Democrats' $700 Billion Inflation Reduction Act Could Hurt US Consumers, Workers

Democrats' $700 Billion Inflation Reduction Act Could Hurt US Consumers, Workers
(L–R) Sen. Joe Manchin (D-W.Va.) talks with Senate Majority Leader Chuck Schumer (D-N.Y.) before a ceremony in the Eisenhower Executive Office Building in Washington on March 15, 2022. (Chip Somodevilla/Getty Images)
Joseph Lord

On July 27, Sen. Joe Manchin (D-W.Va.) announced that he had reached a deal with Senate Majority Leader Chuck Schumer (D-N.Y.) to pledge his support for a $700 billion spending bill, which is supposed to bring in $725 billion in new revenue to the federal government and reduce the deficit by $292 billion annually.

But critics looking inside the text of the bill have argued that a series of policies will likely serve only to further increase consumer prices, suppress wages, expand the scope of federal audits, decrease the value of retirement portfolios, reduce medical innovation, and further escalate already high energy prices.

The bill, dubbed the Inflation Reduction Act, was the product of a year of harried negotiations, compromises, and disappointments for Democrats as they tried to pass the much larger $1.75 trillion Build Back Better (BBB) Act.

Ultimately, Manchin killed the BBB bill in December 2021 when he said he would unilaterally refuse to vote for it over continuing concerns about rising inflation.

Despite standing strong for months on his declaration that BBB was "dead," the Inflation Reduction Act revived many of the Democrats' key priorities from BBB: new taxes on corporations, expansion of the IRS, prescription drug pricing policies, and wide-reaching climate policies.
Manchin's main demand in supporting any reconciliation bill—which under Senate rules is immune from the filibuster and thus can be passed along party lines—was that it reduce inflation and work toward getting the national debt under control.

Lower-Income People Will Still Pay More

A key claim for Democrats in both the BBB and the Inflation Reduction Act has been an emphasis that the bill will not raise taxes on households making less than $400,000 per year.

Technically, the Inflation Reduction Act's tax code changes include no alterations to individual income taxes for earners at any income level. Rather, the only "new" taxes in the bill target corporations and stock market investors, as well as other taxes intended to enforce Democrats' prescription drug pricing policy.

The most substantial new tax in the bill would impose a 15 percent minimum tax on corporations that bring in more than $1 billion in revenue annually.

Far from hurting only billionaires and megacorporations, these taxes will have an economy-wide effect, said Preston Brashers, a senior tax policy analyst at the Heritage Foundation, in an interview with The Epoch Times. Middle class Americans will be left to absorb the blow through lower wages and higher prices, he said.

“A brand can’t pay a tax,” Brashers said. “Technically, legally, the corporations are the ones paying taxes, but ultimately that has to be paid by people, one way or the other. It’s not like Jeff Bezos—if you tax Amazon—that this is coming out of Jeff Bezos’s pocket."

Brashers said the extra money would be coming out of everyone’s pocket that’s involved in the operation, whether it's a worker, a consumer who buys the products, or an investor with stocks or a 401(K).

"What they’re doing is they’re applying general taxes across the whole economy, and so everyone’s going to be caught up in it," he said.

Retirement Accounts Reduced in Real Value

In addition to potentially increasing prices and decreasing wages through the new corporate minimum tax, Democrats' bill would also target some stock sales—thus lowering the value of retirement portfolios like 401(k)s, IRAs, and pension plans.

Any retirement account with a value largely based in stock market shares will see its real value decline, as the bill would impose a new one percent excise tax on every corporate stock buyback.

In contrast to most stock sales, which take place between individuals on the open market, corporate buyback sales involve a corporation itself using cash to buy shares of its own stock back from investors, a practice which is often crucial to increasing the value of retirement portfolios.

Thus, though the nominal value of retirement portfolios will not decline, common corporate buyback stock sales will return less liquid cash to account holders.

Generally, in such sales investors benefit more than the company. But the new excise tax could dissuade corporations from continuing the practice, meaning slower growth for retirement accounts.

About 58 percent of Americans, rich and poor alike, have at least some stake in the stock market, according to a Gallup poll. More than 60 million American workers have a 401(k) retirement portfolio, in addition to about 14.83 million Americans with education savings accounts, according to the Education Data Initiative.
According to data from the nonpartisan Tax Foundation, retirement accounts make up the largest portion—approximately 37 percent—of the approximately $22.8 trillion in U.S. stocks.

