Inflation Reduction Act: Law And Its Impact

On August 16, 2022, US President Joe Biden signed the Inflation Reduction Act into law. The bill, which passed without Republican support, is a slimmed-down version of the Build Back Better bill. It includes large investments in healthcare, fighting climate change, and taxing wealthy corporations. While it may not have a significant impact on inflation, it is expected to lower costs for families, create jobs, and reduce the deficit.

Signed into law by President Biden on 16 August 2022

On 16 August 2022, President Joe Biden signed the Inflation Reduction Act of 2022 into law. The Act is a significant piece of legislation that accomplishes several initiatives that have been mired in congressional debate for decades.

The Act includes large investments in healthcare, fighting climate change, and taxing wealthy corporations. It also continues Affordable Care Act premium subsidies that lower the cost of health insurance until 2025 and caps out-of-pocket prescription drug costs for Medicare beneficiaries at $2,000 starting in 2025.

The Inflation Reduction Act is a slimmed-down version of the Build Back Better bill and includes the following key provisions:

• Creation of a 15% corporate minimum tax rate for corporations with at least $1 billion in income.
• Prescription drug price reform, allowing Medicare to negotiate the price of certain prescription drugs.
• A $80 billion investment in the IRS over the next 10 years.
• Affordable Care Act (ACA) subsidy extension until 2025.
• Energy security and climate change investments, including tax credits for households to offset energy costs and investments in clean energy production.

The Act was passed in the Senate without Republican support and is expected to have a negligible effect on inflation in the near term. However, it is projected to reduce the deficit by more than $100 billion over the next decade.

Includes a 15% minimum tax on corporate profits

On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The Act includes a 15% minimum tax on corporate profits, which will affect corporations reporting over $1 billion in profits to shareholders. This tax is designed to ensure that large corporations pay their fair share of taxes and will apply to any corporation (other than an S corporation, regulated investment company, or real estate investment trust) whose average annual adjusted financial statement income exceeds $1 billion for any three consecutive tax years preceding the tax year.

The 15% corporate minimum tax is based on a corporation's adjusted financial statement income, which is defined as the net income or loss reported in the corporation's applicable financial statement, with certain adjustments. For a corporation to be subject to this minimum tax, its "tentative minimum tax" must exceed its regular US federal income tax liability plus its liability for the base erosion anti-abuse tax. This means that corporations will be required to compute two separate calculations for federal income tax purposes and pay the greater of the two amounts.

The Inflation Reduction Act's 15% corporate minimum tax is similar to a proposal originally included in the House's Build Back Better Act. It was then modified by the Senate Finance Committee before being included in the final version of the Inflation Reduction Act. The tax is primarily intended to raise revenue, with the additional funds expected to contribute to the Act's goal of reducing the deficit.

The corporate minimum tax will apply to taxable years beginning after December 31, 2022, and will not affect corporations that have changed ownership or fallen below the adjusted financial statement income threshold for a specified number of consecutive years (as determined by the Treasury). However, if a corporation meets the three-year average adjusted financial statement income test in future years, it will once again be subject to the tax.

Overall, the inclusion of a 15% minimum tax on corporate profits in the Inflation Reduction Act is a significant development that will impact many large corporations and is expected to result in increased tax revenue for the government.

Lowers prescription drug costs

On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The Act includes several provisions to lower prescription drug costs for people with Medicare and reduce drug spending by the federal government.

The prescription drug provisions included in the Inflation Reduction Act will:

• Require the federal government to negotiate prices for some drugs covered under Medicare Part B and Part D with the highest total spending, beginning in 2026.
• Require drug companies to pay rebates to Medicare if prices rise faster than inflation for drugs used by Medicare beneficiaries, beginning in 2023.
• Cap out-of-pocket spending for Medicare Part D enrollees and make other Part D benefit design changes, beginning in 2024.
• Limit monthly cost sharing for insulin to $35 for people with Medicare, beginning in 2023.
• Eliminate cost sharing for adult vaccines covered under Medicare Part D and improve access to adult vaccines in Medicaid and CHIP, beginning in 2023.
• Expand eligibility for full benefits under the Medicare Part D Low-Income Subsidy Program, beginning in 2024.
• Further delay implementation of the Trump Administration's drug rebate rule, beginning in 2027.

