Biden’s ‘Inflation Reduction Act’ passes — what it means for you

Senate Majority Leader Chuck Schumer speaking to the press at the U.S. Capitol
Senate Majority Leader Chuck Schumer speaks during a news conference after the passage of the Inflation Reduction Act at the U.S. Capitol. (Image credit: Drew Angerer/Getty)

On Sunday, August 7, 2022, the Senate narrowly passed the Democrats’ $750 billion Inflation Reduction Act

The bill was passed by a razor-thin margin of 50-51, thanks to a tie-breaking vote from Vice President Kamala Harris. It represents a multi-faceted approach to major changes to Medicare, reducing the deficit and the effects of climate change in an effort to lessen the economic impact of inflation.

Before President Biden can sign the bill into law, it must pass the Democrat-controlled House of Representatives. The House is expected to vote on this crucial legislation Friday, August 12.

The bill has received criticism even among Democrats for being too lenient. And while this is a slimmed-down version of the Build Back Better plan, a bill proposed last fall, it has also received the expected Republican backlash as being “anti-oil” and “anti-jobs,” according to Mitch McConnell. Some economists predict that employers will reduce wages due to the added corporate tax. 

However, senior citizens stand to benefit significantly from reduced health care costs.

What is the Inflation Reduction Act exactly?

The Inflation Reduction Act represents the largest investment in climate in US history. It is also intended to reduce the deficit, and more importantly for most Americans, the bill gives Medicare the power to negotiate prescription drug prices and extend expiring health care subsidies, effectively lowering the cost of living as it relates to health care.

Senate Democrats remained unified to pass the legislation (with a filibuster-proof process to prevent Republicans from killing the bill). The bill’s final passage came after a contentious “vote-o-rama” that lasted from late Saturday night into Sunday afternoon.

The bill is meant to reduce the deficit by raising corporate taxes through a 15% minimum tax on the “book income” large corporations report to shareholders as well as a 1% tax on stock buybacks. The bill applies only to corporations with profits in excess of $1 billion. The bill would also enhance the Internal Revenue Service’s ability to collect on these new taxes.

President Biden said, “ pays for all this by establishing a minimum corporate tax so that our richest corporations start to pay their fair share. It does not raise taxes on those making under $400,000 a year – not one cent.”

The bill is projected to raise over $700 billion in revenue over 10 years. $430 billion of that revenue is slated for the reduction of carbon emissions as well as extending health insurance subsidies under the Affordable Care Act. The rest of the revenue will be used to reduce the deficit.

After the bill’s passage, President Biden thanked the Senate, saying, “Today, Senate Democrats sided with American families over special interests, voting to lower the cost of prescription drugs, health insurance, and everyday energy costs and reduce the deficit, while making the wealthiest corporations finally pay their fair share.”

What is included in the Inflation Reduction Act?

This multifaceted bill seeks to lower the impact of inflation by reducing costs for average-income Americans while increasing the tax burden of large, wealthy corporations to lower the deficit. 

While the climate change element of the bill may seem out of place, it is intended to strengthen American energy security (reducing dependence on foreign oil), create jobs in the solar, wind, and electric vehicle industries, and lower household energy costs by hundreds of dollars annually.

Climate change

The Inflation Reduction Act aims to reduce US carbon emissions by up to 45% by 2030. The bill incentivizes switching to electric vehicles, solar, and green manufacturing. Here's how:

  • Extended tax credits and lower eligibility thresholds for electric vehicles (a $4,000 tax credit for a used model and $7,500 for a new electric vehicle)
  • 10-year consumer tax incentives to lower the cost of heat pumps, electric HVAC and water hearts, and rooftop solar systems
  • $60 billion for environmental justice communities and the reduction of legacy pollution
  • $60 billion for domestic clean energy manufacturing
  • $30 billion for a production credit tax credit for wind, solar and battery storage.
  • $4 billion in additional drought funding  
  • $27 billion for a so-called clean energy accelerator – essentially a green bank that will leverage public and private funding to expand more green projects
  • Fee on oil and gas producers that emit excessive methane

Health care

Medicare will be able to negotiate the prices of expensive medications. Though much more limited in scope than Democrats wanted, the move opens the door for Medicare to use its power to lower prescription drug costs. The bill includes a cap on insulin costs for Medicare recipients.

However, Republicans blocked imposing a $35 cap on insulin on the private insurance market.

Federal premium subsidies for Obamacare (the Affordable Care Act) would be extended through 2025.

Seniors on Medicare would receive free vaccines (currently, only certain vaccines, including Covid-19, the flu and pneumonia, are free).

The bill also imposes a $2,000 annual cap on out-of-pocket spending for prescription medication for seniors and the disabled.

The President also stated that 13 million Americans covered under Obamacare would see their health insurance premiums cut by $800 annually.

Why this bill matters

Reducing energy and health care costs can be significant for most US families.

The bill is not funded by additional taxes on the average American but rather taxation of the wealthiest corporations. And while everyday costs of health care and energy go down, the environment will benefit in the long term.

Rose Wheeler
Editor-in-Chief, Tom's Guide Money

Rose Wheeler oversees strategy for personal finance content at Tom's Guide Money. She has over 15 years of journalism experience covering consumer finance, business, financial products, banking, credit, money management, and other finance topics. Previously, Rose was a deputy editor at Forbes Advisor and a contract editor/strategist at The Motley Fool. When not working, she's usually exploring her new town, reading or playing video games.