- Democrats are on the brink of passing their proposed $739 billion Inflation Reduction Act.
- The bill provides for cheaper prescription drugs, EV tax credits, and a levy on stock buybacks.
- Here's what you need to know about the proposed legislation, and how it could affect you.
The Democrats are on the brink of passing their $739 billion Inflation Reduction Act after weeks of negotiation culminating in the approval late Thursday from the last of the party's holdout senators.
The proposed legislation provides for cheaper prescription drugs, free vaccines for seniors, and generous tax credits for electric vehicles, among other things. It also aims to create more than 1 million jobs. Moody's says the bill is likely to live up to its name and rein in soaring inflation.
However, late-night wrangling Thursday resulted in notable changes to the legislative package. Notably, plans to close the carried interest loophole were dropped in favour of a new levy on stock buybacks.
Here's what's new in the bill, what's stayed the same, and what it means for you.
Hedge fund, private equity, and real estate executives rejoice
Democrats have engaged in protracted wrangling over the tax legislation in the act. The bill only won the crucial backing of Arizona Sen. Kyrsten Sinema late Thursday after plans were dropped to close the long-criticized carried interest loophole.
Executives in the hedge fund, private equity, and real estate investment businesses benefit from a tax break for carried interest. In simple terms, when they take a percentage of profits from an investment as compensation, they're taxed at the capital-gains rate, which is lower than the comparable income-tax rate.
The bill aimed to close the loophole by extending the holding period for carried interest to five years, up from the current three-year period, thereby forcing investors to hold onto assets for longer.
With the loophole destined to remain open, wealthy investors will be able to continue paying tax at the lower rate.
For stock investors, the news is less good
With plans shelved to close the carried interest loophole, the Democrats instead agreed a new policy targeting investors: a 1% excise tax on stock buybacks.
Democrats have long wanted to rein in stock buybacks, which exploded in the wake of former President Trump's corporate tax cuts in 2017 and hit a record $881.7 billion in 2021, according to data collected by S&P.
A company buys back its own stock when it wants to boost its stock price, by reducing the number of outstanding shares on the market. It's an alternative to the traditional route of distributing cash to shareholders in the form of dividends. It also has the effect of inflating the value of executives' shareholdings.
Opponents argue buybacks take money out of workers' pockets and the broader economy. This week, the head of a flight attendants' union argued that the billions spent by airlines on buybacks could exacerbate travel chaos.
In a Twitter thread, Chuck Marr, VP of Federal Tax Policy at the Center on Budget and Policy Priorities, described the move as an excellent policy that would raise $125 billion over 10 years, and target a large proportion of shareholders based outside the US.
However, the proposed 1% excise tax is likely to weigh on mom-and-pop investors as much as institutional investors. And given buybacks have been a driver of stock gains in recent years, the levy could have broader effects on the market, for example, hitting pension funds.
Cutting the cost of prescription drugs
The authors of the act say it would enable patients on Medicare to get high-priced drugs for the lowest price possible by allowing Medicare to begin negotiating prescription drug prices directly from 2023.
The bill would also cap at $2,000 per year the amount senior Medicare patients spend out of pocket on prescription drugs. Currently, no cap exists.
Capping spending could save more than 860,000 Medicare enrollees an average of $900 a year, according to estimates from the Robert Wood Johnson Foundation, which makes grants and publishes research relating to healthcare.
It would also require drug companies to rebate the difference to Medicare if they raise prices faster than inflation, and would incentivize manufacturers and insurers to keep prices down.
Free vaccines for seniors
The bill would make all vaccines free for seniors on Medicare. Vaccines typically cost $25 per dose, according to analysis by Peterson-KFF Health Systems Tracker.
Money for energy-efficient appliances
The bill would create incentives for Americans to buy energy-efficient appliances, especially for lower-income households and disadvantaged communities.
That includes $9 billion towards electrifying appliances and retrofitting homes to make them more energy efficient, and a $1 billion grant program to make affordable housing more energy efficient.
It also contains 10 years of consumer tax credits to make homes energy efficient and run on clean energy, which it says would make heat pumps, rooftop solar, electric HVAC, and water heaters more affordable.
Cheaper electric vehicles
The bill introduces and expands on tax credits offered to consumers to make electric vehicles more affordable.
The bill would give consumers up to $4,000 in tax credits if they buy used EVs or plug-in hybrids. Customers are already eligible for up to $7,500 in tax credits to buy new EVs but this is limited to the first 200,000 eligible vehicles sold by each automaker. The bill would lift this cap on tax breaks for new EV sales, as long as the vehicle is assembled in the US.
Auto manufacturers would get grants to refit their sites so they could make clean vehicles instead, and up to $20 billion would be given in loans to build new factories.
What about my tax bill?
People who make less than $400,000 a year shouldn't be affected by the higher taxes proposed in the bill.
The bill will be funded by higher corporate taxes, savings on prescription drugs through Medicare, and IRS tax enforcement, among other things, the bill's authors say. They say taxes shouldn't be higher for anyone with less than $400,000 annual taxable income.
Kimberly Clausing, a tax professor at the UCLA School of Law and former senior Treasury Department official, previously told Insider that the average American's tax bill is "absolutely" not going to be affected under the legislation. "Are you a big corporation that earns over a billion dollars and pays less than 15%? If not, there's no increase in your taxes," she said.
"As in any legislation, there's gonna be winners and losers," Marc Goldwein, senior policy director of the nonpartisan Committee for a Responsible Federal Budget, previously told Insider. "But I suspect there's gonna be a lot more winners than losers and it's going to be a broad set of winners."
Creating jobs
The bill seeks to create new jobs in industries including manufacturing, construction, and renewable energies, the bill's authors say. Policy-research company Energy Innovation estimates that the bill would create up to 1.5 million jobs by 2030.
Meanwhile, the University of Massachusetts Political Economy Research Institute estimated the bill would generate 912,000 jobs per year over the next decade.
Bolstering energy security
The bill provides for $369 billion to go towards measures that aim to increase energy security and fight climate change. This is the chunkiest single provision in the proposed legislation.
It would involve hefty funds to speed up manufacturing of clean-energy technologies, such as solar panels, wind turbines, and batteries, which the bill's authors say would make clean energy cheaper and reduce the likelihood of future price shocks.