Just when it seemed that Senator Joe Manchin (D-WV) had killed the Democrats’ agenda for good, Manchin cut a deal with Senate majority leader Chuck Schumer (D-NY) on Thursday to revive legislation that would invest billions of dollars in carbon capture and clean energy, allow Medicare to negotiate the price of some drugs and extend health insurance subsidies, and raise taxes on the wealthy and corporations.
The Inflation Reduction Act (IRA) is a fraction of the size and ambition of the agenda spending package that Democrats debated for much of last year, thanks to the efforts of corporate lobbyists, conservative Democrats, and pundits who have blamed government aid to families during the pandemic for inflation — rather than the supply chain crisis or corporate profiteering. While the legislation would make important investments in clean energy and health care, it simultaneously props up the fossil fuel industry chiefly responsible for the climate crisis.
The Democrats’ original climate and social spending proposal, a $6 trillion package pitched by Senate Budget Committee chairman Bernie Sanders (I-VT) last June, included major investments to address infrastructure, affordable housing, and the climate crisis. Democrats eventually settled on a $3.5 trillion package that Senator Manchin ultimately spiked late last year. The latest proposal totals $700 billion in investments.
The legislation no longer contains key provisions that would reduce the economic misery that an increasing number of Americans are experiencing: Democrats have parted with an expanded child tax credit and earned income tax credit, investments in universal pre-K and childcare, $200 billion more in climate spending, and more.
Still, this bill is better than nothing. It contains necessary investments in clean energy when time is running out to stave off the worst effects of the climate crisis, will prevent a spike in health insurance premium costs for some Americans next year, and will finally grant Medicare the power to negotiate the price of some prescription drugs.
Of course, none of this is a done deal yet. Senator Kyrsten Sinema (D-AZ) has so far declined to comment on the bill. Sinema, who interned last summer at a private equity magnate’s winery, reportedly opposes closing the carried interest loophole, which allows wealthy private equity managers to classify some of their earnings at the lower capital gains tax rate, rather than the higher rate for regular income, and pay less in taxes. The legislation would weaken but not eliminate the loophole.
The Senate parliamentarian, who advises on whether certain measures can be passed under the fast-track budget reconciliation process, has yet to weigh in on the deal — and while Democrats have the power to ignore their parliamentary adviser, some conservative Democrats would likely object to doing so.
Then there’s the ongoing COVID-19 pandemic: Senate majority whip Dick Durbin (D-IL) tested positive for COVID on Thursday and is quarantining. Senators Tina Smith (D-MN), Tom Carper (D-DE), and Manchin have also recently tested positive. Speaking of health issues, octogenarian senator Patrick Leahy (D-VT) fractured his hip in June and disclosed having a second surgery last week.
Despite Democrats likely needing all fifty members of their Senate caucus to cast their votes for the reconciliation bill in person, Schumer claims the legislation could get a vote as soon as late next week.
Bearing all of these caveats in mind, our team read the bill so you don’t have to. Here’s the good, the bad, and the ugly of the legislation’s key health care, energy and climate, and tax provisions.
The proposed deal contains major health care provisions, namely prescription drug pricing reform and an extension of Affordable Care Act (ACA) health insurance subsidies. Unfortunately, the drug pricing reform proposal is largely delayed until 2026 and has been weakened considerably over the past year.
The initial proposal in Build Back Better granted Medicare the power to negotiate the price of at least twenty-five and then fifty costly prescription drugs per year. The version of Build Back Better that passed the House last year would have directed Medicare to specifically negotiate insulin prices — which have tripled over the past fifteen years — and would have capped insulin co-pays at $35 per month. (The co-pay cap wasn’t perfect, as it would have only applied to people with health insurance.)
But the drug price negotiation provision in the current draft of the IRA does not explicitly apply to insulin, which was the main drug this provision was intended to target.
Under the legislation, Medicare will be limited to negotiating lower prices for just ten drugs in 2026 and eventually twenty drugs per year, but the bill doesn’t currently say whether insulin will be one of them. On Thursday, Senate majority leader Chuck Schumer pledged that insulin provisions would be added, telling Politico, “We will be adding things on insulin to the reconciliation proposal.”
