September 27, 2022

It turns out that the congressional Democrats’ agenda was only mostly dead.

The surprise deal announced last month by Sen. Joe Manchin (D-WV) has now finally passed the Senate and looks likely to pass the House later in August. It’s much smaller than the big dreams Democrats had when President Joe Biden took office in 2021. But the bill, the Inflation Reduction Act, still does a lot. It contains historic provisions to address climate change and takes steps toward fulfilling a longtime Democratic policy goal: letting Medicare negotiate the prices of some prescription drugs.

The bill could affect what kind of car you buy and how you heat your home. It will prevent large price increases this year for some people who buy individual health insurance. And if you don’t pay your taxes, there’s a greater chance the IRS will find out.

Here’s what the bill includes and what it would mean for American life in the years to come.

The biggest effort to tackle climate change — ever

The Inflation Reduction Act would be the biggest thing the US has ever done to address climate change, and climate makes up the biggest share of the bill’s spending: nearly $370 billion.

That’s less than the House version from last fall and a fraction of what Biden originally envisioned for the climate. Senate Democrats claim these investments will be enough to reduce climate pollution by about 40 percent. (This is slightly less dramatic than it sounds. The reduction compares to 2005 levels, when emissions peaked. Even without a new policy, the US would still be on track for a 20 percent reduction in emissions by 2030 .)

The policies generally aim to push American consumers and industry away from dependence on fossil fuels. The largest share of funding goes to tax credits and rebates for a range of renewable energy technologies – solar panels, wind turbines, heat pumps, energy efficiency and electric vehicles. It includes incentives for companies to make more of this technology in the United States. The bill will also invest in energy efficiency at industrial sites that can help reduce the industry’s large carbon footprint, while also dedicating some funds to forest and coastal restoration.

The bill, if passed, would break new ground in other problematic areas of the climate crisis. It establishes the first methane tax to penalize fossil fuel companies for excessive emissions of the particularly potent climate pollutant. Another important part of the funding helps disadvantaged communities with monitoring and cleanup pollution and strengthen their resilience to climate impacts.

Beyond reducing climate pollution, clean energy investments could also affect inflation. According to Robbie Orvis, senior director of Energy Innovation, rising energy prices drove about a third of the 9% increase in the overall Consumer Price Index last year. By helping Americans become less dependent on fossil fuels, the spending helps ease the global oil crisis and lower consumer bills.

Helping people afford health insurance for longer

The climate parts of the bill have gotten the most attention. But the bill also includes some important health care steps, including support for an expansion of the Affordable Care Act.

One way Obamacare expanded health care coverage was by creating markets for people to buy insurance and offering federal subsidies to help low- and middle-income households afford it. Households making up to 400 percent of the federal poverty line — about $106,000 for a family of four — could get federal help to pay their premiums. After that, they were on their own.

But in 2021, Congress eliminated those caps, saying no household would have to pay more than 8.5 percent of their income for health insurance. The change had the biggest impact on people making between 400 and 600 percent of the federal poverty line (for the same household of four, that would be up to $159,000 a year). As Vox’s Dylan Scott previously reported, the changes also allowed about 7 million people to qualify for free health insurance under the ACA.

Those policies, however, were set to sunset by the end of this year, leaving millions of people facing much higher health care costs in the future. The Inflation Reduction Act extends these subsidies for three years through the end of 2025, ensuring that people won’t face this increase for a while longer. That extension is expected to cost $64 billion, according to a projection by the Congressional Budget Office.

Prescription drug price negotiation

For years, Democrats have told voters they will pursue policies that lower prescription drug costs, only to be blocked by Republicans and back down. This bill allows them to finally fulfill that campaign promise by allowing Medicare to negotiate for prescription drugs—a major change that could lead to significant cost reductions for a small subset of drugs.

As outlined in the bill, Medicare would be able to negotiate for a handful of drugs, with those new prices taking effect in 2026. In 2026, Medicare would only be able to cover costs for 10 drugs. over time, it will increase to 20 drugs. The drugs in question will be determined based on a number of criteria, including how expensive they are.

These negotiations are poised to save Medicare a lot of money since prices are currently set by manufacturers.

Sen. Elizabeth MacDonough, whose approval was needed for Democrats to move forward with the reconciliation process, signed the Medicare portion of the bill but rejected a provision that would have lowered prescription costs for Americans on private insurance.

Because of this ruling, drug companies will be forced to issue rebates if they try to raise the price of a drug at a rate higher than inflation. But that requirement only applies to drug prices for Medicare beneficiaries, not people currently covered by private insurance.

The deputy also got hit else provision that would limit out-of-pocket insulin costs by $35 per month for those with private insurance. Democrats were able to keep an insulin cap of $35 a month for those covered by Medicare.

More money for the IRS

In fact, raising taxes can be difficult, politically. So Democrats are, in part, taking a different approach: making people pay more in taxes than they already owe. The Inflation Reduction Act deal increases funding for the IRS so it can increase enforcement and crack down on unpaid taxes. Senate Democrats, citing Congressional Budget Office numbers, assessment that, by investing $80 billion in the IRS over a decade, it will collect $203 billion. This was also part of a proposal submitted by the Biden administration in 2021.

Theirs is appreciated that from 2011 to 2013, the “tax gap” — meaning the difference between what people pay in taxes and what they owe in taxes — amounted to $441 billion each year, or about 16 percent of total tax revenue obligation in those years.

A 2019 document by Natasha Sarin, now at the Treasury Department, and economist Larry Summers raised the tax gap to $7.5 trillion from 2020 to 2029, most of it going to the wealthy. They estimated that underreporting was five times higher among people making more than $10 million a year than for those making less than $200,000. Senate Democrats say none of the funds directed to the IRS will go toward raising taxes on those earning less than $400,000.

Closing a loophole to make companies pay more taxes

The deal also includes a minimum tax of 15 percent on companies with more than $1 billion in profits. Senate Democrats note that while the current corporate tax rate is 21 percent, dozens of large companies, including AT&T, Amazon and ExxonMobil, pay far less than that. Originally, the provision was expected to raise $313 billion, although new carvings were added to win the vote of Sen. Kyrsten Sinema (D-AZ)., which give manufacturers and private equity firms more leeway on the new minimum tax rate. These changes are likely to reduce the revenue this measure will generate.

There is also a 1 percent excise duty on share buybacks by companies, which currently not subject to any taxes. This excise duty is estimated to increase approx $73 billion in revenue.

Update, August 5, 12:30 p.m.: This story has been updated to reflect tax policy changes in the legislation.

Update, August 6, 2:30 p.m.: This story has been updated to reflect the congressman’s decision and how drug prices will be affected.

Update, August 7, 15:20: This story has been updated to reflect the Senate’s passage of the Inflation Reduction Act.

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