Key provisions that made it, and ones that failed
Senate Democrats on Sunday voted to pass the $740 billion, 755-page tax, climate and health care reconciliation package that most say will not or barely live up to its name: Inflation Reduction Act. Democrats successfully blocked most GOP amendments. In the vote-a-rama that began Saturday and stretched late into Sunday afternoon, a total of 41 proposed changes were considered and voted upon.
Key provisions and analysis:
- Vote was 51 to 50 as all 50 Senate Democrats voted for the bill and all 50 Republicans voted against it, with Vice President Kamala Harris, as president of the Senate, casting the tie-breaking vote.
- Next step: House vote on Friday as lawmakers return from their summer recess.
- Deficit reduction: On net, the Dems say the package is expected to reduce deficits by roughly $300 billion over a decade, although there is disagreement over that estimate, and we are still waiting on the final estimates from the Congressional Budget Office. Many economists say the bill’s net impact on inflation will likely be quite modest and not felt for some time, given how long it will take to enact many of its programs.
It would raise over $700 billion in government revenue over 10 years Government revenue will be raised via a 15% corporate minimum tax on large firms, a 1% excise tax on the value of stock buybacks and an $80 billion boost to the Internal Revenue Service for enforcement that will generate “savings” from audits with the help of 87,000 new hires.
Details: The measure would impose a 15% minimum tax on the income large corporations report to shareholders, known as book income, as opposed to the Internal Revenue Service. The measure, which would raise $258 billion over a decade, would apply to companies with profits over $1 billion. Concerned about how this provision would affect certain businesses, particularly manufacturers, Sen. Kyrsten Sinema (D-Ariz.) won changes to pare back how companies can deduct depreciated assets from their taxes. The final version still offers a range of exemptions for purchases of machinery and other equipment; amortization of wireless spectrum assets; pension plan contributions; net operating losses; tax credits for research expenses, investments in renewable energy and low-income housing projects and more. In a final change negotiated shortly before passage, Democrats agreed to cut language that counted businesses that fall under a corporation’s umbrella for the tax, which companies argued would impact businesses private equity firms invest in.
Sinema nixed her party’s effort to tighten the carried interest loophole, which allows investment managers to treat much of their compensation as capital gains and pay a 20% long-term capital gains tax rate instead of income tax rates of up to 37%. In its place, a 1% excise tax on companies’ stock buybacks was added, raising another $74 billion.
Analysis: The minimum corporate tax would reportedly affect fewer than 150 companies in a given year. Tech companies such as Alphabet Inc.’s Google and Meta Inc.’s Facebook could face the levy. Last-minute changes narrowed its scope to protect private equity, as well as businesses that invest heavily in equipment and facilities, such as manufacturers.
Analysis: The tax on stock buybacks has largely been shrugged off by Wall Street analysts, though some have noted it could spur corporations to issue dividends over repurchasing shares to boost equity prices. Apple Inc., JP Morgan Chase & Co. and Microsoft Corp. have relied on share repurchases as a strategy to boost stock prices in recent years.
Climate change provisions: The bill allows roughly $374 billion in climate and energy spending such as expanded tax credits for renewable energy projects. Link to a summary of the environmental provisions. Link to a summary of the energy provisions.
It ends per-manufacturer limits for the $7,500 tax credit for electric vehicle (EV) purchases, a boost for EV makers like Tesla. But the vehicles will have to be built in North America and carmakers will have to quickly end a reliance on China for the battery supply chain. Lower- and middle-income people would be eligible for a $4,000 tax credit for buying a used clean car and up to $7,500 for buying a new one. Sen. Debbie Stabenow (D-Mich.) and some automakers like Ford Motor Co. and General Motors Co. lobbied to make changes to the credit.
Impact: According to Democrats, the climate policies would reduce emissions by roughly 40% by 2030. Rhodium Group, an independent research firm, estimated that the bill would cut greenhouse-gas emissions 31% to 44% below 2005 levels in 2030, compared with 24% to 35% under current policy.
The bill’s other climate and energy provisions include $27 billion in grants to help attract private investment in “zero-emission technologies” such as rooftop solar; $20 billion in loans to establish new “clean vehicle manufacturing plants” and a fee on emissions of methane, a potent heat-trapping gas, from oil and gas sites. The measure would also reinstate the lapsed “Superfund” tax on oil producers and importers at a higher rate, with the money going to help clean up contaminated sites. About $9 billion would go to consumer home energy rebate programs. Billions more would be spent to accelerate U.S. manufacturing of solar panels, electric vehicles and other clean products. There is $60 billion to help disadvantaged areas that are disproportionately affected by climate change, including $27 billion for the creation of what would be the first national “green bank” to help drive investments in clean energy projects — particularly in poor communities.
