August 5, 2022

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

Policymakers recently enacted the Inflation Reduction Act of 2022, a bill that addresses some priorities related to climate change and healthcare. Overall, that legislation is projected to reduce deficits by $238 billion over the next 10 years, according to estimates from the Congressional Budget Office.

That reconciliation bill includes $499 billion of new spending. Of that amount, $391 billion 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 remaining $108 billion of new spending would go towards healthcare purposes, such as 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 18 billion
Extension of Expanded ACA Subsidies 64 billion
Part D Redesign, Low Income Subsidy (LIS), Vaccine Coverage 44 billion

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

Spending in the bill would be offset by $738 billion of additional revenues and healthcare cost savings over the next 10 years. 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 $281 billion in cost savings would be realized through provisions that address the cost of prescription drugs.

Offset Includes Programs Like . . . Savings
15 Percent Corporate Minimum Tax $222 billion
IRS Tax Enforcement Funding 101 billion
1 Percent Excise Tax on Stock Buybacks 74 billion
2-Year Extension of the Limitation on Excess Business Losses 53 billion
Methane Fee, Superfund Fee, Other Fees 7 billion
Healthcare Savings
Repeal existing Drug Rebate rule 122 billion
Negotiation of Certain Drug Prices 96 billion
Drug Price Inflation Cap 63 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

The enactment of the Inflation Reduction Act is a promising step forward in our nation’s fiscal situation seriously. The legislation marks 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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