The Inflation Reduction Act is an unprecedented legislative package, both in terms of scope and content. This historical act introduces several measures designed to address inflation, healthcare costs, the upcoming energy transition, and the public deficit.
The passing of the IRA has received a lot of attention in the news, and it’s safe to say that this legislative package will shape the country's future over the next decade besides acting as a defining element of the Biden administration’s legacy.
From fiscal policy reform to groundbreaking climate action measures, the following guide goes over everything you need to know ahead of the first IRA provisions going into effect in January 2023.
Timeline of the Inflation Reduction Act
The Inflation Reduction Act is the result of a broader policy from the Biden administration.
The inception of the IRA dates back to 2020 with the introduction of the Build Back Better Plan. Congress implemented part of this package with the American Rescue Plan, but proposals for the American Jobs Plan and the American Families Plan would go on to become the foundation of the Build Back Better Act.
The House approved the Build Back Better Act in September 2021, but the project underwent some significant amendments in the Senate. The legislative package eventually morphed into the Inflation Reduction Act.
After an official announcement on July 27, 2022, the Inflation Reduction Act became law on August 16, 2022.
What’s in the Inflation Reduction Act?
The IRA is primarily a budget reconciliation bill. It includes provisions for raising a total of $738 billion and investing these funds to tackle the national debt, fight inflation, and take significant climate action.
Out of the $738 billion raised, $328 billion will go toward deficit reduction. Combined with other efforts, the total deficit reduction will reach $1.5 trillion within the first year. The current administration expects that adopting a responsible fiscal policy will have a positive impact on inflation in the long term.
The legislative package also aims to tackle issues linked to the rising cost of healthcare. The IRA includes provisions for lowering the cost of prescription drugs and improving coverage for prescriptions. For instance, the IRA creates a $2,000 annual cap on what seniors can spend on prescriptions and limits the cost of insulin to $35 a month. It also raises enough funding to cover Affordable Care Act subsidies for the next three years, besides expanding these subsidies.
The IRA introduces some significant tax reforms. The goal is to support small businesses through measures like a higher R&D tax credit, modernizing the IRS to improve tax collection, and enforcing a 15% minimum corporate tax for businesses with revenues of more than $1 billion.
The Biden administration also aims to address the need for a clean and modern energy infrastructure. The IRA includes a number of tax credits and other incentives to support the energy transition and fight climate change. There is $400 billion in federal funding that will finance tax incentives, grants, and loan guarantees. The U.S. Department of Energy will also extend its loan program to help upgrade or replace the current energy infrastructure.
Clean energy and climate change: Why the IRA is a historical legislative package
The Inflation Reduction Act is an unprecedented measure in terms of fiscal policy, but it’s also a historical first when it comes to investing in climate change and clean energy.
Thanks to the $369 billion invested to fight climate change and promote clean energy, greenhouse gas emissions could reach 40% of the level recorded in 2005 by 2030.
The IRA supports innovation and the adoption of a clean energy infrastructure at several levels:
- Consumers will have access to point-of-sale rebates and tax credits to help with EV ownership and electrification upgrades. The IRA will result in a more modern energy infrastructure by promoting the adoption of battery storage, solar power, or smart panel upgrades.
- The legislative package will also help create a strong renewable energy sector by introducing labor and sourcing requirements to qualify for different incentives.
- The USPS will become an electrification leader and set a precedent for the adoption of an EV fleet on a large scale with $3 billion in funding.
- The IRA introduces a $1 billion fund to help states, municipalities, and other entities invest in heavy-duty EVs.
- With $3 billion invested in public transit, the IRA will support the development of clean mobility solutions while reducing the number of cars on the roads.
- The act includes $2 billion in funding for the Domestic Manufacturing Conversion Grant program, an initiative that will support the development of a U.S. manufacturing sector for cleaner vehicles.
- The IRA also includes $2.25 billion in funding to develop programs that will reduce pollution in ports.
What does the Inflation Reduction Act mean for Gen Z?
With the Consumer Price Index reaching 9.1%, everyone is feeling the pinch of inflation. By introducing measures to slow down this phenomenon, the IRA should have a positive impact on college students and recent graduates who navigate the high cost of living, a challenging rental market, or student loans.
For current students, the IRA could create some exciting job opportunities. Some measures will strengthen small businesses, promote a more resilient supply chain, and help reduce costs for businesses. A strong economy at the small business level could result in more opportunities for those interested in entrepreneurship or working for a startup.
Climate action is another area that will have a significant impact for Gen Zers. With only one in three Americans feeling optimistic about this issue and Gen Zers and Millennials experiencing unprecedented levels of stress and anxiety about their future, an administration with a clear and actionable plan for change could turn this trend around.
What are the main benefits of the Inflation Reduction Act?
The IRA introduces unprecedented changes in several areas:
- It acknowledges and addresses issues that affect a majority of the population, including inflation, the energy crisis, or healthcare costs.
- It creates a precedent for tackling climate change through significant investments. It’s a drastic turnaround following the U.S. exiting the Paris Climate Accords in 2020.
- It established a framework for guiding the U.S. through a necessary energy transition, a significant step toward no longer depending on fossil fuels.
