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Inflation Reduction Act of 2022 – Investopedia

The Inflation Reduction Act of 2022, H.R. 5376, is designed to reduce the deficit and lower inflation while investing in domestic energy production and lowering healthcare drug costs. The act became law with President Joe Biden's signature on August 16, 2022. In essence, the legislation is a scaled-down version of the Build Back Better Act proposed by the Biden administration in 2021.
The legislation is expected to raise $737 billion, require total investments of $437 billion, and result in a deficit reduction of more than $300 billion. The new law allows Medicare to negotiate lower prescription drug prices and extends the expanded Affordable Care Act program for three years, through 2025.
Additionally, the legislation establishes policies designed to promote and support domestic energy and transmission projects. The goal is to lower costs for consumers and help the U.S. meet long-term emissions goals.

According to the White House, the Inflation Reduction Act will make "the single largest investment in climate and energy in American history." Spending is designed to lower energy costs, increase cleaner energy production, and reduce carbon emissions by 40% by 2030.
The law accomplishes a longstanding Democratic goal to allow Medicare to negotiate lower drug prices, although there are limits to both the number of drugs affected and the time frame involved. Another plus is a $2,000 annual cap on out-of-pocket drug costs. ACA healthcare premiums will be lowered for millions of Americans under the legislation for three years once the bill becomes law.
A significant funding source for programs in the legislation will be a 15% corporate minimum tax on companies making more than a billion dollars per year. Meantime, the law imposes no new taxes on families that make $400,000 or less or on certain small businesses.
Revenue and spending in the legislation breaks down as follows, according to the Congressional Budget Office (CBO), Joint Committee on Taxation (JCT), and Senate estimates:
* Joint Committee on Taxation ** Congressional Budget Office *** Senate estimate awaiting CBO estimate
Each component of the 755-page bill falls under one of two areas listed in the table: revenue or investments. Since the legislation raises more revenue than the amount spent, the difference between the two is available for deficit reduction.
Following are highlights of some of the most notable features of the Inflation Reduction Act of 2022:
The bill introduces a new 15% minimum tax on corporations to help pay for climate and health care measures. The tax applies to companies that generate $1 billion in annual earnings. The Joint Committee on Taxation (JCT) estimates the tax will raise $222 billion in revenue over the next decade.
Exemptions from the tax demanded by Sen. Kyrsten Sinema (D-Ariz.) to secure her 'yes' vote include:
The bill allows Medicare to negotiate prices for some drugs for the first time. This is a policy Democrats have attempted to enact, over objections from the pharmaceutical industry, for many years. The provisions are expected to save $265 billion over 10 years according to analysis by the CBO.

Specifically, the legislation would let Medicare negotiate lower prices for 10 high-cost drugs beginning in 2026. This would jump to 20 drugs by 2029. Companies that refuse to negotiate will be subject to an up to 95% sales tax on that drug. The bill includes a ceiling on the negotiated price of the specified drug. Moderate Democrats, including Sen. Sinema, inserted a requirement that price negotiations only apply to older drugs (9 years for most/13 years for biologic drugs).
Sales tax penalty levied on companies that refuse to negotiate drug prices with Medicare.
The bill caps out-of-pocket drug costs at $2,000 a year for Medicare beneficiaries, starting in 2025.
It also caps insulin costs for people on Medicare at $35 a month. The original proposal called for a cap on both Medicare and private insurance patients, but Republicans voted against extending protection to those on private plans.
Other drug cost caps, which mostly apply to Medicare beneficiaries, are in the legislation as well. Those who get insurance under private plans are largely excluded from these caps because Senate rules limit how expansive such provisions can be.
A further protection mandates that drug companies that raise prices on Medicare faster than the rate of inflation must pay rebates to the government for the price difference.

The Inflation Reduction Act of 2022 allocates $80 billion to increase enforcement by the IRS. Supporters of the measure hope that additional employees and better technology will allow the IRS to catch more tax cheats, especially among the ultra-wealthy. The CBO believes this could boost IRS revenue by at least $124 billion over the next decade.
Stock buybacks will be subject to an additional tax once the legislation becomes law. A 1% excise tax on buybacks is expected to generate $74 billion by 2031.
To recoup tax revenue lost to private equity, the act imposes a limit on losses businesses can deduct from their taxes. These measures are designed to prevent wealthy individuals from reducing or even wiping out their income tax liability and are set to raise up to 52 billion in additional revenue.

