How the Inflation Reduction Act might affect you — and change the U.S.

The package, while smaller than Democrats’ initial ambitions, would transform huge sectors of the U.S. economy and affect millions of Americans

(Emily Wright/The Washington Post)
12 min

Major changes to the Affordable Care Act. The nation’s biggest-ever climate bill. The largest tax hike on corporations in decades. And dozens of lesser-known provisions that will affect millions of Americans.

The Inflation Reduction Act represented one of the most consequential pieces of economic policy in recent U.S. history — though still far smaller than the $3 trillion the Biden administration initially sought.

The law devoted hundreds of billions of dollars to combating climate change and bolstering U.S. energy production through changes that would encourage nearly the whole economy to cut carbon emissions. With the planet rapidly warming, Democrats say the bill would reduce carbon emissions by roughly 40 percent by 2030, close to President Biden’s goal of cutting U.S. emissions by at least 50 to 52 percent below 2005 levels by 2030. Sen. Joe Manchin III (D-W.Va.), whose vote Democrats secured late last year after months of negotiations, has also emphasized that it would spur American energy independence more broadly, including by encouraging natural gas, as the war in Ukraine exposed domestic reliance on petrostates’ fossil fuel production.

The bill uses two main levers: major new incentives for private industry to produce far more renewable energy, and other incentives for households to transform their energy use and consumption. Democrats say this second set of incentives will also offer immediate consumer relief for the higher energy prices that have bedeviled the Biden administration.

The bill would also raise hundreds of billions in new revenue through new tax provisions — the biggest of which will fall on the country’s large corporations. It would give the badly underfunded Internal Revenue Service its biggest budget increase in its history.

On health care, Democrats campaigned in 2020 on major changes, and this deal fulfills two major pledges: allowing Medicare to negotiate the price of prescription drugs, and making health care more affordable for millions of Americans. The Senate dropped initial plans to limit some drug price increases to the rate of inflation for people with private insurance.

The bill falls short on plugging one of the biggest gaps of the Affordable Care Act and other key items long sought by the party’s more liberal members. Still, it amounts to the biggest changes to the health system in roughly a decade.

Here is a summary of what’s in the more than 700-page bill, according to Senate Democratic officials.

Hundreds of billions in clean-energy tax credits

Abandoned coal mines are being transformed into solar installations large enough to contribute renewable energy to the electric grid. (Video: Zoeann Murphy/The Washington Post)

New and extended credits incentivize solar, wind, hydropower and other sources of renewable energy. Private firms and publicly owned utilities can get tax subsidies both for the production of renewable energy and for manufacturing a specific part essential to a renewable project, such as wind turbines or solar panels. The goal? To make new green energy production cheaper for utilities to build than fossil fuel plants are.

$80 billion in new rebates for electric vehicles, green energy at home and more

Buyers of new electric vehicles will get a refundable $7,500 tax credit applied at the point of purchase. That would also apply to vehicles whose manufacturers are no longer eligible for an existing EV credit, such as Tesla and General Motors. Couples who earn less than $300,000 a year or individuals who earn less than $150,000 would be eligible. A new $4,000 tax credit would also apply to purchases of used EVs. Tens of millions of people would qualify for these credits.

Installation of home solar panels are eligible for a 30 percent credit through 2032. That drops to 26 percent in 2033 and 22 percent in 2023. Installing efficient heat pumps for climate control is eligible for rebates of up to $8,000. Electric heat pump water heaters can get $1,750 rebates. Additional consumer subsidies in the bill include $840 for an electric induction cooktop and up to $9,100 for improvements to electric panels, wiring and home insulation. Households could get a total of up to $14,000 in rebates.

If consumers claim the subsidies in the bill, they could save as much as $1,840 on their annual energy bill on average, according to an analysis by Rewiring America, a climate analysis group. (That would also require spending significantly to buy things such as an EV, a heat pump and solar panels.)

Read more: What the electric vehicle tax credits in the Inflation Reduction Act could mean for you

$1.5 billion in rewards for cutting methane emissions

A new Methane Emissions Reduction Program would reward oil and gas companies that slash their emissions of methane and penalize those that don’t. The program, crafted by Senate Environment and Public Works Chair Thomas R. Carper (D-Del.), originally would have provided $775 million upfront to oil and gas companies to cut their methane emissions. The agreement doubles that money to $1.5 billion, according to a Senate Democratic aide. Methane traps far more heat in the atmosphere than carbon dioxide, the most abundant greenhouse gas.

$27 billion ‘green bank’

A Clean Energy and Sustainability Accelerator, commonly referred to as a green bank, would leverage public and private funds to invest in clean-energy technologies and infrastructure. In states where green banks have already been established, public money has been used to leverage six to 20 times more dollars in private investment in clean energy.

Support for fossil fuel projects

To secure Manchin’s vote, Democratic leadership pledged to mandate new oil and gas leasing in the Gulf of Mexico and off the coast of Alaska, where industry groups are pushing for a major expansion in oil production. Manchin views drilling in those areas as important for the country’s domestic energy independence.

Support for coal miners with black lung

The agreement would permanently extend funding for the Black Lung Disability Trust Fund, which covers benefits for roughly 25,000 coal miners suffering from black lung disease, including those in Manchin’s coal-rich state of West Virginia.

Agriculture, steel, ports and more

The bill contains numerous smaller measures aimed at specific parts of the economy with high emissions: $20 billion for agriculture subsidies to help farmers reduce emissions, $6 billion to reduce emissions in chemical, steel and cement plants, and $3 billion to reduce air pollution at ports.

