The Manchin-Schumer deal takes on climate change and drug pricing
Sen. Joe Manchin(D-WV) faces reporters as he arrives at a hearing of the Senate Energy and Natural Resources committee at the Dirksen S.O.B. at the U.S. Capitol, in Washington, DC.

Sen. Joe Manchin (D-W.Va.) speaks to reporters at the Capitol, in Washington, D.C., on July 21.

Bill O'Leary/The Washington Post via Getty Images

360°

The Inflation Reduction Act: What’s inside lawmakers’ once-in-a-generation stab at solving climate change

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360°

The Inflation Reduction Act: What’s inside lawmakers’ once-in-a-generation stab at solving climate change

The bill, expected to clear the House later this week, tackles drug pricing and addresses climate change.

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The Senate pulled an all-nighter over the weekend to pass a bill that represents the first time Congress has taken up one of Washington’s most vexing policy issues: climate change.

The Inflation Reduction Act, which passed the Senate in a 51-50 vote Sunday afternoon, would create the biggest investment in climate change that the country has ever seen: more than $300 billion toward addressing warming temperatures and extreme weather plaguing the U.S. and Europe this summer. While experts warn more action is needed, the deal represents the first time Washington lawmakers are putting significant money into the climate. The House is expected to take up the bill this week, where it is expected to pass, and President Joe Biden is expected to sign it into law shortly thereafter.

The legislation would also bring down prescription drug prices and create a corporate minimum tax — all big changes Democrats have sought in Congress since Biden took office, but previously failed to reach agreement on. It represents the culmination of months of debate among Democrats.

If the legislation becomes law, as is expected, it will give Democrats a legislative achievement to run on going into the tumultuous midterm elections. It would also allow Biden to say he delivered on his promise to address climate change.

Grid breaks down the most important parts of the Inflation Reduction Act below.

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Economy Lens

Raising revenue through tax enforcement and taxing stock buybacks

The tax policy provisions of the Inflation Reduction Act are a far cry from the initial ambitions of Democratic lawmakers. Gone are the headline increases of the corporate tax rate and any effort to raise the income taxes of wealthy individuals. The legislation necessary to implement a painstaking multinational agreement for a minimum rate of corporate taxation, which Treasury Secretary Janet Yellen negotiated, is not in this bill either.

And yet, when balanced against provisions to shore up Affordable Care Act subsidies and make the most aggressive and expansive investment in clean energy in American history, it still manages to reduce the federal deficit by around $300 billion over the next 10 years, according to preliminary numbers put out by Senate Democrats.


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How? There are three major revenue provisions in the bill, two of which affect taxation. Of the $739 billion of revenue raised over the next 10 years, more than $300 billion of it is estimated to come from a 15 percent minimum tax on corporations with over $1 billion in annual profits and $124 billion from increased tax enforcement.

While the headline corporate tax rate is 21 percent, many large American companies such as Amazon, FedEx and Oracle pay a tax rate below 21 percent, let alone 15. This is because the corporate tax system also includes a number of deductions and credits for things like research and development and even green energy investments that can bring corporate income taxes down.

According to an analysis of an earlier version of the bill from the office of Sen. Elizabeth Warren (D-Mass.), the 15 percent minimum tax would apply to about 200 U.S. companies.

One thing the minimum tax does not do is implement the global 15 percent minimum tax that Yellen helped negotiate in late last year. The agreement is supposed to reduce the ability of companies to move profits around the world to low-tax countries in order to lower their overall rate of corporate taxation. While versions of the necessary legislation to implement the agreement have been part of various Democratic legislative packages, it did not make it into the Inflation Reduction Act.

Larry Summers, a noted critic of the administration’s stimulus efforts who supports the Inflation Reduction Act, tweeted July 27 that the proposed legislation was “great” but called completing the international tax agreement “urgent unfinished business.”