The new excise tax would make no distinction between a $2 million portfolio and a $300,000 portfolio, meaning Americans at every income level will be affected by the tax.

Aside from the effect that these new taxes could have on the real value of Americans' retirement portfolios, critics, including the nonpartisan group Americans for Tax Reform, have warned that they could also decrease U.S. financial competitiveness with China, where such rules are not in place.

'Army' of 87,000 New IRS Agents

One of the biggest federal winners from new funding in the bill is the Internal Revenue Service (IRS), which stands to gain $80 billion—about six times its current budget—in new funding to hire what GOP critics have described as an "army" of new IRS agents.

Put into context, the ballooning of the IRS to hire 87,000 more tax agents would make the personnel list of the IRS longer than the Pentagon, the State Department, the FBI, and the Border Patrol.

Broken down, the roughly $80 billion appropriation to the IRS will go toward “necessary expenses for tax enforcement activities … to determine and collect owed taxes, to provide legal and litigation support, to conduct criminal investigations (including investigative technology), to provide digital asset monitoring and compliance activities, to enforce criminal statutes related to violations of internal revenue laws and other financial crimes … and to provide other services.”

The effort to expand the IRS is not popular with Republicans, who have generally opposed such efforts in the past.

“Democrats are scheming to double the size of the IRS by hiring an army of 87,000 new agents to spy on Americans,” wrote House Minority Leader Kevin McCarthy (R-Calif.) in an Aug. 4 tweet.

Inside the text of the tax and IRS sections of the bill, Democrats repeat their claim that the legislation will have no effect on the tax rate of households making less than $400,000.

"Nothing in this subsection is intended to increase taxes on any taxpayer with a taxable income below $400,000," the bill reads.

During an Aug. 9 White House press conference, press secretary Karine Jean-Pierre doubled down on this claim, saying that the expansion of the IRS includes no new audits on people making less than $400,000.

While this claim is technically true—the bill does not order new audits at any income level—neither does the bill explicitly prohibit audits on people or small businesses making less than $400,000 per year. Thus, the IRS—as it always has—will have substantially unilateral authority over whom it audits.

In the same interview, Brashers explained how, contrary to Democrats' claims, small businesses—including those making less than the $400,000 figure—will likely be hardest hit by the massive IRS expansion.

“If you look at the [dispersion] of audits right now, there’s a lot of audits that happen on the lower end,” he said. “Especially on the business side: if you’re a small business, a sole proprietor—if you’re running your own books—a lot of times the IRS looks at that as a prime target because you don’t have the accountants that are keeping everything buttoned down necessarily."

“If you’re a sole proprietor and you’re keeping your own books … it’s probably just going to be harder for you to keep up with the convoluted tax code," he said. "So, if anything, more of that weight is probably going to hit small businesses.”

Health Care Provisions Would Hinder Innovation

A key component of the bill for progressives has been its alteration of prescription drug pricing policy.

The bill allows Medicare to negotiate prices with drug companies, an option long available to private insurers. Republicans prohibited Medicare from doing this about 20 years ago.

The difference it that private insurers' negotiations are based on voluntary agreements between both parties. Pharmaceutical companies will have no choice under the legislation but to negotiate with the federal government upon the receipt of an offer from the secretary of the Department of Health and Human Services (HHS).

However, the bill makes very clear what will happen to companies that refuse to negotiate or to accept the price controls dictated by the HHS secretary: a massive 95 percent excise tax, designed more to enforce compliance than to raise revenue.

In a 2019 letter to Democrats, the Congressional Budget Office (CBO) warned that requiring drug companies to negotiate on the government's terms would substantially hamper medical innovation (pdf).
The CBO has suggested in its analysis of the current bill that as many as 50 percent fewer new drugs could come to market as a consequence of the bill’s health care provisions (pdf).

At the same time, the stated goal of the policy change—and of the bill as a whole—would only scantly be served by the Medicare changes.

The CBO estimated in its 2019 letter that the proposed changes “would reduce federal direct spending for Medicare by $345 billion over the 2023–2029 period.” This estimate comes out to annual spending reductions of only about $57.5 billion.

The worst case scenario, the CBO has warned, would be that pharmaceutical companies would simply pull out of the U.S. market entirely if they refused to accept the price controls, meaning that Americans would have access to fewer life-saving drugs.

