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What You Need to Know About the Inflation Reduction Act

7 minute read

In a party-line vote, the Senate on Sunday passed a landmark climate, health care and tax package called the Inflation Reduction Act.

Legislators advanced the bill after an all-night session in which they voted on dozens of proposed amendments in a process known as a “vote-o-rama.” In the evenly split Senate, all 50 members that caucus with Democrats backed the package, allowing Vice President Kamala Harris to serve as the tie-breaker.

The bill came about after months of intense negotiations, much of it focused on garnering the support of two Democratic centrists—Senators Joe Manchin of West Virginia and Kyrsten Sinema of Arizona.

The bill now heads to the House, where a vote is expected on Friday. If it passes there, it will go to President Joe Biden, who has said he will sign it.

Here’s what you need to know about the Inflation Reduction Act.

What is the Inflation Reduction Act?

The bill would be the country’s biggest climate investment in U.S. history, and also deliver health care subsidies for millions, and enact a 15% minimum tax on corporations that make more than $1 billion in profits.

Although the version the Senate passed on Sunday is significantly smaller than President Biden’s original promises for the package—which was earlier known as the Build Back Better Act—party leaders maintain that this legislation will still address voters’ main concerns.

Reducing climate change proved to be a top priority as the bill invests more than $360 billion in energy and climate change programs over the next decade, including cash incentives for electric vehicle consumers and tax breaks to speed up the country’s transition to renewable energy sources. Senate Democrats say the bill will reduce carbon emissions by nearly 40% by 2030, about 10% below the target Biden originally pledged to reach last year at the Leaders Summit on Climate that he hosted at the White House.

An additional $60 billion will be given to cities that are disproportionately affected by climate change, and millions more as “climate resiliency funding” for Native American communities.

The bill could also reduce healthcare costs for many Americans by allowing Medicare to directly negotiate the price of medicine with drugmakers, and ensuring that recipients pay a maximum of $2,000 in out-of-pocket costs for prescriptions annually. Congress was also seeking to cap the amount uninsured people pay for insulin at $35. But this provision was removed by Senate Republicans on Sunday during the amendment process, though the same cap for insulin users on Medicare remains in the bill.

The bill’s costs would be covered in part by a new 15% minimum tax rate applied to corporations with profits of $1 billion or more. It would also make companies pay a 1% tax when they buy back their own stock and significantly beef up the IRS’s tax evasion enforcement. A measure that would have minimized the carried interest tax—which allows hedge fund managers to have their profits taxed at a lower rate of 20% as opposed to the individual income tax rate of 37% for the highest bracket of earners—was cut to ensure Sinema’s support.

How we got here

President Biden’s first iteration of this bill, the $1.75 trillion Build Back Better, was introduced last year, and initially passed the House in November. In the evenly divided Senate, Democrats needed to keep every member of their caucus on board. The bill died out on December 19, after Manchin told Fox News that he would vote “no” amid concerns that it would increase inflation and national debt.

Missing from the Inflation Reduction Act are initiatives from Build Back Better intended to specifically benefit parents and families: federal paid family and medical leave, funding for universal pre-K for nearly 6 million children, subsidized child care and the expansion of the child tax credit for another year. David Mitchell, the director of government and external relations at the Washington Center for Equitable Growth, which focuses on inequality, says that investment in social infrastructure like childcare would have increased the labor supply and helped reduce economic pressures. “I think that was a major weakness not tackling those kinds of care infrastructure problems that we know the country is toiling under,” Mitchell says. “Universal pre-K, paid leave, the child tax credit, those types of investments would have both increased growth potential of the economy by allowing, you know, mostly women who do so much with childcare in the US to enter the workforce.”

The programs that made it into the Inflation Reduction Act largely reflected what Manchin was willing to support. After suggesting negotiations had died earlier this year, the West Virginia Republican stunned much of Washington last month by announcing that he and Senate Majority Leader Chuck Schumer had come to a deal on a $433 billion health, climate, and tax bill.

Republicans were unanimous in their opposition to the bill on Sunday. Senator Ted Cruz, Republican of Texas, called it a “massive power grab,” claiming it would reduce manufacturing jobs and increase gas prices.

Some liberals have also expressed displeasure with the final version of the bill. Senator Bernie Sanders, a Vermont independent who caucuses with Democrats, has been vocal with his criticism of the many concessions that were made to get Manchin to sign on. On Sunday, Sanders tried to pass numerous amendments, including one that would provide dental, vision, and hearing benefits to Medicare beneficiaries. Only two other senators, the two Democrats from Georgia, supported him.

“As currently written, this is an extremely modest bill that does virtually nothing to address the enormous crises facing the working families of our country.” Sanders said in a public statement. “It falls far short of what the American people want, what they need, and what they are begging us to do.”

The House is expected to return on Aug. 12 to send the bill to Biden’s desk.

Will the bill actually reduce inflation?

There has been much debate over the substance of the bill, and the effect, if any, it will have on inflation.

During Sunday’s vote-a-rama, Sanders cited the Congressional Budget Office’s economic analysis, which predicts the Inflation Reduction Act would have a “negligible effect on inflation.” That same analysis estimates that the bill would decrease the deficit by $102 billion over the next nine years.

Mitchell says that despite disagreement on the bill’s immediate effect on inflation, there’s less debate over the long-term impact. “For the most part, economists agree that it will help relieve some of the price pressure that Americans are facing,” Mitchell says.

Former Federal Reserve Economist Claudia Sahm agrees. She predicts short-term effects on inflation will be modest, but the bill’s climate provisions will be especially beneficial for the future. “An increase in energy efficiency and use of renewable energy would better protect us from spikes in global oil prices like the one causing hardship now,” Sahm told TIME in an email statement. “The legislation is a big step forward in Congress recognizing that it too has a responsibility to fight inflation. ”

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