The other major revenue-raising provision is increased funding for tax enforcement by the Internal Revenue Service, which Senate Democrats said would raise $124 billion over 10 years, citing a Congressional Budget Office report.

That is a net figure; the plan would raise IRS funding by around $80 billion and produce $200 billion in new revenue, the CBO estimated. Summers, a longtime advocate for closing the “tax gap” — the difference between what taxpayers owe according to the letter of the law and what they end up paying — was more optimistic (from the perspective of the federal budget, not from the perspective of large taxpayers). He said that the IRS provisions could “increase revenues by over a trillion dollars.”

One of the major changes to the bill came over the weekend when, at the insistence of Sen. Kyrsten Sinema, the Arizona Democrat, the bill was stripped of its attempt to modify the treatment of what is known as “carried interest” — the ability of managers of investment funds to pay the lower capital gains rates on investment profits for capital contributed by outside investors. While the original provision would not have fully eliminated the ability of investment managers to pay the lower rate, it would have narrowed it and was estimated to raise $14 billion. Instead, the bill includes a 1 percent tax on stock buybacks, which is estimated to raise around $75 billion over 10 years.

This wasn’t the last change to the bill that Sinema negotiated — the corporate tax provisions were adjusted so that they wouldn’t apply to companies owned by private equity firms, and the lost revenue was made up by limiting deductions on taxes paid by companies whose profits show up on individuals’ tax returns.

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Climate Lens

Rewiring the U.S. energy sector to cut climate emissions

Climate portions of the new Senate bill will result in a likely 40 to 42 percent cut in U.S. carbon emissions by 2030, in a massive push toward turning energy industries away from fossil fuels. Overall, the bill contains $369 billion in tax breaks and other climate incentives meant to kickstart a green economy.

“This is a historic victory for the United States and the planet,” said Hawaii Democrat Brian Schatz in a statement after the Senate vote. “We have met the ambition this crisis requires, and passed the biggest climate action in American history.”

In the next decade, tens of billions of dollars in tax incentives and other subsidies would be steered to wind, solar, geothermal and other green energy technologies by the bill. Nuclear plants, which don’t generate greenhouse gases, would receive subsidies to stay open (0.3 to 2.5 cents per kilowatt-hour of electricity a plant produces in a year), and coal and natural gas plants would be eligible for subsidies for installing devices to capture their emissions. There are incentives for “sustainable aviation fuel” and “clean hydrogen,” as well as for reducing leaks of methane, a potent greenhouse gas, from oil and gas infrastructure.

Middle- and low-income people would be eligible for a $7,500 tax credit to buy an electric car or $2,000 credits for more efficient heat pumps for their homes. Homeowners could receive $150 for a “home energy audit” telling them where they could make the most improvements for efficient heating, cooling and appliance use. Communities affected by air pollution would be eligible for grants from a $60 billion environmental justice fund.

In return, oil drillers will receive new sales of federal leases in the Gulf of Mexico and on federal lands, and natural gas pipelines would see faster permitting, a demand meant to placate fossil-fuel state senators like Joe Manchin, the central figure in the deal. The pipeline permit agreement comes in a side promise made by the administration and has been mentioned by Manchin in connection with the delayed Mountain Valley Pipeline, which will carry shale gas from his state, West Virginia, to the East Coast.

Overall, climate advocates have praised the deal, seeing any trade-offs for turning the energy sector toward clean technologies as a win. “This is the big gorilla, the one we had to have to set the economy on the path to a low-carbon future,” said Christina DeConcini, director of government affairs at the World Resources Institute. “It was the best-kept secret in Washington, D.C., and we are thrilled to cross our fingers and toes for it to happen, which looks likely.”

The estimated benefits of the bill bring the U.S. close to climate pledges made by the Biden administration and are seen as giving the country more credibility in international climate negotiations ahead. The congressional action comes a month after a Supreme Court decision limited the power of the Environmental Protection Agency to undertake such a wholesale rewiring of the energy industry through Clean Air Act regulation. To the surprise of many — especially after the recent defeat of a larger Build Back Better bill that contained even bigger climate incentives — Senate Democrats appear to have produced a deal that would significantly move the country toward a greener economy after decades of stalled efforts.

