The Democrats' Inflation Reduction Act Won't Lower Inflation

After a year of infighting, Senate Democrats are now working to pass legislation that could reduce the cost of prescription drugs, health care premiums and energy for millions of Americans.

The $369 billion package, known as the Inflation Reduction Act, is essentially a pared-down version of President Joe Biden’s massive Build Back Better social-spending agenda. Except this iteration has a notable perk: the approval of Democratic holdout Sen. Joe Manchin III of West Virginia. That, plus the signoff of Senate Majority Leader Chuck Schumer, indicates the proposal could become law soon.

The proposed legislation does not include funding for many staples of Build Back Better, such as extended child tax credit payments, universal preschool or more affordable housing.

However, the Inflation Reduction Act could have a broad economic impact on the U.S., given that it's aimed at addressing the climate crisis, bringing down drug prices, raising taxes for high-income earners and billion-dollar corporations, and extending health care subsidies — all while reducing the federal deficit.

Here’s what else you need to know.

Will the Inflation Reduction Act reduce inflation?

One of the reasons Manchin said he was opposed to a larger spending package was because he was worried it would worsen inflation, which is at a four-decade high (9.1%). "America cannot spend its way out of debt or out of inflation," he said in a statement on his website.

For the IRA, Manchin reportedly sought assurance from Larry Summers, an economist and Obama-era Treasury secretary, that it would not add to the inflation rate. But will the Inflation Reduction Act actually lower inflation, as its name suggests?

Not really, say economists and researchers at the University of Pennsylvania.

The Inflation Reduction Act “would very slightly increase inflation until 2024 and decrease inflation thereafter,” they wrote in a report released Friday. “These point estimates are statistically indistinguishable from zero.”

The analysts at University of Pennsylvania did find that the legislation would reduce the federal deficit by approximately $250 billion by 2031. A separate estimate from Senate Democrats said the deficit reduction would be more than $300 billion.

A federal deficit occurs when the government spends more money than it raises through tax revenue. The Biden administration often suggests reducing the deficit will tamp down inflation, but experts say it's more complicated than that.

“There’s no simple-minded deficit-to-inflation link," Glenn Hubbard, a professor of finance and economics at Columbia University, recently told the New York Times. "You have to look at both the demand and the supply side of the economy."

How the Inflation Reduction Act could affect you

The current version of the Inflation Reduction Act contains a lot of big-picture changes for health care, climate and tax policy that affect corporations, federal agencies and manufacturers.

A few key areas do, however, impact everyday consumers. They include:

1. Extended health care subsidies

The IRA will subsidize premiums for people who receive health care coverage under the Affordable Care Act and fall within 400% of the federal poverty line. This subsidy is already in place via pandemic-era policy but is slated to expire at the end of the year. The new proposal would extend the subsidy to 2025.

"The bill locks in place lower health care premiums for the next three years for millions of families that get coverage under the Affordable Care Act," Biden said at the White House following the announcement of the Manchin-Schumer deal. "That will mean an average savings of $800 a year for 13 million people."

2. Tax credits for electric vehicles

The IRA expands a $7,500 tax credit for new electric vehicles and introduces a new $4,000 credit for used EVs. Both tax credits have income caps — $150,000 per year for single filers (or $300,000 for joint filers) seeking the new-EV credit and $75,000 for single filers ($150,000 for joint filers) seeking the used-EV credit.

3. Incentives for energy-efficient home upgrades

The bill earmarks $9 billion for rebates to low-income consumers who buy energy-efficient home appliances like refrigerators or dishwashers. Also, folks who make clean-energy home upgrades (i.e. installing rooftop solar panels or electric HVAC systems) are eligible for a decade of tax credits to offset some of the costs.

Other climate-related proposals are expected to incentivize American companies and manufacturers to transition to green energy sources and curb emissions — while increasing domestic energy production. The logic follows that these changes would reduce the U.S.'s reliance on fossil fuels and lower the cost of energy in the long run.

4. Prescription drug cost cap for Medicare

The bill would also make some big changes to Medicare, a federal health insurance program that covers more than 60 million Americans, primarily folks 65 and older. Under the IRA, out-of-pocket drug costs for Medicare beneficiaries would be capped at $2,000 per year, a completely new rule. Those with Medicare coverage would also be able to break down out-of-pocket costs into monthly payments. Biden highlighted this provision as "a godsend for many families."

Additional changes could be coming for the pharmaceutical industry. A key provision of the IRA is to allow Medicare to negotiate prescription drug prices directly with the drug makers, a move long sought after by many Democrats and advocates who want to rein in drug prices. The IRA would also implement an “inflation rebate” rule that would penalize drug makers for hiking the price of certain drugs higher than the rate of inflation.

What's the likelihood the IRA becomes law?

With Manchin's support, many Democrats and analysts are optimistic that some version of the bill will ultimately have the votes it needs to clear the House and Senate. But, as always, logistical hurdles complicate the way forward.

Democrats hold only a razor-thin majority in the Senate, and that's counting Vice President Kamala Harris’ tie-breaking vote. Through a process called reconciliation, Senate Democrats can avoid the filibuster for certain tax and budgetary bills, meaning the IRA could pass with only the support of a simple majority.

Still, a simple majority is not sure thing. Aside from Manchin, Arizona Sen. Kyrsten Sinema was also a holdout in negotiations of Biden’s broader Build Back Better package. Since the surprise IRA deal was announced, Sinema has not voiced support of the bill publicly. Her spokesperson said last week that the senator was reviewing the bill, and Sinema has not acknowledged the IRA on Twitter or on her website in the days since.

One final complication? The Senate's looming summer recess, which starts on Aug. 8.

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The New Inflation Reduction Act Won’t Lower Inflation — but It Could Save You Money