Analysis: The most significant climate provisions are tax credits that would channel billions of dollars to wind, solar and battery developments that put clean power onto the grid, according to Rhodium Group. Resources for the Future, a nonpartisan research organization, estimates retail electricity costs would drop 5% to 7% and the average U.S. household would save $170 to $200 a year.
A home improvement credit for energy efficiency would allow households to deduct from their taxes up to 30% of the cost of upgrades like heat pumps and insulation. Another provision extends a program that allows households that are installing solar or battery storage systems to deduct 30% of the cost of those projects from their taxes.
To maximize the benefit of some incentives, clean energy projects would have to pay the going rate for similar jobs in the local area and hire apprentices from government-run programs, which Senate Finance Chair Ron Wyden (D-Ore.) touted as ensuring that “clean energy jobs will be good-paying jobs.” Subsidies for building facilities and buying equipment or other technology would have to source U.S.-made steel and iron.
As part of Democrats’ concessions to Sen. Joe Manchin (D-W.Va.), the bill contains provisions calling for offshore oil lease sales in the Gulf of Mexico and off the coast of Alaska, and a commitment to take up a separate measure to ease the permitting of new energy projects. Senate Majority Leader Chuck Schumer (D-N.Y. agreed to allow new lease sales for oil and gas development on up to 2 million acres offshore and 60 million on shore, over the next decade. Manchin also secured other significant concessions to the fossil fuel industry, such as tax credits for carbon capture technology to help coal-fired power plants stay competitive and language to speed construction of a gas pipeline through his state.
Ag and biofuel climate change provisions include:
* The $1-a-gallon tax credit for biomass-based diesel would be extended through 2024 and then replaced by the clean fuels tax credit that would vary according to the biofuel’s carbon rating. A temporary $1.25 per gallon tax credit would be created for sustainable aviation fuel (SAF) to serve as a bridge to the implementation of the clean fuels credit in 2025. The new clean fuels credit would be in effect through 2027.
* Infrastructure: Funding for blender pumps and other biofuel infrastructure.
* Roughly $2 billion for USDA’s Rural Energy for America Program, which funds renewable energy and energy efficiency projects.
* $9.7 billion in assistance to rural electric cooperatives for renewable energy and energy efficiency projects and another $1 billion in loans for renewable energy projects in rural areas.
* Rural electric cooperatives would get direct payments for the benefit of renewable energy tax credits. Electric co-ops now have to work with third parties to get such benefits.
* Forests: Over $5 billion for wildfire prevention and climate resiliency projects in public and private forests.
Aims to lower cost of prescription drugs but that outlook is murky, according to Sen. Bernie Sanders (I-Vt.), who called that portion of the bill “pretty weak.” But Democrats soundly rejected his amendment.
Medicare would be allowed to negotiate drug prices, starting with 10 high-priced drugs but negotiations between Medicare and drugmakers wouldn’t start until 2026. The Health and Human Services secretary would negotiate the prices of 10 drugs in 2026, and another 15 drugs in 2027 and again in 2028. The number would rise to 20 drugs a year for 2029 and beyond. Price negotiations would save the federal government an estimated $288 billion over a decade, according to the nonpartisan Congressional Budget Office.
Analysis: While the CBO estimated that the measure would result in as many as 15 fewer new drugs over 30 years, Republicans have trumpeted a University of Chicago analysis projecting as many as 342 fewer drugs over 18 years.
Beginning in 2025, it would cap out-of-pocket drug costs for seniors enrolled in Part D at $2,000 per year, a policy that could help the approximately 1.4 million enrollees who hit that amount each year, according to the Kaiser Family Foundation. Drugmakers generally like the out-of-pocket cap because the federal government will pick up the tab after patients spend the maximum.
The measure would also impose a cap on drugmakers’ price increases, though Democrats had to scale back the inflationary cap when the Senate parliamentarian ruled that it didn’t adhere to Senate rules. The Senate parliamentarian spared drugmakers any penalties for increasing prices in the commercial market.
Starting next year, the measure would mandate free vaccines for Medicare enrollees.
Savings to Medicare will be used to pay the $64 billion it costs in extending for three years (until 2025) subsidized Affordable Care Act/ObamaCare premiums. That way, they wouldn’t expire until just after the 2024 presidential election.
Republicans succeeded in killing one provision that violated Senate budget rules. It would have capped the price of insulin at $35 a month in the private insurance market. The $35 insulin cap for Medicare beneficiaries remains in place. Democrats tried, and failed, to attach an amendment including the insulin provision to the bill, but Republicans voted it down, eliminating it from the package. Seven GOP senators, including Bill Cassidy (R-La.), Susan Collins (R-Maine), Josh Hawley (R-Mo.), Cindy Hyde-Smith (R-Miss.), John Kennedy (R-La.), Lisa Murkowski (R-Alaska), and Dan Sullivan (R-Alaska) voted with Democrats. But the 57-43 vote to waive budget rules still fell short of the 60 votes needed, and the $35 insulin cost cap for commercial health plans was removed.
