, and an excise tax on stock buybacks. The surplus $300 billion would then be put toward cutting the deficit. That represents about 1% of the national debt, which has topped $30 trillion for the first time.
Democrats’ revenue estimates may be overly optimistic; the nonpartisan Congressional Budget Office estimates that the bill will not meaningfully cut inflation and will only reduce the deficit by $100 billion. But others, such as former Clinton Treasury Secretary Lawrence Summers, who sounded early warnings last year on inflation, believe the bill’s IRS reform provisions will generate far more revenue than the CBO estimates.
Why We Wrote This
The Inflation Reduction Act will allocate billions to combat climate change, while lowering the cost of some prescription drugs and cutting the deficit, although some analysts say it will not meaningfully impact inflation.
So, what will it do?
Despite the downsizing of the bill, it still represents the largest-ever investment in initiatives meant to mitigate climate change, estimated at $369 billion. That includes $60 billion in environmental justice priorities, ranging from community-led pollution monitoring to mitigating the climate and health risks of urban heat islands.
Among the largest line items are $27 billion for projects that reduce greenhouse gas emissions, more than half of which is allocated for low-income and disadvantaged communities; $10 billion for the long-term resiliency, reliability, and affordability of rural electric systems; and $3 billion for the U.S. Postal Service to buy zero-emission vehicles. There is also $4.3 billion for home energy-efficiency rebates of up to $4,000, or $8,000 for low- or moderate-income households. The agricultural sector is included as well, with programs focused on helping farmers, ranchers, and forest landowners monitor and address climate issues, including greenhouse gas emissions. Democrats say the bill will cut carbon emissions to 40% of 2005 levels by 2030.
Some of the investments in clean energy, such as offshore wind development, are tied to requirements for government lease sales to oil and gas companies, which have been largely frozen under the Biden administration. However, the bill increases the cost per acre of such fossil fuel extraction tenfold, from $1.50 per acre to a minimum of $15 over the decade. It also incentivizes carbon capture technology and facilities, which oil-rich states North Dakota and Wyoming have been pioneering to produce lower-carbon energy.
“It’s an amazing moment for the country and the world to have bold action on climate finally pass the Congress,” California Rep. Ro Khanna, deputy whip of the Congressional Progressive Caucus, told the Monitor as his Democratic colleagues’ cheers echoed through the Capitol’s hallways shortly after the bill passed on Aug. 12. “It’s a moment of pride for everyone in the Congress that we’re part of this historic effort.”
The bill also extends for another three years Affordable Care Act subsidies for families within 400% of the poverty line, which were enacted as part of last year’s $1.9 trillion American Rescue Plan and set to expire this year. And it makes a modest investment in drought resilience – a provision that was key to winning the support of Democratic Sen. Kyrsten Sinema of Arizona. All 50 Senate Democrats, plus Vice President Kamala Harris’ tie-breaking vote, were needed to pass the bill.
The 728-page bill outlines billions of dollars in spending for which little direction is given, such as $1.26 billion allocated for Federal Highway Administration grants in economically disadvantaged communities or a conservation stewardship program for the agricultural sector whose annual allocation would gradually grow to $1.5 billion. Decisions about how exactly to spend much of the funding will likely be made by unelected administrators within federal agencies.
Legislative text of the Inflation Reduction Act (H.R. 5376), Senate Democrats summaries, and analyses by the Congressional Budget Office, Joint Committee on Taxation, and Tax Foundation
How will these investments be paid for?
The bill outlines a number of tax changes and increased tax enforcement, as well as prescription drug pricing reform to pay for these investments and also pay down the deficit. A 15% minimum tax on corporations making $1 billion or more for three consecutive years is estimated to bring in $222 billion, according to the Joint Committee on Taxation – about a third of total revenue raised by the legislation. Other analyses estimate that actual revenues would be lower, given the likelihood that corporations would try to find workarounds.
In addition, the bill extends a limitation on “pass-through” business losses and adds a 1% tax on stock buybacks – a last-minute addition to replace a carried-interest provision that would have affected private-equity executives, which Senator Sinema objected to. It will also invest $80 billion in the IRS, including $45 billion for stepped-up enforcement such as criminal investigations and digital asset monitoring and compliance. The CBO, which last year estimated that such an investment would more than double the IRS workforce, estimates that the increased enforcement will net $124 billion.
Another major revenue source is prescription drug pricing reform, though it was pared down somewhat by the Senate parliamentarian, who can reject certain parts of legislation that do not qualify for budget reconciliation. This will allow Medicare to negotiate the prices of 10 major drugs by 2026, and 20 by 2029, saving the government money. It will also keep costs down for seniors on Medicare; starting in 2025, their annual out-of-pocket drug costs will be capped at $2,000.
Will it reduce inflation? What about the deficit?
The CBO projects no impact on inflation this year and a +/- 0.1% change in 2023. “The impact on inflation is statistically indistinguishable from zero,” wrote another nonpartisan budget modeling group, Penn Wharton, which estimated a slight increase in inflation in the first few years and then a slight reduction toward the end of the decade.
Sen. Joe Manchin, a West Virginia Democrat who was largely responsible for blocking the original Build Back Better plan due to his concerns over inflation, said on CNN he “respectfully disagrees” with Penn Wharton’s assessment.
Rep. Jason Smith of Missouri, the top Republican on the House Budget Committee, points out that due to the phased-in timing of some of the revenue-raising measures, 80% of the deficit reduction won’t come until after 2029.
“With raising taxes, increasing inflation, and doubling the size of the IRS, it’s the complete wrong recipe for America,” he told the Monitor in a brief hallway interview.
How will it affect Americans’ taxes?
President Biden promised not to raise new taxes on Americans making less than $400,000, and he and his Democratic allies say that most of the additional tax revenue generated by this bill, including from the stepped-up IRS enforcement, will come from the country’s wealthiest corporations and individuals. However, Penn Wharton estimated that earners in all five quintiles will have less after-tax income, and the CBO estimated that those making less than $400,000 would pay $20 billion more in taxes over the next decade.
One of the biggest line items that was cut from the original Build Back Better bill is the expanded child tax credit, which last year’s American Rescue Plan increased to $3,600 per eligible child under age 6 and $3,000 for those ages 6 to 17. Senate Budget Committee Chair Bernie Sanders of Vermont, who had wanted $6 billion for the Build Back Better plan, pressed to include it in the Inflation Reduction Act but did not succeed.
