What the Inflation Reduction Act does and doesn't do about rising prices
Updated August 13, 2022 at 8:49 AM ET
The massive climate, health care and tax bill making its way toward President Biden's desk is called the Inflation Reduction Act. But how much does it actually do to slow consumer prices that are climbing at their fastest pace in about 40 years?
After months of negotiations, a 730-page version of the bill passed the House on Friday and President Biden said he plans to sign it into law next week.
The White House says the package will address inflation in two key ways: by lowering energy and health care costs for families and by helping to bring down the deficit.
"And that's why even Democrats and Republicans, former Treasury secretaries, economists across the board have said that this bill will make a positive impact on inflation while also tackling some of the biggest and long-standing issues facing our country, like prescription drugs and like tackling climate change," said Brian Deese, director of the National Economic Council, in an interview this week with NPR's Morning Edition.
While experts generally agree that the legislation will modestly help slow the growth of prices, it may not do so in the ways you think, or as quickly. Here are some answers about what the legislation means for inflation.
How will this bill bring down inflation?
The bill will make small steps to help bring inflation back to normal levels, said Shai Akabas, the director of economic policy at the Bipartisan Policy Center.
"It will generally work in the right direction and help the Federal Reserve, which has the primary responsibility for getting a hold of inflation," Akabas said.
There are three main ways the bill targets rising prices, according to Akabas. First, it plans to reduce the federal deficit, which is the difference between how much the U.S. government spends and how much it makes in taxes and revenue. When there's less money floating in the economy, there tends to be less demand and fewer price hikes, Akabas said.
Because there are several provisions to encourage spending in the bill, the net impact on inflation is unclear.
Second, it will promote the production of certain goods, mainly in renewable energy. Having more supply than demand could help lower some costs over time, he added.
Third and more directly, one provision of the bill will help limit the price growth of certain prescription drugs by allowing Medicare to negotiate their cost with pharmaceutical companies. Still, some of the biggest drivers of inflation, including food and energy costs, are not immediately addressed.
OK — so how soon?
The proposal won't help curb inflation dramatically nor right away, experts say.
"It's not likely to have a major effect on inflation in the next few months," Akabas said.
Some experts, like Kent Smetters, faculty director of the Penn Wharton Budget Model, do not expect a significant impact in the next few years.
"On one hand, it does not add to inflation, which was what the previous concern that people had about passing legislation like this right now," Smetters said. "But at the same it doesn't really take away from the rise in prices either."
The nonpartisan Congressional Budget Office, which scored the bill, also determined that the bill will have a "negligible effect" on inflation this year and next.
If the impact on inflation is limited, then what else does it do?
The package includes $369 billion in new spending to reduce greenhouse gas emissions, invest in clean energy technologies and extend subsidies for the Affordable Care Act.
The bill also plans to bring in more than $300 billion in new revenue, Democrats say, by imposing a 15% minimum tax on corporations making over $1 billion and through a new excise tax on corporate stock buybacks.
"The way to think about this is not about inflation at all, but about the tradeoffs between helping people who need more help, especially in health care and reducing carbon, versus the potential impact on future investment," Smetters said.
What are some changes I'll see in the near future?
While experts don't see a rapid curb to inflation through this bill, there are a range of measures to help with high costs. For instance:
- The bill offers a number of tax credits for people switching to cleaner energy sources, including electric vehicles and rooftop solar panels. Those incentives will take effect in 2023, and according to Democrats, will mean a 40% cut in greenhouse emissions from 2005 levels by the end of the decade.
- The Internal Revenue Service will get a boost in funding, particularly to improve its customer service and tax enforcement. Akabas said that investment could help alleviate some of the challenges with long response times or getting tax refunds processed. It could also increase collection of taxes that are currently owed but go unpaid.
- Millions of Americans will continue to benefit from subsidies that help with rising health insurance premiums that were originally slated to expire next year.
- The bill will put a $2,000 annual cap on out-of-pocket prescription drugs for people insured by Medicare, which will be most impactful for senior citizens with illnesses such as cancer and multiple sclerosis. But that provision won't materialize until 2025.
"Prices are high now but we're talking about prices that have been putting burdens on household budgets for decades," said Rakeen Mabud, the chief economist of the Groundwork Collaborative, a progressive economics think tank.
"We've been struggling with skyrocketing health care costs for a really long time and this bill is an important step forward."
Am I going to see an increase in my taxes?
It's unlikely that a vast majority of households will see a direct impact on their taxes, said Akabas, who focuses on federal budget policy.
Instead, the tax increases will largely fall on corporations. That being said, some employees may feel that tax burden indirectly.
"If a company is less profitable and less able to spend money on labor and less able to pay higher wages, then that will be felt by individuals throughout the economy," Akabas explained.
Chye-Ching Huang, the executive director of the Tax Law Center at New York University, doesn't expect a significant impact on wages. Since the tax cut in 2017, economists did not see a major difference in wages, Huang said.
"Reversing some of that for the very largest corporations can be expected to have a similarly small or imperceptible effect," she said.
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