A quarter of the 7.4 million Americans who need insulin to survive struggle to afford it. The IRA’s drug negotiation provision is estimated to generate upward of $101 billion in Medicare savings, according to the Congressional Budget Office. And if insulin were added to the legislation, not only would negotiating such prices reduce the cost burden on millions of Americans, it would also save the federal government a lot of money. Dialysis, a kidney-related treatment for advanced diabetics, is the only form of medical care where all of the costs, no matter the patient, are borne by the federal government.
It’s also worth noting that the stock prices of the major drug manufacturers are for the most part up or barely down over the past five days. When the Barack Obama administration cracked down on private prisons in August 2016, it immediately sent private prison stocks cratering.
The legislation also extends federal subsidies for health insurance premiums paid by patients on individual health insurance plans. These subsidies, first enacted in Democrats’ American Rescue Plan Act in early 2021, would run through 2025 — a three-year extension.
Extending the subsidies will undoubtedly help millions of Americans who buy health insurance through the state exchanges created under the ACA, Democrats’ 2010 health care law. It also solves a looming political problem: without an extension, Americans on these plans would receive notices of significant premium increases in October, just before the midterm elections in November.
On the other hand, these subsidies represent a costly giveaway to the highly profitable and predatory health insurance industry. As we reported last January, Democrats’ plan to expand ACA subsidies was ripped straight out of a list of demands crafted by health insurance lobbyists.
Energy and Climate
The IRA adopts what has been touted by Manchin as an “all of the above energy strategy”: it will provide support not only for renewables and nuclear energy, but also for the fossil fuel industry.
It will be the single-largest climate bill in the history of the United States — $369 billion in climate and energy investments — but will still fall short of delivering on President Joe Biden’s promise to slash carbon emissions by 50 percent by 2030.
An analysis from Rhodium Group, which scores climate legislation based on carbon emissions, says the bill will reduce carbon emissions by somewhere from 31 to 44 percent by 2030. (Without the legislation, Rhodium estimates the United States would be on track to reduce emissions by 25 to 34 percent in that timeframe.)
Those emissions reductions would be achieved by subsidizing clean energy production and providing incentives for nascent climate technologies such as hydrogen power and carbon direct air capture, which extracts carbon dioxide from the atmosphere.
While it’s about $200 billion smaller than the climate investments in Build Back Better, the IRA preserves key programs.
Those climate investments are essential, but the emissions reductions will be thwarted at least in part by a separate provision that expands the federal oil and gas leasing program, which allows oil and gas companies to conduct drilling operations on federal lands, in exchange for paying royalties on their production.
National climate groups have criticized the deal for propping up the fossil fuel industry. For good reason: the fossil fuel industry is largely pleased with the bill, Politico reports. “This is a bill that keeps the fossil fuel industry, and the country, in a very strong position,” Manchin said, according to reporting from Bloomberg News.
Most of the energy spending in this bill comes from “technology-neutral” tax credits for energy projects — meaning they can be claimed by any projects that produce zero-carbon energy.
The legislation extends two tax credits, the production tax credit and investment tax credit, which have been essential for building domestic wind and solar industries, and makes hydrogen, geothermal, and nuclear energy eligible for the credits.
Crucially, the bill makes these tax credits available to public developers that were previously excluded, by making them “direct pay,” which allows entities that don’t have tax liability — namely state, local, and tribal governments and rural energy cooperatives — to claim the subsidies up front. This direct pay provision only lasts through 2024, however. It also contains a separate provision that allows developers with low tax liability to transfer the credits.
Some smaller tax credits are aimed at increasing US manufacturing of clean energy technologies, keeping nuclear plants open, and helping utilities reduce emissions. The bill also contains $500 million to fund Biden’s plan for using the Domestic Production Act to produce heat pumps and process critical minerals.
It also includes subsidies for individual investments in renewable energy, including subsidies for electric vehicle purchases, heat pumps, electric water heaters, and rooftop solar panels. The bill also makes $60 billion available for environmental justice investments in marginalized communities.
Notably, the new electric vehicle subsidy may be short-circuited by a stipulation that it only apply to electric vehicles “made with a certain percentage of minerals mined or processed in nations with U.S. free trade agreements, or recycled in North America,” according to E&E News. Currently, no such mineral supply chain exists. Manchin has long opposed subsidies for electric vehicle purchases.
