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Inflation Reduction Act Summary

In today’s article, our team wanted to give you an overview of what the Inflation Reduction Act is, what it covers, the impacts of it, our insights, and some helpful links for you.

President Joe Biden recently signed a sweeping $750 billion health care, tax and climate bill into law at the White House. This new bill focuses on a few key funding and legislative priorities from climate change to prescription drugs. 

Inflation Reduction Act Overview

Key Funding and Legislative Priorities:

  • Climate change – Provides tax credits and incentives for green energy.
  • Prescription drug costs – Gives Medicare price negotiation ability on select drugs.
  • Health care coverage – Extends the ACA health insurance subsidies passed as part of the economic stimulus package in 2021.
  • Federal Deficit Reduction – Reduces the federal deficit by $300 billion. The federal deficit through June 2022 is $515 billion. The federal debt, which is the total amount of money the federal government owes, is currently $30 trillion.

New Tax Provisions

  • 15% minimum corporate income tax for large corporations
  • 1% tax on stock buybacks
  • $80 billion for new IRS tax enforcement, which is expected to raise $124 billion in new tax revenue

Bill Totals

  • Approximately $740 billion in new spending. By comparison, the more comprehensive Build Back Better legislation that included many of these provisions was introduced in 2021 with a price tag of $3.5 trillion.
  • Approximately $450 billion in new taxes, not including additional revenue raised by the IRS.

Impact & Analysis

On Inflation

The Congressional Budget Office (CBO) has stated the legislation will have a “negligible effect” on inflation. The non-partisan, non-profit Penn Wharton Business Model has stated the impact on inflation is “statistically indistinguishable from zero.”

On Taxes

New proposed taxes on retirement accounts (like IRAs, 401(k)s, and Roth accounts) which were included in the initial Build Back Better bill, were not included in this legislation.

The White House press release on the bill quoted President Biden as saying, “It does not raise taxes on those making less than $400,000 a year – not one cent.” However, the new IRS tax enforcement is expected to heavily impact taxpayers making less than $400,000 a year. 

The Joint Committee on Taxation estimates that up to 90% of new IRS enforcement tax revenue will come from taxpayers making less than $400,000 a year.

Our Insights on the Inflation Reduction Act

We are currently experiencing a tax-and-spend era of legislative activity in Washington.

As this bill makes clear, Congress’s approach to reducing the deficit is currently focused on raising taxes. We can expect this bill to be the first of multiple tax and spending bills Congress will seek to pass. Many of the Democrats’ top priorities were not included in this bill. After all, the original Build Back Better legislation carried a price tag of $3.5 trillion, so there are still nearly $2.8 trillion of legislative priorities that have yet to be funded. It is reasonable to expect future bills will seek new taxes to fund these additional spending priorities.

While new taxes on retirement accounts were not included in this legislation, they have been a point in Congress’s tax policy debates in both 2021 and 2022. Qualified accounts in particular continue to have heightened legislative risk as we enter an era of rising taxes.

Knowing higher taxes and unstable tax policy are likely in the near- and mid-term, American savers can benefit from diversifying the tax status of their retirement assets to include tax-free assets that are less likely to be impacted by future tax changes.

I know there’s a ton of information to take in, «Nickname», and I would love to help you sort it all out. What questions do you have for us here at WAG? 

We’re happy to work with you either in person, over the phone, or virtually, based on your preference. Give our office a call and we can schedule some time together.

Helpful Links And References:

June Monthly Treasury Report | Current Federal Debt and Deficit:

https://www.fiscal.treasury.gov/files/reports-statements/mts/mts0622.pdf

Joint Committee on Taxation | Distributional Effect of Inflation Reduction Act:

https://www.finance.senate.gov/imo/media/doc/jct_distributional_effects_inflation_reduction_act.pdf

Penn Wharton Budget Model | Analysis of Inflation Reduction Act:

https://budgetmodel.wharton.upenn.edu/issues/2022/7/29/inflation-reduction-act-preliminary-estimates

Senate Democrats | Bill Summary:

https://www.democrats.senate.gov/imo/media/doc/inflation_reduction_act_one_page_summary.pdf

White House Statement on Inflation Reduction Act:

https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/07/statement-by-president-biden-on-senate-passage-of-the-inflation-reduction-act/