Hundreds of billions from a 15 percent corporate minimum tax

The biggest tax hike in the plan would apply to all U.S. corporations that earn more than $1 billion per year in profits. Under previous law, U.S. corporations ostensibly pay a 21 percent tax rate. But dozens of Fortune 500 companies pay no federal income tax at all, by claiming deductions for research and development and other credits.

The corporate minimum tax could hit these ultra-profitable companies

The law attempts to close off that option by subjecting large corporations to a tax on their financial statements. Corporations would still be able to claim tax credits, though, since renewable energy groups raised concerns the minimum tax could undercut the effectiveness of the climate tax credits. As part of their deal with Sen. Kyrsten Sinema (D-Ariz.), a moderate who asked for changes before backing the bill, Democrats agreed to tweak the minimum tax to allow firms to keep deducting some investment expenses. They also amended the legislation to exempt firms owned by private equity from the new minimum tax.

Billions of dollars for major enforcement increases at the IRS

The law devoted money to let the IRS scale up dramatically in an attempt to close the “tax gap” — the difference between what people and corporations owe and what they actually pay. Democrats say that their plan to invest $80 billion in the IRS would more than pay for itself, in part because the tax agency’s budget was cut by 20 percent between 2010 and 2020. Former IRS commissioner Charles Rossotti and current Treasury official Natasha Sarin previously estimated the IRS could raise $1.4 trillion in additional tax revenue with more funding.

A 2023 agreement to raise the debt ceiling, though, cut about $20 billion from that $80 billion. Administration officials said the agency would still be able to pursue tax cheats.

A new tax on companies repurchasing their own shares

As part of their last-minute negotiations with Sinema, Democrats agreed to limit the extent of the corporate minimum tax and instead inserted a new tax on corporations that purchase shares of their own stocks — a maneuver known as a “stock buyback.”

Democrats have for years complained that these buybacks enrich wealthy shareholders, because a firm drives up the value of its stock by buying it. Liberal tax experts have said that rather than spending money to increase their stocks’ values, large corporations should spend it on improving worker pay or investing in new research and development. After the 2017 GOP tax law, 10 drug companies spent roughly $75 billion on buybacks — in the same year, they spent roughly $72 billion on research and development, according to the Roosevelt Institute, a left-leaning think tank.

The 1 percent tax on stock buybacks would raise roughly $73 billion, according to a Senate Democratic aide. Conservatives warned that the provision would discourage investment, because the tax makes investors less likely to give their money to companies when rewarding them with buybacks becomes more expensive. The provision could also hurt retirement pension plans, said John Kartch, a spokesman for Americans for Tax Reform, a conservative group.

Lowering prescription drug prices

The deal allows Medicare to negotiate drug prices for the first time and would prevent future administrations from refusing to do so. It’s a major win for Democrats, who have long pledged to lower the cost of medicines, particularly for seniors. The government would start by negotiating the price of 10 drugs in 2026 and gradually scale up to 20 by 2029.

But it isn’t clear how many Americans with Medicare coverage would see lower out-of-pocket costs — or how much money they could save. That depends on which drugs wind up being negotiated and how much prices drop, according to the KFF.

The bill includes other policies aimed at curbing the sky-high cost of drugs. For instance, it caps seniors’ drug costs under Medicare to $2,000 per year, forces drug companies to pay a rebate if they increase prices faster than the rate of inflation in Medicare and provides free vaccines for seniors. The drug-pricing components are a key money saver — congressional scorekeepers had estimated these policies would reduce the deficit by nearly $288 billion over a decade.

Read more: How the Inflation Reduction Act might affect your health care costs

The legislation also imposes a $35 monthly cap on the cost of insulin — which people with Type 1 diabetes need to stay alive, and which many people with Type 2 diabetes use to manage their blood sugar levels — for patients enrolled in Medicare. Democrats had sought to extend the same cap to people with private insurance, but Republicans nixed such a policy on the Senate floor, pointing to the Senate parliamentarian’s ruling that it didn’t comply with budget rules.

Extending health insurance subsidies

Democrats’ pandemic aid law boosted financial help for low-income Americans with plans on the Affordable Care Act’s insurance exchanges and extended the subsidies to middle-income earners for the first time. But the enhanced tax credits were set to expire at the end of 2022, raising the specter of roughly 13 million Americans learning that their health premiums would soon increase — in some cases by hundreds of dollars per person annually — just weeks before the elections.

The deal extended the tax credits for three more years, starting in 2023 and running through 2025.

Reducing the federal deficit

The original version of the legislation would have brought down the federal deficit by about $300 billion over 10 years, according to Marc Goldwein, senior vice president of the Committee for a Responsible Federal Budget. That would be more than any other legislation has done since 2011. The savings would shrink somewhat if Congress later extends the Affordable Care Act subsidies, which only last for a few years in the current version of the bill. Last minute changes to assuage the parliamentarian — and secure the final support of all Democrats — have changed some of the bill’s components and the amount of money they raise. Democrats say it is still far more than needed to offset its costs, and could perhaps deliver the full $300 billion in deficit reduction.

Democrats have sought to reclaim the mantle of fiscal responsibility from Republicans after the 2017 GOP tax act increased the federal deficit by $1.5 trillion. Most of the deficit reduction from the bill, however, will not occur for a few years, because the prescription drug provisions largely do not take effect until after 2026.

This story has been updated multiple times throughout the legislative process.