Inflation Reduction, What’s Your Function?

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (IRA). The bill invests $400 billion in energy security, climate change, drought resiliency, and extending certain Affordable Care Act provisions. The IRA is expected to generate over $700 billion in federal tax revenue from both corporate tax previsions and prescription drug pricing reform.

However, unlike recent significant federal spending bills that delivered large infusions of discretionary cash to state and local governments, the IRA largely provides diffuse benefits to prescribed populations and industries.

Medicare enrollees may see lower drug prices as a result of the IRA. The bill allows Medicare to negotiate directly on pharmaceutical drugs and caps the amount that Medicare enrollees are allowed to spend out-of-pocket on drug costs. Drug manufacturers will be required to issue rebates to Medicare if they raise the prices of their drugs faster than the rate of inflation. The IRA will also extend premium subsidies for individuals enrolled in health insurance plans through Affordable Care Act marketplaces.

Consumers, through state-administered rebate programs and tax credits, may save on electrification of home appliances, energy-efficient retrofits, and new and used electric vehicle purchases. Corporations may benefit (through tax credits, grants, and loans) in manufacturing renewable energy products and clean vehicles, as well from the construction of manufacturing facilities to support clean technology.

Finally, the bill includes smaller sums of money for a wide variety of state grants, including building code updates, open space acquisition, greenhouse gas reduction, mitigating air pollution, zero-emission vehicles, drought response for western states, state energy programs, and communities divided by past road construction. These grants will largely be competitive and will go through Utah’s normal federal funds review process administered by the Governor’s Office of Planning and Budget and the Office of the Legislative Fiscal Analyst.

On the federal revenue side, the IRA imposes a 15 percent minimum tax on corporations with profits of at least $1 billion dollars, and a 1 percent excise tax on stock buybacks. The legislation allocates significant funding to the Internal Revenue Service (IRS) to improve tax compliance by hiring additional staff and increasing audit activity, specifically to focus on filers earning more than $400,000 annually. The Utah State Tax Commission does not believe that these activities will have a direct or demonstrable effect on Utah state revenue.

Legislative economists do not expect the IRA to have a discernible effect on the Utah economy. While some individuals and corporations may benefit from provisions in the bill, all revenue generated in the bill will go to the federal government. While the bill has the potential to be disinflationary in the long run (in large part due to its tax provisions), any effects are not likely to be evident in the macroeconomy in the near term.

For more information, the National Conference of State Legislatures (NCSL) produced a detailed summary of the IRA available here.