- Drought aid: Provides $4 billion for the Bureau of Reclamation to combat drought in the West — a last-minute addition.
Other ag sector provisions include:
Farm debt relief: Democrats added $5.3 billion in farm debt relief to the package. $3.1 billion in assistance to “distressed” borrowers who hold direct or guaranteed farm loans and $2.2 billion in payments to farmers who had experienced discrimination in USDA loan programs. Payments would be capped at $500,000 per producer. The debt relief provisions would be paid for by repealing a debt relief program authorized by the American Rescue Plan in 2021 and later blocked by the courts.
Contains around $18 billion for four conservation programs, starting in fiscal year 2023, with USDA told to prioritize projects that “mitigate or address climate change through the management of agricultural production.” The Environmental Quality Incentives Program would get $8.45 billion, starting with $250 million in FY 2023, which begins Oct. 1. The Regional Conservation Partnership Program would receive $4.95 billion. Another $3.25 billion would go to the Conservation Stewardship Program, and the Agricultural Conservation Easement Program would get $1.4 billion. Under the budget reconciliation rules, all of the funding authorized by the bill must be spent before fiscal year 2032.
Implementation: $1 billion would be provided to USDA’s Natural Resources Conservation Service for conservation technical assistance and $300 million is allocated to USDA for measuring the impact of agricultural practices on greenhouse gas emissions.
What the package does not do: The bill doesn’t address two key priorities for many Democrats: implementing a 15% global minimum tax deal that Treasury Secretary Janet Yellen negotiated with nearly 140 countries last year and it does not increase the $10,000 cap on the state and local tax deduction, or SALT. Sen. Sinema knocked out proposals to raise the corporate tax rate from 21% to 25% and raise the top marginal income tax rate on the nation’s wealthiest individuals and families.
A test for the bill emerged Sunday afternoon when Sinema (and other Democrats) joined Republicans to support an amendment from Sen. John Thune (R-S.D.) to shield individual companies operating under the umbrella of a single owner from the 15% corporate minimum tax, a step that would help the private-equity firms that own such companies. Under the Thune proposal, the $35 billion in lost revenue from the change would be replaced by a one-year extension of the $10,000 cap on state and local taxes, a levy loathed by Democrats in high-tax states such as New York and New Jersey. It is currently set to expire after 2025. Several Democrats opposed using the SALT deductions as a revenue stream. To defend against extending the state and local tax cap, Democrats crafted a parallel amendment that makes a similar change to the corporate minimum tax, which Democrats had previously softened at Sinema’s request. Instead of replacing the lost revenue with extending the cap on state and local deduction, Democrats moved to extend the limitation on deductions for business losses instead, adopting an amendment that effectively replaced the Republican plan. The change was intended to prevent House Democrats primarily from coastal districts, who have campaigned on repealing limits on the SALT deduction, from breaking from the bill.
Republicans argued it wouldn’t stop high inflation and would impose taxes that could tip the U.S. economy into recession. Senate GOP leader Mitch McConnell (R-Ky.) argued that “hundreds of billions of dollars in tax hikes during a recession will kill jobs.”
Bottom line: This is a landmark bill, at least for the Democrats, in that it includes several major policy initiatives it has wanted for years, especially funding for various carbon mitigation programs and provides funding and programs to transition away from fossil fuels. As for the push ahead for electric vehicles, there are income thresholds to the EV credits, a key demand of Sen. Manchin. There are limits on where the vehicles can be manufactured, another demand meant to make sure these vehicles are largely produced in the U.S., but one that means the credits might not be available for a few years. The Democrats also got an extension for expiring ObamaCare premiums until after the 2024 presidential/congressional elections. Other health care provisions in the package have been pushed for years by the Democrats.
On the ag side of the ledger, as previously reported, the new conservation funding will be available in each of FY 2023, 2024, 2025, and 2026, though CBO projects that the initial funding levels will not all be used because NRCS is not able to fully utilize its current budget. The new funding does not establish a higher budget baseline for the farm bill although the Budget Committees could allow this next year in a budget resolution passed by Congress. If the Budget Committees do allow this, the new funding could be restructured in any 2023 Farm Bill to arrive at more achievable spending targets, say Combest, Sell & Associates. They add this would take some real skill from lawmakers and, if done right, could be parlayed into other needed investments in the Commodity Title and crop insurance.
Meanwhile, several Pro Farmer members have already emailed questions regarding the debt relief funding provided in the package. This awaits USDA working on how they will implement this program and that will take proposed rulemaking via the Federal Register. That will take time.
As for whether the Inflation Reduction Act will indeed reduce inflation, the verdict is not clear. The independent analysis from the Penn Wharton Budget Model found that it might cause a slight uptick in inflation over the next few years but then reduce it later.
Other key impacts of this huge measure will surface over the next few weeks and months, and we will cover the most important ones.