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Inflation Reduction Act – Basic Breakdown:

After months of sparring through negotiations, Joe Manchin agreed to back a package aimed at lowering carbon emissions and curbing healthcare costs, while raising taxes.  This marks a revival of Biden’s economic and climate agenda that was seemingly killed earlier by Manchin.  The deal agreed upon is much more narrow than the original package proposed by Biden, with Republicans expected to oppose the package.

What’s in the Deal?

The deal labeled the Inflation Reduction Act of 2022 would raise a total of $739 billion in revenue, and spend a total of $433 billion.  The deal would reduce the current budget deficit by $300 billion over a decade.

Tax Impact:

Before we jump into what the money is being spent on, let’s take a look at how the funds will be raised.

This proposal would implement a 15% corporate minimum tax, which is pointed at large companies that post significant profits but pay little to nothing in income taxes.  It is important to note, however, that this corporate minimum tax, is different than the 15% global minimum tax (which is not included in the deal).

The plan would increase enforcement efforts at the IRS, almost doubling the size of the agency over the next 10 years.  This is expected to net more money than it would cost and increase audit rates in the future.

Past this, higher taxes on carried-interest income are seen in the deal as it plans to change the way this income is currently taxed from long-term capital gains to ordinary income rates.  Carried interest income is a share of private equity or hedge fund’s profits that is paid to the fund managers.  This is often viewed as a performance bonus (because the more the fund makes, the more profit there is for managers), and now will be taxed the same as one.

Climate and Energy Policy:

The package focuses largely on climate and energy policy through tax credits for purchasing electric and hydrogen vehicles .  Past this, Joe Manchin stated the proposed legislation will also invest in technology used for cleaner energy production.  These moves are being made in hopes of further reducing the United States’ greenhouse-gas emissions.

Healthcare & Prescription Drugs:

The proposed deal would allocate $64 billion to extending the Affordable Care Act subsidies for another three years.  The subsidies under the 2021 American Rescue Plan increased the size of premium tax credits and eliminated the upper-income limit for subsidy eligibility.  It also ensures that those who are receiving unemployment compensation can enroll in a silver plan with $0 premiums and cost-sharing reductions.

The premium subsidies, which are also referred to as premium tax credits typically adjust yearly to maintain pace with premiums.  Under the ACA, there is no longer a “subsidy cliff”, and instead no one purchasing coverage through the marketplace has to pay more than 8.5% of their household income.  Additionally, individuals with lower incomes are expected to pay a smaller percentage, as low as $0 for some whose income doesn’t exceed 150% of the poverty level.

Past subsidies, the deal would also allow Medicare to negotiate the cost of some prescription drugs with pharmaceutical companies.  This is a move that has long been sought after by the Democratic party but has been heavily opposed by the drug industry.

Wrap Up:

While the package is dubbed the “Inflation Reduction Act”, there is not a clear picture of how much this will help the U.S. fight inflation.  Rather, Manchin and Schumer relayed in a joint statement that the measure would “make a historic down payment on deficit reduction,” thus fighting inflation.

No matter your thoughts on the package, it may be a little early to react as it is still not clear if the deal will be passed or not.  For the deal to pass, only a majority vote from the house is needed, with the House of Representatives having a slight Democratic margin.  Republicans are likely to unanimously oppose, so Democrats will need to stick tightly together, trying to reconcile any issues had internally over provisions left out of or included in the package if it is to pass.

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