- Lastly, it sets a precedent for using tax credits and other incentives to promote change rather than taking punitive measures.
Are there any drawbacks to the Inflation Reduction Act?
The outcome of the IRA is difficult to predict since most of the measures don’t have comparable precedents. Some experts have also expressed concerns about the following areas:
- Some credits and incentives are difficult to qualify for and still feel too restrictive. For instance, the EV point-of-sale credits only apply to specific models while income requirements limit who can qualify for some tax credits.
- The corporate tax reform could have a negative impact on the economy. Some experts predict a mild drop in the GDP as well as job losses.
- Relying on government funding to transition to a clean energy infrastructure could result in high energy costs spurred by a lack of competition among energy producers.
- Some provisions aren’t permanent. Tax credits and other incentives will expire after a few years.
- While the IRA has an unprecedented scope, it overlooks some significant issues. For instance, it doesn’t tackle rising interest rates or inflated material costs that make homeownership difficult to achieve for many.
Taxes, national debt, and inflation
The good news is that the average household will not see any changes when the time to file taxes comes.
While the IRA has provisions for investing billions across several projects, the legislative package will raise most of the necessary funds via a minimum tax rate of 15% for corporations earning more than $1 billion. Funding will also come from lowering what Medicare and Medicaid programs spend on prescription drugs.
The IRA will also crack down on loopholes and dishonest practices that corporations use to reduce their tax bills. Plus, it will introduce a 1% tax on corporate share buybacks.
Another aspect of the fiscal policy introduced by the IRA is to modernize the IRS. Experts believe that there is a $1 trillion gap in taxes that go uncollected. By investing in the IRS, this legislative package will reduce operational costs and optimize revenues.
Lowering the national debt is another significant area of focus for the IRA. This legislative package introduces the largest deficit reduction in history. It also sets a precedent for bipartisan efforts to tackle this growing issue and acknowledges the impact fiscal policies have on inflation. The IRA should reduce the budget deficit by $238 billion over the next 10 years.
While the IRA might not have a strong effect on inflation immediately after the legislative package goes into effect, several measures will help reduce costs for businesses, make medications more affordable, and lower the cost of energy upgrades in the long term. Plus, some measures will support the creation of good-paying jobs.
However, the IRA doesn’t directly address the cost of housing, cost of consumer goods, or the cost of energy. As a result, experts are issuing mitigated predictions regarding the impact of the IRA on inflation, with some sources predicting a slight drop of 0.1% in about five years.
The Inflation Reduction Act in 5 Numbers
These five numbers are representative of the IRA’s predicted impact:
- 13 million Americans will save $800 a year on health insurance premiums on average.
- Congress is predicting a historical deficit reduction of over $300 billion.
- The IRA will lead to the creation of 9 million jobs in the clean energy sector by 2032.
- 100 million households could save a total of $37 billion a year on their energy bills by taking advantage of the different incentives introduced by the IRA.
- The IRA will reduce the social cost of climate change by $1.9 trillion before 2050.
What impact will the IRA have? Read on to learn more about this innovative legislation package.
Will the November elections have any effect on the Inflation Reduction Act?
Since Congress already found ways of funding the IRA, the outcome of the November elections will have little effect on the legislative package. However, a scenario with a divided government could lead to increased oversight and scrutiny that would create cumbersome processes for issuing grants.
When will the Inflation Reduction Act go into effect?
It depends. The IRA extends and modifies some existing measures, and most of these changes will go into effect in January 2023. Some measures will take longer to go into effect. For instance, lower drug prices will become a reality in 2026.
Is the IRA sufficient to fight climate change?
In 2021, emissions went up by 6.2% in the U.S. The IRA represents a drastic change and puts the country on track to achieve a net zero economy at a future date. However, continued efforts will be necessary.
How will the Inflation Reduction Act affect you?
In the short term, you’ll likely not see any changes unless you take advantage of the tax credits or extended ACA subsidies. In the long term, experts predict that the IRA could help households save around $1,000 a year by 2030.
Explore more resources from It’s Up to Us
The Inflation Reduction Act touches on many important topics like the national debt, climate change, or the energy transition.
It’s important to do some background research to better understand the full extent of this historical legislative package, starting with a few resources from It’s Up to Us:
- The IRA introduces groundbreaking measures to tackle the national debt. Learn more about the ongoing fiscal challenge our country is facing and why getting the public deficit under control should be a priority.
- Job creation is one of the areas of focus for the IRA. Learn more about how inflation and national debt are affecting the job market as well as your potential income.
- Climate change is another key topic for understanding how impactful the IRA truly is. We have some background information about this issue and its economic effects.
- We also discussed how the IRA will help reduce healthcare costs and expand access to ACA subsidies. Read more about access to universal healthcare in the U.S.
- With the IRA, the Biden administration is sending a strong message regarding its leadership position. However, change can happen at all levels.
By taking a holistic approach to building a strong economy with measures that support access to clean energy, good-paying jobs, healthcare costs, or tax reform, the Inflation Reduction Act is a turning point.
For many young adults, the IRA is a source of inspiration and hope for the future. With change happening at the federal level, now is the right time to look into civic engagement. Find out how you can get involved.