The bill entitled the ‘Inflation Reduction Act,’ while largely ineffective at its stated purpose, is projected to reduce CO₂ emissions by 40% by 2030. It also takes a step towards reducing the price of prescription drugs and making the tax code just a little bit fairer. To put it simply, this is a big deal.
It is far from perfect. There is no attempt to create a carbon market or put a price on carbon. The tax policy sits atop the existing complicated tax structure. The minimum tax maintains an exemption for carried interest. Carried interest is a term for income paid to investment managers like private equity or hedge funds allowing them to count their fees as investment income rather than revenue (it is, in reality, performance-based revenue). It does nothing to curb inflation in the short run; that would require passing an unpopular tax on consumption. It is the best policy that could be achieved in the Senate.
Previous approaches to climate policy have always been narrow in scope or largely ineffective. In an ideal world, a cap and trade system would put a fair price on CO₂ and a decentralized infrastructure would come up organically to promote the most innovative ideas. Entrepreneurs do tend to be more creative than bureaucrats in creating solutions, after all. Sen. Joe Manchin (D – WV) would never accept a carbon price, though, and his vote was necessary to pass the bill. Instead, this bill relies on tax credits and subsidies to achieve climate goals. In the interest of funding some of the less established ideas, a ‘green bank’ is being seeded with $27 billion.
Tax incentives are being used liberally for both the supply and demand side. All sorts of carbon-free technologies are being somehow incentivized. Even nuclear power, long cast aside, is making a triumphant return to the table. Wind, solar, hydrogen, and various forms of energy storage get their own pots. From the demand side, buildings are given incentives to use green energy and energy-efficient design. In total, the bill allocates $369 billion to energy and climate tech.
Concessions to fossil fuel production had to be made in order to assuage Senator Manchin. Drilling rights on public land are extended and off-shore drilling is back on the table. Prices for those leases were raised, though, and a small tax on imported petroleum will be used to fund relief for communities directly impacted by fossil fuel production and use.
The bill also spans healthcare and drug costs. For the first time, some drug prices will be capped, albeit in a very limited way. Medicare is also being given the ability to negotiate with pharmaceutical companies in an effort to lower drug prices. Restrictions do exist: negotiations will not begin until 9 years after the introduction of typical drugs and 13 years for the more complicated biologic drugs. Additionally, premium subsidies for Affordable Care Act insurance policies are being extended to help those hardest hit by inflation.
Fortunately, the IRA does not just dump money into the economy; it pays for itself and then contributes nearly $300 billion into deficit reduction over the next decade. The IRS is getting needed resources to enforce the tax code, raising an estimated $200 billion. A new tax is also being established so that large corporations will have to pay a minimum of 15% of earnings reported to shareholders. When accounting for all tax revenue generated by the bill, it is expected to raise almost $800 billion over the next 10 years.
If we were constructing a climate bill for maximizing effect while minimizing economic disruption, this would not be it. It does not have nearly enough flexibility for new innovations or changing economic conditions. Carrots abound, but sticks are conspicuously absent. The tax policy, rather than simplifying our obscenely complicated tax code, sits atop it, adding another layer of complexity. Still, it accomplishes more than we could have hoped for just a few weeks ago. What’s more, it does that without adding to inflationary pressures. It’s an impressive accomplishment from a beleaguered administration.