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The Inflation Reduction Act, explained

The climate act is also a health care act (and it does a few things on taxes, too).

Sen. Ed Markey (D-MA) shoots a celebratory selfie video with climate activists outside the US Capitol after the Senate passed the Inflation Reduction Act on August 7.
Bill Clark/CQ-Roll Call, Inc via Getty Images

It turns out that Democrats’ agenda in Congress didn’t die last December after all. In fact, President Joe Biden signed much of it into law Tuesday.

A surprise deal, the Inflation Reduction Act announced in July by Sen. Joe Manchin (D-WV), brought Democrats’ policy goals back to life. The law accomplishes only a fraction of the grand dreams Democrats had when Biden took office in 2021. But it still does quite a lot.

Notably, the Inflation Reduction Act contains historic provisions to tackle climate change and takes steps toward fulfilling a longtime Democratic policy goal: letting Medicare negotiate the prices of some prescription drugs. Together with the infrastructure package Democrats passed in November, the IRA marks the achievement of a significant portion of Biden’s agenda.

While it’s unlikely to noticeably reduce inflation, at least in the short term, the legislation will have concrete effects: It could affect what kind of car you buy and how you heat your home. It will prevent big price increases this year for some people who purchase individual health insurance. And if you aren’t paying your taxes, there’s a better chance that the IRS will find out.

Here’s what’s in the law and what it would mean for American life in the coming years.

The biggest effort to tackle climate change — ever

The Inflation Reduction Act is the biggest thing the US has ever done to tackle climate change, and climate makes up the largest share of its spending: nearly $370 billion.

That’s smaller than the House version from last fall, and a fraction of what Biden originally envisioned for climate action. Senate Democrats claim these investments will be enough to cut climate pollution by roughly 40 percent. (That’s slightly less dramatic than it sounds; the decrease is compared to 2005 levels, when emissions peaked. Even without new policy, the US still would have been on track to cut 20 percent of emissions by 2030.)

The policies overall aim to push American consumers and industry away from reliance on fossil fuels. The biggest share of the funding goes to tax credits and rebates for a host of renewable technologies — solar panels, wind turbines, heat pumps, energy efficiency, and electric vehicles. It includes incentives for companies to manufacture more of that technology in the United States. The law will also put funding into energy efficiency at industrial sites that can help lower the sector’s hefty carbon footprint, while dedicating some funds to forest and coastal restoration.

The IRA also breaks new ground on other problematic areas of the climate crisis. It sets the first methane fee that penalizes fossil fuel companies for excess emissions of the especially powerful climate pollutant. Another substantial part of the funding helps disadvantaged communities with monitoring and cleaning up pollution, and builds their resilience to climate impacts.

Beyond cutting climate pollution, the clean energy investments could also make a dent in inflation. According to Robbie Orvis, senior director at Energy Innovation, rising energy prices have driven roughly a third of the 9 percent rise in the overall Consumer Price Index this past year. By helping Americans become less reliant on fossil fuels, the spending helps ease the global oil crunch and cut consumer bills.

Helping people afford health insurance for longer

The climate parts of the IRA have gotten the most attention. But it also includes some significant steps on health care, including shoring up an expansion to the Affordable Care Act.

One way Obamacare expanded health care coverage was by creating marketplaces for people to purchase insurance and offering federal subsidies to help low- and middle-income households afford it. Households making up to 400 percent of the federal poverty line — about $106,000 for a family of four — could get federal help to pay their premiums. After that, they were on their own.

But in 2021, Congress eliminated those caps, instead saying that no household should have to pay more than 8.5 percent of their income for health insurance. The change had the biggest effect on people making between 400 and 600 percent of the federal poverty line (for the same household of four, that would be up to $159,000 per year). As Vox’s Dylan Scott previously reported, the changes also enabled roughly 7 million people to qualify for free health insurance under the ACA.

Those policies, however, were set to sunset by the end of this year, leaving millions of people to face much higher health care expenses moving forward. The Inflation Reduction Act extends these subsidies for three years through the end of 2025, ensuring that people won’t face that surge for a while yet. That extension is expected to cost $64 billion, according to a projection from the Congressional Budget Office.

Negotiating prescription drug prices

For years, Democrats have told voters that they will take on policies that reduce the costs of prescription drugs, only to be blocked by Republicans and fall short. This law allows them to finally fulfill that campaign promise by enabling Medicare to negotiate on prescription drugs — a major change that could lead to significant cost reductions for a small subset of drugs.

As outlined in the IRA, Medicare will be able to negotiate on a handful of drugs, with those new prices taking effect in 2026. In 2026, Medicare will only be able to address costs for 10 drugs; over time, that will increase to 20 drugs. The drugs in question will be determined based on a slew of criteria, including how expensive they are.

These negotiations are poised to save Medicare a lot of money, since the prices are currently set by manufacturers.

Senate Parliamentarian Elizabeth MacDonough, whose approval was needed for Democrats to move forward with the reconciliation process, signed off on the Medicare portion of the bill, but nixed a provision that would have lowered prescription costs for Americans on private insurance.

Because of that decision, pharmaceutical companies will be required to issue rebates if they try to raise the price of a drug at a rate higher than inflation. But that requirement only applies to drug prices for Medicare beneficiaries, and not those for people who are currently covered by private insurance.

The parliamentarian also struck another provision that would cap out-of-pocket insulin costs at $35 a month for those with private insurance. Democrats were able to keep an insulin cap of $35 a month for those covered by Medicare.

More money for the IRS

Actually raising taxes can be hard, politically. So Democrats are, in part, taking a different approach: getting people to pay more of the taxes they already owe. The Inflation Reduction Act agreement increases funding for the IRS so that it can up enforcement and go after unpaid taxes. Senate Democrats, drawing from Congressional Budget Office numbers, estimate that, by investing $80 billion in the IRS over a decade, it will collect $203 billion. This was also part of a proposal put out by the Biden administration in 2021.

The IRS estimated that from 2011 to 2013, the “tax gap” — meaning the difference between what people pay in taxes and what they owe in taxes — amounted to $441 billion each year, or around 16 percent of total tax liability those years.

One 2019 paper by Natasha Sarin, now at the Treasury Department, and economist Larry Summers put the tax gap at $7.5 trillion from 2020 to 2029, with most of that figure linked to the wealthy. They calculated that underreporting was five times higher among people making more than $10 million annually than for those making under $200,000. Senate Democrats say that none of the funds directed to the IRS will be intended to increase taxes on anyone making under $400,000.

Closing a loophole to make corporations pay more taxes

The agreement also includes a 15 percent minimum tax on corporations with profits over $1 billion. Senate Democrats note that while the current corporate tax rate is 21 percent, dozens of major companies, including AT&T, Amazon, and ExxonMobil, pay much less than that. Originally, the provision was expected to raise $313 billion, though new carveouts were added to win Sen. Kyrsten Sinema’s (D-AZ) vote, which give manufacturers and private equity firms more leeway when it comes to the new minimum tax rate. Those changes are likely to reduce the revenue this measure will bring in.

There is also a 1 percent excise tax on corporations’ stock buybacks, which are currently not subject to any taxes at all. That excise tax is estimated to raise roughly $73 billion in revenue.

Update, August 16, 4:02 pm: This story was originally published July 28, 2022, and has been updated to reflect new information, most recently that President Joe Biden signed the Inflation Reduction Act.