On August 16, 2022, President Biden signed the Inflation Reduction Act of 2022. This bill (a legislative proposal before Congress) was the net result of 18 months of hard-fought and often contentious negotiations among factions of the Democratic Party and the Biden administration. The nexus for the bill stemmed from the 2022 budget reconciliation agreement passed in March 2021, which provided the Democrats with a vehicle to forward President Biden’s and the party’s social and climate priorities while raising taxes on wealthy corporations.

What is the Inflation Reduction Act reconciliation bill?
  • Originally named the “American Family Act” then “Build Back Better,” the Inflation Reduction Act is the final version of the reconciliation bill originally passed in March 2021.
  • Reconciliation is a special legislative process allowing a bill to be passed under budgetary measures requiring only a simple Senate majority of 51 votes, avoiding a filibuster which would require 60 votes. With a 50/50 Senate, all 50 Democrats must vote for successful passage (with Vice President Harris casting the deciding 51st vote).
  • “Build Back Better” was thwarted in December 2021 when Senator Joe Manchin announced his refusal to back the bill.
  • The resulting bill is a slimmed-down version of the original $4 trillion package proposed by President Biden and the $6 trillion package proposed by progressive Democrats.
  • The final climate, healthcare, and tax overhaul bill will add $437 billion of new spending and bring $737 billion in new revenue to the US government.
  • This watershed Act represents the largest investment by the US, or any other country, to fight climate change.
  • The bill aims to reduce carbon emissions by ~40% by 2030.
Inflation
  • Economists claim the Inflation Reduction Act is unlikely to reduce inflation anytime soon.
  • The nonpartisan Congressional Budget Office (CBO) estimates it will change inflation by +/- 0.1% in 2023.
Deficit
  • Based on the CBO analysis, the legislation would reduce deficits by $305 billion through 2031.
    • Deficit reductions include over $100 billion of net savings and $200 billion of gross revenue from enhanced tax compliance measures.
Spending
  • Designates ~$370 billion of the $437 billion for climate programs and tax credits to businesses and individuals to accelerate development and use of clean energy.
    • $8 billion earmarked for credits to households paying for green energy upgrades like replacing old appliances with new energy-efficient models
      • Households earning between 80% and 150% of their area’s median income will qualify for the credits
    • 30% credit for homeowners installing solar panels
    • $7,500 credit for Americans purchasing new electric vehicles and $4,000 credit for purchasing used electric vehicles beginning in 2023
      • Only individuals making less than $150,000 and households making less than $300,000 qualify for the credit
      • The credit is only for cars under $58,000 or trucks/vans/SUVs under $80,000
  • Expands subsidies for the Affordable Care Act through 2024
    • ACA subsidies expire September 30, 2022
    • If ACA subsidies expire, 70% of Americans relying on the ACA for healthcare insurance will be impacted by seeing a reduction in subsidies or losing subsidies altogether
    • Given subsidies would expire weeks before midterms, potential damage to Democrats is substantial
  • Enables Medicare to negotiate drug prices
    • Medicare can begin to negotiate in 2026
    • Up to ten of the most expensive drugs can be negotiated
    • The number of negotiated drugs will increase each year
    • Medicare recipients will have a $4,000 cap on out-of-pocket prescription drug costs in 2024, and a reduced $2,000 cap in 2025
    • Insulin costs will be capped at $35 a month
  • $20 billion to farmers to support pre-existing agricultural programs promoting environmental management and conservation
Revenue
  • Corporate taxes on companies reporting $1 billion in annual earnings would be at least 15%
    • Impacts roughly 150 large firms, according to the Joint Committee on Taxation
    • Revenues expected to exceed $300 billion
  • Excise tax of 1% on stock buybacks of publicly traded companies expected to raise over $70 billion
    • Some opponents argue this excise tax is unlikely to discourage companies from enacting stock buybacks.
    • More concerning…. now that this stock buyback excise tax is out of the bottle and easily raises quite significant tax revenue, politicians may keep going back to this well.
  • Internal Revenue Service will receive $80 billion over a 10-year allocation
    • Over half is earmarked for increased enforcement – more IRS auditors
    • The IRS’s current budget is 20% lower in 2022 than it was in 2010
    • Increased collection from tax dodgers is estimated at over $200 billion
    • Households making less than $400,000 a year are not the target for the increased enforcement, according to the IRS and Democrats
While the final iteration of the Inflation Reduction Act was a sliver of what the president and progressive Democrats originally envisioned, they were pleased to ultimately advance their climate and healthcare agenda. Furthermore, this success proves that the Democrats can, in fact, govern – leading to a slight uptick in polling for the party and the president, shifting some of the Republican midterm election momentum their way. Whether this is a gift that will keep on giving until Election Day is anyone’s guess, but in a year the Republicans are favored to sweep the midterms, the president and his party will take any gift they can get.
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of August 29, 2022, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted, and actual results may vary.

The views and opinions contained herein reflect the subjective judgments and assumptions of the authors only and do not necessarily reflect the views of Natixis Investment Managers, or any of its affiliates.

Provided by Natixis Distribution, LLC, 888 Boylston Street, Boston, MA 02199. Natixis Managers includes all of the investment management and distribution entities affiliated with Natixis Distribution, LLC and Natixis Investment Managers S.A.

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