The bill provides a substantial, $250 billion boost to the Department of Energy’s (DOE) Loan Programs Office — separate from the $369 billion in other climate investments — which finances clean energy technology projects that may struggle to find private investors. In the past few days, the DOE loans program has announced two loans aimed at expanding lithium-ion battery manufacturing, which is the basis for expanding electric vehicle production, as well as resilience in an electricity grid that will be hit hard by future climate disasters.
The IRA does not include any measures to restrict fossil fuel supply, instead entrenching the industry’s access to federal lands for drilling, and holding wind and solar development hostage on federal lands until lease sales are conducted.
According to the Center for Biological Diversity:
The bill would require the Interior Department to offer at least 2 million acres of public lands and 60 million acres of offshore waters for oil and gas leasing each year for a decade as a prerequisite to installing any new solar or wind energy. If the department failed to offer these minimum amounts for leasing, no right of ways could be granted for any utility-scale renewable energy project on public lands or waters.
The IRA specifies that the federal government must hold offshore lease sales in the Gulf of Mexico and Alaska’s Cook Inlet.
On a slightly more positive note, the bill hikes costs for fossil fuel development by increasing the royalties that companies must pay for the oil and gas they produce on these federal leases from 12.5 to 16.66 percent.
It also contains some key measures to tackle emissions from methane — climate-warming gas that is eighty-six times more potent than carbon dioxide. A “methane fee” would fine companies for emitting methane over a certain amount. It also sets up a new $850 million “Methane Emissions Reduction Program,” which contains grants and loans for oil and gas companies to monitor and reduce their methane emissions.
The bill contains a number of tax increases to offset the impact on the federal budget deficit. They appear to be progressive, but as always, the devil is in the details and implementation.
The carried interest loophole allows private equity and venture capital managers to count some of their earnings as capital gains, which are taxed at the lower 20 percent rate instead of the usual top federal income tax rate of 37 percent.
The legislation would tighten but not eliminate this loophole, allowing private equity managers to continue pocketing extraordinary profits at the lower rate.
Instead of requiring private equity managers to hold investments for three years to benefit from the loophole, the bill extends the requirement for holding investments to five years. As UC Irvine tax professor Victor Fleischer noted on Twitter, since most private equity investments last five to seven years, most carried interest will continue to be taxed as long-term capital gain.
The bill contains a 15 percent minimum tax for corporations, but tax credits and operating losses can be used against it, which will almost certainly incentivize more accounting creativity from US companies. Currently there is no corporate minimum tax.
The proposed bill contains $80 billion in additional funding for the Internal Revenue Service (IRS) to go after delinquent taxpayers. However, nothing in the legislation mandates that the additional IRS resources go to auditing the wealthy and superwealthy. As of now, poor Americans are five times more likely to be audited than the rich, and the superrich are 87.5 percent less likely to be audited today than in 2010.
The Government Accountability Office has ascribed this situation to a lack of funding. But another likely factor is who leads the IRS. The current IRS commissioner, Charles Rettig, is a former corporate tax lawyer who represented clients before the IRS. His Obama-tapped predecessor, John Koskinen, is a close friend and business associate of former president Donald Trump.
The legislation does contain a provision mandating a study on a free direct e-file tax return system — a program that would be administered by the IRS for tax filing and would compete with and threaten the duopoly of TurboTax/Intuit and H&R Block. Expect those companies to lobby hard against any recommendations that emerge from the study.
Will It Actually Pass?
Besides Manchin, the other key swing vote in the Senate, Sinema, has been silent as of now. There are potential spoilers in the House, too, like Representative Josh Gottheimer (D-NJ).
The US Chamber of Commerce, the nation’s top business lobby, has pledged to oppose much of the plan, principally its tax and prescription drug components.
One factor working in Democrats’ favor is that lawmakers may feel less inclined to drag out negotiations over this bill since it would mean cutting into their monthlong planned vacation, slated to begin August 8. We are not making any predictions. Maybe it will happen. But if you see observers, pundits, or lawmakers spiking the football and applauding Manchin and Schumer for outmaneuvering Republicans and corporate lobbyists with this bill, remember that the fight over this legislation is just getting started, and nothing is guaranteed.