A bill with the wrong name
The Senate passes the Inflation Reduction Act of 2022
WASHINGTON—The Inflation Reduction Act of 2022 covers a gamut of policy initiatives. But according to Todd Knoop, a professor of Economics and Business at Cornell College in Iowa, one of the things it doesn’t do—at least in the short term—is reduce inflation.
“That doesn’t mean the bill isn’t a good idea, but calling it the Inflation Reduction Act is really more about politics than it is about economics,” Knoop said.
In a 51-50 vote on Sunday afternoon, the U.S. Senate passed the bill, enacting portions of Biden’s 2021 domestic policy package formerly known as “Build Back Better.” The Inflation Reduction Act is a far cry from Biden’s original plan, which was designed as a $3.5trillion omnibus bill aimed at overhauling healthcare and enhancing social safety nets, but it still carries many elements of the original.
The 728-page bill imposes a 15 percent minimum tax on some corporations with an income of over $1 billion and adds a 1 percent excise tax on corporate stock buybacks. It also:
Secures funding for the services within nine executive branch departments.
Grants funding for the Affordable Care Act.
Empowers Medicare to negotiate drug pricing.
Caps out-of-pocket Medicare expenses at $2,000 starting in 2025.
Creates tax credits for individual and corporate uses of renewable energy.
Appropriates funds for drought response in the western United States and infrastructure projects between states.
Places new royalties on oil and gas production on federal lands and offshore drilling.
Provides for the research and development of new renewable energy.
Although distributed through multiple government departments, roughly 85 percent of the bill’s $433 billion expenses will go to what Senate Democrats describe as “energy security and climate change.”
For Senate Majority Leader Chuck Schumer, D-N.Y., the bill’s passage has been more than a year in the making.
In the months leading up to the Senate’s vote, Schumer had struggled to find common ground within his own party. To pass the bill, Senate Democrats used a process called budget reconciliation. That Senate procedure allows the chamber to pass a bill without it being subject to a filibuster, which requires 60 votes to break. With exactly 50 Democratic senators in office, Schumer couldn’t afford to lose the support of a single member of his party. That would mean courting party moderates Senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona, whose opposition torpedoed Build Back Better in 2021. At the time, the pair cited concerns over inflationary pressure that could be caused by an increase in government spending.
After months of negotiations, Manchin and Schumer came to an agreement on the size and substance of the Inflation Reduction Act and set about convincing the remaining Democrats to vote in the bill’s favor. Sinema agreed to vote for the bill, giving Democrats a fragile unity on its language. Following a 15-hour session where Senate Republicans introduced a flurry of amendments, Democrats maintained their bloc and passed it with Vice President Kamala Harris casting the tie-breaking vote.
Manchin joined Schumer in hailing the significance of the bill, calling its passage a landmark in American efforts to confront climate change.
“By investing in American energy production and innovative technologies the U.S. is on a path toward energy security, lower gas and home energy prices and we are leading the fight on global climate,” Manchin wrote on his website.
For Democrats eyeing a tough election cycle in November, the bill’s passage in the Senate and its likely success in the House puts some wind in the sails of campaigning candidates.
As Schumer and Manchin both indicated, this will be the largest bill the U.S. has passed regarding “clean energy” and climate change, appropriating more funding for the subject than any other single piece of legislation. But on inflation, Democrats may have to hope the title catches more attention with voters than the bill perhaps merits. While Democrats’ messaging indicates the bill takes measures to stop the ongoing price hikes happening across the country, Knoop says he doesn’t see it that way.
“I don’t think that this is going to reduce inflation next quarter. But there are a few long-term effects that could slow inflation over the next few years,” economist Knoop said.
He pointed to the tax increases as something that would help fight inflation in the distant future by disincentivizing spending, but noted that those won’t go into effect immediately. Instead, Knoop believes the bill’s changes tohealthcare will have the most tangible effect on prices, at least in and around hospitals. Giving Medicare the ability to negotiate for lower prescription drug prices could reduce costs in a major area of government spending in years to come.
“More than 10 percent of our economy now is devoted to healthcare. Government provision of healthcare is a big part of that 10 percent and a big part of that provision is prescription drugs,” Knoop said. “It’s quite possible that in the long run that’s where the bill will have the most disinflationary effect; putting a cap on those prescription drug prices—one of the largest driving factors in higher prices [in healthcare] over the last two decades.”
Although the bill isn’t likely to provide immediate relief at fuel pumps, grocery aisles, or department stores, Knoop notes that its passage isn’t likely to worsen the problem either. The U.S. won’t have to borrow a nickel to get the list done. Portions of of it squeeze close to $300 billion for deficit reduction. In total, the bill is estimated to raise $725 billion while only spending 60 percent of that funding.
“This bill is not going to increase the budget deficit. And that’s going to have a moderating effect on the economy in the long term,” Knoop said.
With the Senate having passed the legislation, it will now return to the House of Representatives, where the chamber is expected to vote on it this Friday.
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