Later this week, the U.S. House is expected to consider the $740 billion Inflation Reduction Act that narrowly passed in the U.S. Senate Sunday night. However, economists are sounding alarm bells saying it will raise inflation, not reduce it, on those who need help the most.
The Senate’s 51-50 vote came with Vice President Kamala Harris casting the tie-breaking vote for a piece of legislation that Democrats hope will save their November 2022 election amid plunging poll numbers.
North Carolina Republican U.S. Senators Richard Burr and Thom Tillis joined their fellow Republicans in voting ‘no’ on the bill.
“It’s an insult to the intelligence of North Carolinians when politicians like President Biden and Governor Cooper claim that raising taxes and spending $740 billion on their far-left priorities will actually reduce inflation and stop the Biden recession,” Tillis said in a press release. “I voted against this reckless tax and spending spree because it will cause more pain for North Carolinians already struggling to fill up their gas tanks and pay for their groceries and other essential goods their families need.”
Democrat senators Joe Manchin, WV, and Kyrsten Sinema, AZ, both critical of the Build Back Better bill, voted in favor of its watered-down version.
North Carolina’s Democrat Senate Candidate Cheri Beasley was quick to criticize Tillis and Burr for their votes on the bill, indicating that she would’ve voted for it.
The bill likely won’t live up to its title, containing $433 billion in new spending, most of which will be invested in climate provisions, including $386 billion of climate and energy spending and tax breaks – mainly in new or expanded tax credits to promote clean energy generation, electrification, green technology retrofits for homes and buildings, greater use of clean fuels, environmental conservation, and wider adoption of electric vehicles.
Health care spending would also increase by nearly $100 billion, mostly by extending the American Rescue Plan’s temporarily expanded Affordable Care Act (ACA) premium tax credits through 2025. In addition to the new spending would be various regulatory and permitting reforms to help reduce energy costs outside of the reconciliation package.
The legislation will bring in $740 billion in new revenue through a series of measures, including $313 billion by implementing a 15% corporate minimum tax on companies that make $1 billion or more; $288 billion from authorizing Medicare to negotiate lower drug prices; $124 billion from IRS enforcement of tax law, and $14 billion from closing the carried interest loophole for money managers.
Democrats are touting the bill’s cap on prescription drugs for Medicare patients as one of the major victories, but that $2,000 cap is not phased in until 2025. The provision allowing Medicare to negotiate won’t take effect until 2026 and will only cover ten drugs for the first three years.
Democrats say the bill will reduce the country’s deficit by $300 billion over the next ten years and not raise taxes on people making less than $400,000 but according to tax analysts, that’s not the case.
“The Inflation Reduction Act is grossly misnamed,” said Brian Balfour, senior vice president of research, John Locke Foundation. “Indeed, a University of Pennsylvania Wharton School of Business analysis shows that the bill will increase inflation in the first few years, the very time when fighting inflation is most urgent. Moreover, the corporate tax hike will disincentivize investment and result in lower worker wages, while the bill spends $80 billion to unleash tens of thousands of IRS agents to audit mostly middle-class taxpayers.”
The nonpartisan Congressional Joint Committee on Taxation (JCT) released data over the weekend that concurs with Balfour’s analysis.
The JCT shows that in 2023, when the legislation is expected to increase tax revenue the most, taxes will increase by $16.7 billion on those making less than $200,000. Another $14.1 billion would come from those earning between $200,000 and $500,000.
People making less than $10,000 per year would pay 3.1% more in taxes, and those making between $20,000-$30,000 per year would see a 1.1% tax increase. Tax revenue would increase by $5.8 billion from those making $100,000 or less per year.
A press release issued Saturday by U.S. Sen. Mike Crapo, R, ID, Ranking Member of the Senate Finance Committee, said that by 2031, when the new green energy credits and subsidies provide an even greater benefit to those with higher incomes, those earning below $400,000 are projected to pay as much as two-thirds of the additional tax revenue collected that year, citing the JCT report.
In a Forbes column, economist Adam Millsap points out that tax credits for things like electric vehicles will likely increase their prices rather than lower them because it will increase demand without doing anything to help manufacture them. Millsap also says the same holds true for the construction of new energy infrastructure like windmills and solar panels and additional ACA subsidies.
“The Inflation Reduction Act isn’t just misnamed because it won’t do what its title promises — it will likely make inflation worse by raising the cost of producing goods and services and lowering their overall supply,” said Wilbur John Coleman, professor of economics at Duke University’s Fuqua School of Business. “The higher cost and consequent lower supply of goods mean that money circulating in the economy is used to purchase fewer goods, thereby pushing up the price of goods, leading to higher inflation.”
The IRS is also set to double in size under the new legislation. Currently, the agency has almost 79,000 full-time staff. An additional 87,000 employees are expected to be hired with this bill, which would make it one of the largest federal agencies, more than the Pentagon, State Department, FBI, and Border Patrol combined.
An additional $80 billion, nearly six times its current budget of $12.6 billion, is earmarked under the bill for the agency. Democrats say the additional funds and employees are to help target those in the higher income brackets from hiding income, but the JCT, in a separate study, said most of the new revenue from IRS audits will come from those who earn $200,000 or less each year.
The bill moves on to the House for a vote Friday when it briefly returns from summer recess.