Climate Taxes Will Increase Energy Costs

At a time when Americans are already reeling from a massive increase in the price of energy, particularly gasoline, the Inflation Reduction Act would impose a litany of new taxes on several of the most common types of energy in accordance with Democrats' climate policy ambitions.

Specifically, Democrats in support of the bill have cited various analyses suggesting that these policies would cause a net reduction in U.S. emissions of about 40 percent over the 2005 levels.

To achieve this goal, the bill would furnish major tax incentives to individuals and corporate entities that switch to renewable energy sources and more efficient appliances, but would also impose an array of taxes on fossil fuel energy sources.

First on the list of fossil fuel targets in the Inflation Reduction Act is a tax on methane, which is commonly used to heat homes during the winter. The CBO estimates in its analysis of the bill that this tax would raise about $6.5 billion in revenue—a negligible sum for the federal government, which spends more than that every single day.

But the effect on methane companies and on natural gas consumers would be far more pronounced.

In a letter to Congress advising against the tax, the American Gas Association (AGA) warned that consumers could see double-digit price increases as a result of the tax (pdf).

"New fees or taxes on energy companies will raise costs for customers, creating a burden that will fall most heavily on lower-income Americans," the AGA wrote. "These major new costs most likely will result in higher bills for natural gas customers, including families, small businesses, and power generators.

"In one scenario, we estimate that such a fee could result in the average customer seeing an approximate increase of 17 percent in their natural gas bill, or over $100 per year for the average American family. We also estimate that the proposal could put more than 100,000 American jobs at risk."

But methane is not the only fossil fuel targeted by the bill: crude oil and imported petroleum products would also see a new 16.4 cents-per-barrel tax.

For American consumers who have struggled to absorb the blow of increasing gas prices over the past year, this tax might only worsen the situation, and could cause a further hike in fuel prices.

As with the methane tax, the effect on federal revenue would come out to a negligible $12 billion, according to estimates by the Joint Committee on Taxation (pdf).

Finally, the bill would more than double the excise tax rate on coal—meaning that Manchin's West Virginia constituents, who rely on coal for about 90 percent of their energy, would be among the hardest hit by the change.

Specifically, the bill would raise the tax rate on subsurface mining of coal from its previous level of $0.50 per ton to $1.10 per ton, and would increase the tax rate on surface mining from $0.25 per ton to $0.55 per ton.

Taken together, these provisions could spell out across-the-board energy price hikes for all Americans, particularly during the transition period to other forms of energy incentivized by the bill.

What's Next for the Bill

After a hurried push through the Senate, Democrats in the upper chamber approved the bill in a 51–50 vote on Aug. 7.

In the past, Sens. Kyrsten Sinema (D-Ariz.) and Manchin, the two swing-voting members of the Democratic caucus in the upper chamber, have been the largest threat to the passage of any overly ambitious reconciliation bill from their party. As soon as the agreement was unveiled by Manchin and Schumer, Manchin vowed his support for the legislation, leaving a question mark only on Sinema.

Despite some hopes among critics that Sinema would hold out against the bill, denying it the 50 votes needed to activate Harris’ tie-breaking vote, her office announced late in the evening on Aug. 4 that Sinema had decided to back the bill.

The original draft of the bill would have closed the “carried interest loophole,” a tax code workaround that allows money managers to pay a lower tax rate than normal on profitable investments. This proposal, which was part of the original BBB plan, would have brought in another $14 billion in revenue, Democrats said.

As part of committing her support for the bill, Sinema demanded that this provision be removed, despite Manchin’s expressed demands that the provision remain in the bill. Democrat negotiators acceded to Sinema’s request, paving a way forward for the bill.

“We have agreed to remove the carried interest tax provision, protect advanced manufacturing, and boost our clean energy economy in the Senate’s budget reconciliation legislation,” Sinema said.

The last thing needed for the quick passage of the bill through the Senate was the approval of the Senate parliamentarian, a nonpartisan referee in the upper chamber whose go-ahead is necessary for reconciliation bills, After striking out a few minor provisions, Senate parliamentarian Elizabeth MacDonough gave the green light for the package as a whole, opening the way to its eventual passage on Aug. 7.

Now, it will head to the House for final approval.

Speaker of the House Nancy Pelosi (D-Calif.) has expressed support for the bill, and it is likely that the House will take up and pass the bill following its passage in the Senate.

Biden, likewise, is likely to sign it upon its approval by both chambers of Congress.