The largest investment made by the Inflation Reduction Act of 2022 is for energy security and climate change. It totals $369 billion and consists of the following:
Business Incentives and Tax Credits
New tax credit rules make EV tax credit hard to get:
Business and Consumer Incentives
Some provisions of the Inflation Reduction Act of 2022 actually increase fossil fuel production on public lands.
Use of Public Lands
Miscellaneous Provisions
The legislation extends financial assistance to help people enrolled in ACA through 2025. Without this action, extra assistance would have stopped at the end of 2022. The provision also expands eligibility to allow more middle-class people to receive premium help. The extension of ACA help is estimated to cost $64 billion by the CBO.
A last-minute addition to the Inflation Reduction Act includes $4 billion in new funding for the drought scorching the Western U.S. The law calls for the Bureau of Reclamation to address the 22-year drought impacting that part of the country.

Funds will be used to compensate farmers who voluntarily reduce their water deliveries under short-term or multi-year agreements, as well as projects that conserve water in Lake Mead and Lake Powell. Funding will also be available to mitigate the environmental effects of shrinking inland water sources such as the Salton Sea and the Great Salt Lake.
The CBO estimates that, because prescription drug savings would be larger than new spending, net spending would be reduced by nearly $15 billion through 2031. This includes savings of almost $40 billion in 2031.
Net taxes would go down by about $2 billion per year once the Inflation Reduction Act of 2022 is fully phased in, according to the CBO's estimates. The CBO also takes into account what it calls the "spillover" effects of higher wages resulting from lower healthcare premiums under the ACA.
Overall, CBO estimates $790 billion in offsets to fund roughly $485 billion of new spending and tax breaks. Because this legislation actually reduces deficits, proponents believe it will also reduce inflation and serve as a risk-reduction measure against recession.
One study often cited by critics of the Inflation Reduction Act of 2022 was conducted by the Penn Wharton School at the University of Pennsylvania. The Penn Wharton Budget Model (PWBM) estimates that the Inflation Reduction Act would reduce cumulative deficits by $248 billion over the next decade with no impact on GDP in 2031.
The anticipated impact on inflation, according to Penn Wharton, will be "statistically indistinguishable from zero." PWBM conducted an alternative scenario in which the Affordable Care Act subsidies are made permanent. Under this scenario (which is not part of the current legislation), the 10-year deficit reduction estimate falls to $89 billion.
Estimates range from the Penn Wharton Budget Model estimate of $248 billion to the Congressional Budget Office score of $305 billion. Most other estimates are $300 billion or more.
According to the Tax Foundation, the legislation calls for no new taxes on families making $400,000 or less. The bill extends expanded health insurance Premium Tax Credits provided in the American Rescue Plan Act (ARPA) through the end of 2025. The legislation also imposes a 15% minimum tax on corporate book income for corporations with profits over $1 billion, effective for tax years beginning after December 31, 2022.

The answer depends on whom you ask. Senate Democrats say lower prescription and energy costs will tamp down inflation, at least over time. The Congressional Budget Office sees little to no impact on inflation this year.
The Inflation Reduction Act of 2022 is most controversial when it comes to the subject of the measure's title: inflation. There is no real consensus on how much—or even if—the bill will reduce inflation.
There is little debate that the act will reduce the deficit, albeit with some variation in the amount of the deficit reduction. The part of the bill that deals with prescription drug costs is far less than Democrats hoped for, but all agree it is at least a good start.
While raising taxes on corporations and the rich is generally popular, some conservatives have expressed concern that these measures will discourage investments and hiring on the part of affected companies.
At the end of the day, nobody got all they wanted, showing at least that the art of compromise is not dead in Washington.

Senate.Democrats.gov. "Summary: The Inflation Reduction Act of 2022."
Whitehouse.gov. "Inflation Reduction Act of 2022."
Senate.Democrats.gov. "H.R. 5376."
CBO.gov. "Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022."
Penn Wharton. "Inflation Reduction Act: Preliminary Estimates of Budgetary and Macroeconomic Effects."
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Joseph Muongi

Financial.co.ke was founded by Mr. Joseph Muongi Kamau. He holds a Master of Science in Finance, Bachelors of Science in Actuarial Science and a Certificate of proficiencty in insurance. He's also the lead financial consultant.