By Dr. James M. Dahle, WCI Founder
On August 16, 2022, President Biden signed the Inflation Reduction Act into law. In today's post, I'll tell you what's in it and how it might affect your financial life. But first, I'm going to rant a little. If you don't like rants, just skip on down to the next section.
Inflation Reduction Act Is the Best Display of What I Hate About Congress
I really hate the way Congress does its work. I'm not singling out the Democrats here either. This is a bipartisan criticism.
#1 I Hate Partisan Bills
The Inflation Reduction Act was passed 50-50 in the Senate, with Vice President Kamala Harris casting the deciding vote. The only way this could even pass the Senate at all was to avoid the filibuster by passing it under the Budget Reconciliation process I've discussed on the blog before. In the House, it passed 220-207. Not a single Republican voted for the bill in either the House or the Senate. The funniest part is that the bill is described as a “compromise” by our leaders. A compromise between who? Between Democrats. It was the bill that all of the Democrats were willing to vote for. I wouldn't pat yourself on the back too hard about your ability to compromise there.
#2 I Hate Big Bills
Why do we have to put everything into one big bill and then turn it into some kind of weird team sport where one team must win and one team must lose? Why can't we bring every single provision up for a vote? The good ones pass; the bad ones don't. If you like one but not another, you can go trade votes with someone else. You can lobby each other for bills you feel really passionate about. That way, the arguments remain about the issues. The bills with bipartisan support pass, and the ones without that support fail. But with these monstrosities? You're forced to side with your team, or you have to go back and face the voters and get voted out of office—even if you supported or didn't support a third of the provisions in the bill!
#3 I Hate Misnamed Bills
What is this, 1984? We call a bill that has almost nothing to do with inflation (and may even increase it) the Inflation Reduction Act? It's mostly a climate bill for crying out loud. Do your job and stop playing politics for the cable news stations.
What's in the Inflation Reduction Act?
OK, rant over. The Inflation Reduction Act is the scaled-down version of the Build Back Better bill that did not pass months ago due to Senators Joe Manchin (D-West Virginia) and Kyrsten Sinema (D-Arizona) (along with all the Republicans in the Senate) opposing it. It's actually mostly a climate bill. In fact, it is the largest clean energy bill ever passed by Congress.
More information here:
Climate Provisions in the Inflation Reduction Act
Here are the numbers: $369 billion will go toward energy and climate reform, and $60 billion will go toward renewable energy projects like solar and wind. There are also some tax credits for making your home more energy efficient and, in the part that you would think would be most likely to affect white coat investors, credits for electric vehicles. Unfortunately, that credit has such limitations that few electric vehicles and even fewer white coat investors will qualify for it. The vehicles must be assembled in America and the manufacturer must not yet have met its sales cap. See this chart from Electrek to see which ones will qualify for the credit.
Note that no Teslas qualify. Sorry white coat investors. The favorite of doctors and content directors the world over is not eligible. You can get a Leaf, though. By the way, the car cannot cost more than $55,000 ($80,000 for an SUV or truck). And you can't have a Modified Adjusted Gross Income (MAGI) of more than $150,000 ($300,000 married). Basically, residents can go buy a Leaf.
If doctors aren't going to get squat for their Teslas, what will they get? How about a 30% tax credit on solar panels for your house? No income phaseout on that one.
There are a dozen or more other climate-related provisions of varying sizes, such as the postal service going to electric vehicles. There are a few provisions that climate activists aren't super happy about, too—more drilling in the Gulf of Mexico and Cook Inlet and some credits for coal sequestration that will prolong the life of coal plants.
More information here:
Prescription Drug Reform
The bill also has some prescription drug reforms. But it's awfully limited. It doesn't start allowing Medicare to negotiate down drug costs for four more years (2026) and even then only covers 10 drugs (but 10 more in 2029!) That's awfully weak and hardly a provision to be proud of. However, it also puts a cap of $2,000 on the annual cost of prescription drugs for Medicare D patients starting in 2025. I'm more impressed with that one. I'm not sure who eats the rest of the cost, though. I don't think it's Big Pharma or the pharmacy. I think it's the taxpayer.
The Affordable Care Act was also expanded somewhat.
OK, here's the part you've been waiting for, although there isn't all that much to talk about. There's a new tax on big corporations. It is 15% of income above and beyond $1 billion for a corporation. The net effect on you will be lower returns on your US stocks than you would have otherwise had. Corporations aren't people, so it's best to think of this as a tax on your 401(k) rather than a tax on “someone else.” If you own stocks, this is a new tax for you to pay, albeit indirectly. There is also a 1% excise tax on stock buybacks. I suspect this will just reduce how much corporations spend on stock buybacks. Presumably, that money will go to dividends instead—at least after the rush of buybacks that will be occurring between now and the end of the year.
Here's the one most likely to affect you: Congress has allocated more money for the IRS to use to enforce tax laws. Honestly, the IRS has been starved for funds for years. If you've tried to call them, you know what I mean. This money is mostly supposed to go toward doing more audits, though, which will presumably raise more money than the audits cost.
I have mixed feelings about this. I hate tax cheats, and this will catch more of them. But it will also drag people through more audits. At any rate, this is how the law pays for a lot of this new spending, by making more people pay the taxes they owe. There's a lot of arguing and political posturing about what kinds of people are going to be audited more. I think the answer is that all people are more likely to be audited—rich, poor, and in between. I think you should pay all the taxes you owe, whether you owe a lot or a little. If the price of cutting down on tax cheats is for me to go through one more audit during my life than I otherwise would, I'm willing.
More information here:
The bill is supposed to decrease spending overall (mostly because it brings in more money through all those audits, but also by paying less for those drugs.) I guess we'll see. Remember, this does not reduce the federal debt. It just reduces how much the federal debt goes up by each year. There's still a deficit. We run a deficit of more than $2 trillion each year. This reduces the deficit by about $300 billion over a decade. Not exactly a big reduction, even if it works.
Will the Inflation Reduction Act Work?
Yeah, I'm not sure how it is supposed to reduce inflation either (for what it's worth, by October 2022, two months after the bill passed, inflation remained at 8.2% though it did drop to 7.1% in November)). I guess new drilling in Cook Inlet and the Gulf of Mexico will eventually have a downward effect on the cost of gasoline. And I guess Medicare is going to be negotiating down the price of those drugs a few years from now. Seriously, though, that's all I could come up with. It's really a terrible name. I'm amazed that there are Americans who don't see right through that one, but I guess there are enough that don't that it's politically worth it to use a name like that.
There's a lot of controversy and arguments here, but even great proponents of the bill aren't arguing that this bill will have any sort of large effect on inflation. The Committee for a Responsible Federal Budget is supposedly non-partisan, but in reality, it probably leans slightly left. This is its analysis, which seems the most comprehensive of any I've seen:
At any rate, the point of this bill clearly wasn't to reduce inflation. The point was to do as much as Democrats could do on their environmental, health care, and tax priorities. It wasn't as much as they wanted, but it was certainly something.
Should You Do Anything with Your Financial Life Because of the Inflation Reduction Act?
No. I can't think of a single personal finance or investing decision that should be altered by this bill for a typical white coat investor. Except maybe be a little more likely to put in a solar system to charge that Tesla.
What do you think? Did I miss anything important in the bill? How will this bill affect your finances? Comment below!