Inside the Inflation Reduction Act

On August 16, 2022, President Biden signed into law the Inflation Reduction Act (the Act or IRA). Enacted in both the Senate and the House by narrow margins on party-line votes, the expansive legislation makes major federal investments designed to reduce US greenhouse gas emissions and combat climate change; catalyze US domestic clean energy, development, deployment, and expansion; and enhance US energy security.  It also makes substantial changes to federal prescription drug financing with significant implications for the pharmaceutical industry, Medicare and Medicaid recipients and others.

To finance these new expenditures and $300 billion in deficit reduction, the new law imposes a new minimum tax on the income of larger corporations, creates a new excise tax on public corporation stock buybacks, and provides substantial additional funding for IRS enforcement, operations, and modernization.

The IRA is a significantly pared and revised version of the previously proposed, multi-trillion-dollar Build Back Better bill.  It is the product of an unexpected late compromise among congressional Democrats that allowed the bill to pass the Senate by the narrowest possible margin, through the budget reconciliation process.  Much smaller than prior proposals, the IRA is nonetheless extraordinary legislation, with a price tag of approximately $737 billion and the potential to achieve up to a 50-percent reduction in US GHG emissions by 2030.

Unprecedented funding for clean energy and climate change abatement and changes to prescription drug financing

The Act aims to advance decarbonization and clean energy goals through a spectrum of expanded and new tax credits, incentives, and other measures aimed at increasing clean and renewable energy innovation, development, manufacturing, generation, distribution, and use in the United States. 

Authorizing almost $370 billion in clean energy and decarbonization expenditures over 10 years – the largest investment in addressing climate change in the nation’s history, and the first major federal environmental law in more than 30 years – the historic law also seeks to enhance US energy security and spur the development of a robust domestic energy production and storage supply chain. For a detailed description and analysis of the IRA’s extensive clean energy provisions, please see our alert Clean energy provisions of the IRA. For details on the IRA’s additional environmental provisions, see The historic Inflation Reduction Act makes significant changes to federal environmental law and programs.

New clean vehicle tax credits for electric vehicle purchasers

The IRA revises and expands tax credits for electric vehicles (EVs) by providing a new tax credit of $4,000 for the sale of used electric cars and extends tax credits of up to $7,500 on certain new EVs. To qualify for the revised "clean vehicle credit," electric vehicles must meet several conditions. For details and analysis regarding the Act’s electric vehicle and EV manufacturing and supply chain provisions, please see our alert Inflation Reduction Act would jumpstart electric vehicle market.

Changes affecting federal healthcare financing: Prescription drugs and ACA subsidy

In addition to the IRA’s unprecedented energy and climate change provisions, the new law also makes significant changes to public healthcare financing. 

For the first time, the Department of Health and Human Services is authorized to negotiate prices of prescription drugs covered by Medicare and Medicaid, starting with 10 drugs in 2026 and increasing to 20 drugs in 2029 and thereafter.

The IRA also will implement several limits on Medicare beneficiaries’ out-of-pocket costs and co-pays for prescription drugs (including insulin) and restrict annual drug price increases for the Medicare program to the general rate of inflation. The Act also extends for another three years premium payment assistance (refundable tax credit) for approximately 13 million people who obtain health insurance via Affordable Care Act public marketplaces.

 For further details and analysis of the IRA’s prescription drug and healthcare finance provisions, please see our alert Inflation Reduction Act makes substantial changes to federal healthcare laws.

Beyond the energy, climate, and healthcare programs and expenditures, the new law also dedicates $300 billion for federal budget deficit reduction, and $80 billion for IRS modernization and increased tax enforcement, including approximately 87,000 new IRS employees. Views are mixed as to whether and when the law will reduce inflation as suggested by its moniker, with the Congressional Budget Office estimating that the law will have no statistically significant effect on inflation.

Significant changes to corporate taxes and prescription drug pricing

The IRA pays for the panoply of energy, climate change, healthcare, and other incentives and subsidies, as well as deficit reduction, primarily through a few substantial changes to federal tax law. 

Chief among those changes is the imposition of a modified and expanded minimum tax of 15 percent on corporations with annual income of $ 1 billion or more, including foreign corporations with at least $100 million in US-based annual income.  The Act also creates a one percent excise tax on stock buybacks by publicly traded corporations.  Both provisions take effect after December 31, 2022.  For details and analysis of the Act’s corporate tax provisions, please see our alert The Inflation Reduction Act becomes law: An overview of the tax law changes.

As discussed above, the IRA also seeks to increase revenue collection and efficiency by providing substantial additional funding for IRS enforcement, modernization, and operations.  Significantly, the new law does not include a number of other proposed tax law changes, such as changes to the tax treatment of carried interest, modification of deduction limits for state and local taxes (SALT), or the recently negotiated global minimum corporate tax.

For further information or assistance regarding the IRA and its effects, challenges, and opportunities, please contact Paul Hemmersbaugh, Gwen Keyes Fleming (environmental); Jim Greenwood or Jamie Gregorian (life sciences regulatory); Evan Migdail or Melissa Gierach (tax); Steven R. Phillips (federal government affairs and EV incentives); Vanessa Richelle Wilson (clean energy-related credits and incentives); or your regular DLA Piper contact.

Learn more about these developments in these concise alerts examining business-critical aspects of the IRA: