Inflation Reduction Act: What's In A Name?

Last year ended with a legislative surprise. After an interval of elevated government spending, the Build Back Better plan collapsed in the Senate. At the time, we speculated that the era of the open checkbook was over. Slow news from Capitol Hill through the first seven months of this year gave us no reason to expect a revival.

Then, earlier this month, Senate Democrats agreed upon a narrower reconciliation spending bill, passed with a filibuster-proof simple majority. The “Inflation Reduction Act” (or IRA—more on that name later) likely represents a concluding step in an expansive era for government spending.

Totaling $401 billion, green funding is the largest and broadest segment of the bill. This allocation will create new subsidies for household purchases of more efficient appliances, electric vehicles (EVs) and solar panels. It will also support research and investment in renewable energy generation and upgrades to the nation’s electric grids.

The bill also funds healthcare subsidies, to the tune of $98 billion. This allocation will serve primarily to limit cost increases for Affordable Care Act enrollees and Medicare recipients. Though not a direct outlay, starting in 2026, Medicare will be empowered to directly negotiate the prices of the most commonly-used drugs and limit price increases to no greater than the broader rate of inflation.

Chart: Composition of IRA (10 Yr. Totals) & IRS staffing and workload

Finally, the Internal Revenue Service will receive an additional $80 billion to modernize and enhance enforcement. Taxes are always a contentious topic, but the IRS’ backlog of over a year of returns and inability to audit complex returns are evidence of prolonged neglect. Projecting the return on this investment is difficult: The IRS has estimated the tax gap (the difference between taxes fairly owed and taxes paid) in a tremendous range of $441 billion to $1 trillion annually. Greater capacity to scrutinize complex returns will generate more tax revenue, while merely increasing the perceived risk of an audit will deter potential fraud. The Congressional Budget Office (CBO) estimates a yield of $200 billion in additional tax revenue over ten years.