The Inflation Reduction Act of 2022

August 24, 2022

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The Inflation Reduction Act of 2022

As most of you have heard, President Biden has recently signed The Inflation Reduction Act of 2022 after it passed the Senate and House last week. So what does this new Bill mean to you the investor?

First off, lets realize that the stock market acts like a big baby when it doesn’t get its way.  Since news of this passing through the legislative process broke, the stock market has not moved a whole lot, it fact it has actually been up slightly over the past 3 weeks.  That tells me that this bill is not a huge concern for the stock market or publicly traded companies in general.  If it was, you would have seen a drop in the market and/or a lot of market volatility.  With that being said, I want to touch on a few key points of this bill.

On the tax side, the bill would impose a 15% corporate alternative minimum tax aimed towards corporations that have been able to shrink their tax burden far below the current 21% rate. Again, the stock market didn’t move a whole lot, so this may not affect corporate profits a whole lot.  The bill also imposes a 1% tax on the amount that companies use to buy back their own company stock, which will generate additional tax revenues.  Again, this additional tax did not shake up the stock market.

The bill would also spend $80 billion on boosting the IRS’ tax enforcement and compliance capabilities.  This should help to improve its customer service and tax enforcement as this investment could help alleviate some of the challenges with long response times or getting tax refunds processed. It could also increase collection of taxes that are currently owed but go unpaid.

One of the biggest changes you may feel effects prescription drug laws.  The U.S. government is now able to negotiate prices on the costliest prescription drugs, cap costs at $2,000 per year for people on Medicare, limit the monthly cost of insulin to $35 for seniors, and extend subsidies for people buying their own health coverage through the Affordable Care Act, also known as Obamacare. The law also provides free vaccines for seniors.

Starting in 2026, Medicare will begin negotiating the price of 10 drugs (which is expected to be made public in 2023). The negotiation process applies to drugs covered under Medicare Part D that lack a generic or comparable alternative, though drugs under Medicare Part B will eventually be included.

This bill will also provide a $7,500 tax credit for new purchases of electric vehicles, though most EVs won't qualify because the legislation requires them to include batteries with U.S. materials.

This legislation also significantly expands a tax credit for homeowners who invest in energy-efficient equipment, from a one-time $500 credit to $1,200 that a homeowner could claim each year. Both of these incentives will take effect in 2023.

So how does this bill reduce inflation?  Theoretically, there are three main ways the bill targets rising prices.  First, it plans to reduce the federal deficit. When there's less money floating in the economy, there tends to be less demand and fewer price hikes.  Second, it will promote the production of certain goods, mainly in renewable energy. Having more supply than demand could help lower some costs over time.  Third and more directly, one provision of the bill will help limit the price growth of certain prescription drugs as discussed.

While I feel that this bill may be a good start to fighting inflation (prescription drugs mainly), I feel that some of the biggest drivers of inflation, including food and energy costs, are not immediately addressed.  Time will tell – so stay tuned.


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