The Inflation Reduction Act directs the Secretary of Health and Human Services (HHS) to negotiate directly with pharmaceutical companies to lower the cost of prescription drugs for Medicare beneficiaries. This includes a $2,000 cap on out-of-pocket prescription drug costs for Medicare beneficiaries, effective in 2025. The Act also establishes a new inflation rebate that requires drug companies that increase their prices beyond the pace of inflation to pay a rebate to Medicare for Part B and Part D drugs.

Lowers health insurance costs

On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The Act includes provisions that lower health insurance costs for millions of Americans.

Firstly, the Act extends the enhanced premium subsidies for those who access their health care through the Affordable Care Act (ACA) for three years, until 2025. These subsidies were scheduled to expire at the end of 2022, and approximately 3 million Americans could have lost their health insurance if they weren't extended. The extension ensures that no family will be forced to pay more than 8.5% of their income for ACA coverage, regardless of income. Consumers in these plans saved an average of $800 on their premiums in 2021 as a result of the American Rescue Plan, and this saving will continue through 2025.

Secondly, the Act caps out-of-pocket prescription drug costs in Medicare at $2,000 per year, starting in 2025. This provision also allows seniors to spread costs throughout the year instead of facing them all upfront at the start of the year. Additionally, Medicare will have the ability to negotiate the price of certain prescription drugs, bringing down the price beneficiaries will pay for their medications.

Thirdly, the Act includes a monthly $35 cap on out-of-pocket insulin costs for all Ohioans on Medicare who rely on insulin to stay healthy. This change will benefit at least 1.4 million people with Medicare.

Finally, the Act improves coverage and lowers out-of-pocket costs of recommended vaccines in Medicare, Medicaid, and the Children's Health Insurance Program. Starting in 2023, people with Medicare drug coverage will pay nothing out-of-pocket for adult vaccines recommended by the Advisory Committee on Immunization Practices (ACIP), including the shingles and Tetanus-Diphtheria-Whooping Cough vaccines. Most adults enrolled in Medicaid or the Children's Health Insurance Program will also be guaranteed coverage of ACIP-recommended vaccines at no cost, beginning October 1, 2023.

Includes tax credits for clean energy

On August 16, 2022, President Biden signed the Inflation Reduction Act into law. The legislation includes tax credits for clean energy, which can be broken down into three main categories:

• Expansion of Existing Energy Tax Credits: The Act amended the Internal Revenue Code (IRC) to include solar facilities and wind facilities that begin construction by the end of 2024 under the inflation-adjusted IRC Section 45 Production Tax Credit (PTC). It also expands the applicability of the IRC Section 48 Investment Tax Credit (ITC) to standalone energy storage and biogas projects, among other things. The base credit rate for the ITC is 6% of the qualified costs of eligible facilities.
• Creation of a Two-Tier Credit Regime: The IRA breaks the PTC and ITC into a two-tier regime consisting of a base credit and an additional bonus credit. The bonus credit is available for eligible projects that satisfy certain prevailing wage and apprenticeship requirements. The base credit for the PTC is 20% of the available credit, while the bonus credit is 80%. For the ITC, the base credit is 6%, and the bonus credit is 30%.
• Additional Bonus Credits: The Act establishes "energy community" and "domestic content" bonus credits, which can be stacked on top of the PTC or ITC credits. Facilities located in "energy communities", including areas with significant employment related to fossil fuels and high unemployment, can increase their PTC or ITC credits by an additional 10%. Projects that meet the "domestic content" requirements, which incentivize the use of domestically produced construction materials, can also increase their PTC or ITC credits by an additional 10%.

These tax credits for clean energy technologies are designed to incentivize and offset the cost of constructing renewable energy generation facilities and other green-energy projects.

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