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Health Lens

New tactics for prescription drug prices

The biggest healthcare provision of the bill is one that would allow Medicare to negotiate some prescription drug prices, a long-standing goal for Democrats. The insurance program for seniors has historically been unable to negotiate prices, giving pharmaceutical companies the upper hand. They have argued that allowing Medicare to negotiate prices will stifle innovation. An analysis by the Congressional Budget Office estimates the provisions would save Medicare about $100 billion dollars over 10 years, reducing the number of drugs coming to market by 1 percent over the next 30 years.

Meanwhile, Medicare’s huge buying power could mean big price drops for certain drugs covered by the program; the new legislation would gradually make specific drugs subject to price controls over the next several years. “The short-term impact may not be all that dramatic, since the first-year negotiated prices would be available in 2026,” said Juliette Cubanski, deputy director of the Program on Medicare Policy at the Kaiser Family Foundation. But over time, “it will translate into big savings for the Medicare program and out-of-pocket costs for Medicare beneficiaries,” she said.

One big question mark before the bill hit the Senate floor was whether it would cap insulin costs. The price of insulin, which Type 1 diabetics need to survive and many Type 2 diabetics depend on as well, has skyrocketed, forcing some users to ration their supply. Democrats introduced an amendment to limit insulin costs to $35 per month for both Medicare recipients and people with private insurance. But only the Medicare price cap made it through to the final bill, as Republicans succeeded in removing the cap for private insurers. That leaves out the more than 1 in 5 insulin users who would’ve benefited from the price cap, according to a Kaiser Family Foundation analysis.

The Senate bill would cap out-of-pocket drug costs for seniors at $2,000 per year, which would be especially helpful to people who take extremely expensive drugs for conditions like cancer or multiple sclerosis. No cap on out-of-pocket spending currently exists. In 2020, Medicare beneficiaries spent an average of $6,200 on the cancer drug Revlimid, according to the Kaiser Family Foundation. “Starting in 2024, Medicare beneficiaries who face really high prescription drug costs will see relief,” said Cubanski.

The bill also extends the pandemic-related tax subsidies for health insurance coverage under the Affordable Care Act through 2025, pumping $64 billion into the program. Those subsidies, which were due to expire at the end of this year, help reduce health insurance premium costs for the 13 million people who buy insurance through public marketplaces. Had those subsidies not been extended, 8.9 million people would have to pay about $400 more each year, on average, in health insurance premiums.

Seniors and low-income adults on Medicaid would be able to get all adult vaccines for free under the bill, a significant change from previous plans. Currently, vaccine coverage under these programs is variable across states, with about half not requiring coverage of recommended vaccines for Medicaid beneficiaries. But with the rollout of free covid vaccines, the idea of making more shots free to low-income adults has gained favor — mirroring an existing program to make routine vaccinations free for low-income children.

Thanks to Lillian Barkley for copy editing this article.

  • Maggie Severns
    Maggie Severns

    Domestic Policy Reporter

    Maggie Severns is a policy reporter for Grid covering complex policy stories and major headlines.

  • Matthew Zeitlin
    Matthew Zeitlin

    Domestic Economics Reporter

    Matthew Zeitlin is an economics reporter at Grid focused on the domestic impact of major stories such as coronavirus, the supply chain and economic volatility.

  • Dan Vergano
    Dan Vergano

    Science Reporter

    Dan Vergano is a science reporter for Grid.

  • Jonathan Lambert
    Jonathan Lambert

    Public Health Reporter

    Jonathan Lambert is a public health reporter for Grid focused on how science, policy and the environment shape our collective well-being.

Contributors

The Inflation Reduction Act: What’s inside lawmakers’ once-in-a-generation stab at solving climate change