The Inflation Reduction Act: The Policy in the IRA, Explained

It turns out that the agenda of the Democrats in Congress… only mostly dead.

The surprise deal announced last month by Senator Joe Manchin (D-WV) is now finally through the Senate, and it looks like the House will pass later in August. It’s a lot smaller than the big dreams the Democrats had when President Joe Biden took office in 2021. But the bill, the Inflation Reduction Act, still does a lot. It contains landmark provisions to address climate change and takes steps toward fulfilling a long-standing Democratic policy goal: to let Medicare negotiate the prices of some prescription drugs.

The bill can affect what kind of car you buy and how you heat your home. It prevents major price hikes this year for some people who take out individual health insurance. And if you don’t pay your taxes, the IRS is more likely to find out.

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

The biggest effort to tackle climate change — ever

The Inflation Reduction Act would be the biggest the US has ever done to tackle climate change, and climate makes up the bulk of the bill’s spending: nearly $370 billion.

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

Policy is generally aimed at pushing US consumers and industry away from fossil fuel dependency. Most of the funding will go towards tax credits and rebates for a wide range of renewable technologies: solar panels, wind turbines, heat pumps, energy efficiency and electric vehicles. It includes incentives for companies to produce more of that technology in the United States. The bill would also invest in energy efficiency in industrial sites, which could help reduce the sector’s hefty carbon footprint, while also spending some money on forest and coastal restoration.

The bill, if passed, would break new ground in other troubled areas of the climate crisis. It establishes the first methane fee to penalize fossil fuel companies for excessive emissions of the particularly potent climate pollutant. Another substantial portion of the funding helps underserved communities monitor and clean up pollution, and build their resilience to climate impacts.

In addition to reducing climate pollution, investment in clean energy could also reduce inflation. Robbie Orvis, senior director at Energy Innovation, said rising energy prices accounted for about a third of the 9 percent rise in the overall consumer price index over the past year. By helping Americans become less dependent on fossil fuels, spending is helping to alleviate the global oil crisis and lower consumer bills.

Helping people pay for health insurance for longer

The climate elements of the bill have received the most attention. But the bill also includes some important healthcare steps, including supporting an extension of the Affordable Care Act.

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

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

However, that policy is set to end by the end of this year, leaving millions of people facing much higher health care costs in the future. The Inflation Reduction Act extends these subsidies by three years until the end of 2025, so that people will not experience that increase for the time being. That extension is expected to cost $64 billion, according to a Congressional Budget Office forecast.

Negotiating the prices of prescription drugs

For years, Democrats have told voters they will pursue policies that lower the cost of prescription drugs, but are blocked by Republicans and fall short. With this bill, they can finally deliver on that campaign promise by allowing Medicare to negotiate prescription drugs — a major change that could lead to significant cost savings for a small subset of drugs.

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

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

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

Because of that decision, drug companies will have to provide rebates if they try to increase the price of a drug at a faster rate than inflation. But that requirement only applies to drug prices for Medicare beneficiaries, and not for people currently covered by private insurance.

The parliamentarian also struck another provision that would limit out-of-house insulin costs to $35 per month for those with private insurance. Democrats were able to maintain a $35 per month insulin limit for those covered by Medicare.

More money for the tax authorities

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

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

A 2019 paper by Natasha Sarin, now at the Treasury Department, and economist Larry Summers estimate the tax gap between 2020 and 2029 at $7.5 trillion, most of which corresponds to the wealthy. They calculated that underreporting was five times higher in people earning more than $10 million a year than in people earning less than $200,000. Senate Democrats say none of the funds spent on the IRS will be aimed at raising taxes on anyone making less than $400,000.

Closing a loophole to make companies pay more tax

The agreement also includes a 15 percent minimum tax for companies with profits in excess of $1 billion. Senate Democrats note that while the current corporate tax rate is 21 percent, dozens of large companies, including AT&T, Amazon, and ExxonMobil, pay much less than that. The provision was originally expected to raise $313 billion, although new carveouts have been added to win the vote of Senator Kyrsten Sinema (D-AZ), 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 that this measure will bring.

There is also a 1 percent tax on share buybacks by companies, which: are currently not subject to taxes at all. That excise duty is estimated to increase approximately $73 billion in revenue.

Update, August 5, 12:30 PM: This story has been updated to reflect tax policy changes in the law.

Update, August 6, 2:30 PM: This story has been updated to reflect the MP’s decision and how drug prices will be affected.

Update, August 7, 3:20 PM: This story has been updated to reflect the Senate passage of the Inflation Reduction Act.

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