August 5, 2022

What Is in the Inflation Reduction Act and How Much Will It Reduce the Deficit?

As Senate Democrats work on finalizing the legislative text for the Inflation Reduction Act of 2022, the main components of the legislation are becoming clear. The bill would address some priorities related to climate change and healthcare while also reducing the deficit. Some elements of the legislation have not yet been scored, but the current discussion indicates that the deficit reduction will total around $300 billion over the next 10 years.

Most of the spending would be dedicated to climate and energy programs, such as introducing new and expanded tax credits that would incentivize the generation of clean energy, wider adoption of electric vehicles, and environmental conservation. The Congressional Budget Office (CBO) estimates that $98 billion would go towards extending eligibility for subsidies to purchase health insurance from Affordable Care Act (ACA) marketplaces; such subsidies were expanded by the American Rescue Plan through 2022 and would now be extended through 2025.

Policy Area Includes Programs Like . . . Cost
Climate and Energy
Clean Electricity Tax Credits $161 billion
Air Pollution, Hazardous Materials, Transportation and Infrastructure 40 billion
Individual Clean Energy Incentives 37 billion
Clean Manufacturing Tax Credits 37 billion
Clean Fuel and Vehicle Tax Credits 36 billion
Conservation, Rural Development, Forestry 35 billion
Building Efficiency, Electrification, Transmission, Industrial, DOE Grants and Loans 27 billion
Other Climate and Energy Spending Under discussion
Extension of Expanded ACA Subsidies 64 billion
Part D Redesign, Low Income Subsidy (LIS), Vaccine Coverage 34 billion

SOURCE: Committee for a Responsible Federal Budget.
© 2022 Peter G. Peterson Foundation

Spending in the bill would be offset by additional revenues and healthcare cost savings over the next 10 years. Reports indicate that such policies will raise around $800 billion. Such offsets would be derived from changes to the corporate tax system and increased IRS enforcement to reduce the tax gap, among other changes. CBO estimates that $322 billion in cost savings would be realized through provisions that address the cost of prescription drugs.

Offset Includes Programs Like . . . Savings
Corporate Taxes* Under discussion
IRS Tax Enforcement Funding 124 billion
Methane Fee, Superfund Fee, Other Fee 18 billion
Healthcare Savings
Repeal existing Drug Rebate rule 122 billion
Drug Price Inflation Cap 101 billion
Negotiation of Certain Drug Prices 99 billion

Source: Committee for a Responsible Federal Budget
*Includes the addition of a 1 percent excise tax on corporate stock buybacks
© 2022 Peter G. Peterson Foundation

A number of provisions included in the legislation remain subject to change and numbers will be amended pending a revised CBO score. Revisions are currently in the works related to corporate taxation and there will likely be new spending for additional climate issues.

If enacted, the Inflation Reduction Act would mark a promising step forward in taking our nation’s fiscal situation seriously. The legislation could mark the most significant deficit reduction bill in over a decade. As Foundation CEO Michael Peterson noted in a recent statement, “Looking ahead, there is much more work to be done to put our nation on a more sustainable fiscal path, but the deficit reduction provisions in this legislation are an important step in the right direction.”

Related: What is Budget Reconciliation?

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