How the So-Called “Inflation Reduction Act” Would Actually Hurt Americans’ Pocketbooks

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KEY FINDINGS

Overview

Inflation is at a 40-year high, gross domestic product (GDP) has been shrinking for two straight quarters, the stock market has tumbled, and labor force participation is hovering around a 45-year low.1-4 Despite the poor economic outlook under the leadership of President Joe Biden, congressional Democrats have advanced legislation that would take an even bigger bite out of Americans’ pocketbooks.

The so-called “Inflation Reduction Act” under consideration in Congress would not only fail to tame inflation, but it would actually increase reckless spending and raise taxes on hardworking Americans. As a result, consumers would pay more—to the IRS and on everyday goods and services.

Bidenflation has plunged the economy into a recession

The American economy faces major challenges across the board: skyrocketing inflation, a shrinking economy, a plunging stock market, and too few workers. Inflation soared to a 40-year high in June 2022, reaching 9.1 percent.5 The Biden administration initially denied that there was even a risk of inflation, then, once it became apparent prices were rapidly rising, pivoted to promises that it would be “temporary” or “transitory.”6 Since then, the Biden administration has blamed Russia’s invasion of Ukraine, oil companies, “corporate greed,” and small business owners running local gas stations.7

Rising inflation has had a serious impact on economic growth. The American economy shrank in the first half of 2022, with GDP declining by 1.6 percent in the first quarter and 0.9 percent of the second quarter.8 Faced with this shrinking economy, the Biden administration has attempted to simply redefine the word “recession,” a strategy that harkens back to the administration’s initial denials of an inflation crisis.9

The current recession has wiped out trillions of dollars in American workers’ retirement savings.10 All of the major stock market indices—including the S&P 500, NASDAQ, Dow Jones Industrial Average, Russell 2000, and the New York Stock Exchange composite—have seen massive, double-digit declines in 2022.11-15 Americans have lost more than $7 trillion in wealth from S&P 500 companies alone this year.16-17

Despite these economic troubles, President Biden and congressional Democrats have put forward a plan that would make these problems even worse. The so-called “Inflation Reduction Act” would increase inflation, appropriate billions of dollars in new federal spending, hike taxes on the middle class, and shrink the economy even further.

The “Inflation Reduction Act” would increase inflation, not reduce it

Despite its name, the “Inflation Reduction Act” would do nothing to tame the inflation crisis and would instead make inflation even worse. The Wharton School of Business, for example, estimates that the plan would have no statistically significant effect on reducing inflation, now or in the future.18 In fact, the legislation would actually increase inflation over the next two years as new spending measures go into effect.19 Indeed, the combination of frontloaded spending hikes and higher taxes in the legislation would undoubtedly result in higher prices for consumers.

Worse yet, the legislation has provisions that would directly hurt Americans’ wallets in the most critical areas. President Biden’s regulatory war on American energy has already added fuel to the inflation fire, with Americans paying the price for those regulatory actions at the gas pump and on their electric bills.20 Gas prices have skyrocketed by nearly 90 percent since President Biden took office, even after falling from record highs in June 2022.21

But the “Inflation Reduction Act” would make matters even worse, increasing royalties for both offshore and onshore drilling activities in the name of curbing climate change.22 Similarly, the legislation imposes billions of dollars in additional taxes on crude oil, implements new taxes that would hike consumers’ natural gas bills, doubles taxes on coal, and subjects energy companies to some of the highest taxes of any businesses in the nation.23-25 Unfortunately, these costs will inevitably be passed along to consumers in the form of higher gas prices and higher utility bills.26

The proposal also does nothing to address or even acknowledge Congress and the Biden administration’s recent spending in other areas. In July 2022, for example, Congress passed the $280 billion CHIPS and Science Act, which included billions of dollars in subsidies and research.27 Congress is also poised to pass the $280 billion PACT Act to address health care benefits for certain veterans.28 And extending the student loan payment pause is also on the administration’s radar, yet another multi-billion-dollar expense.29 These recent spending policies more than offset the promised deficit reduction measures, even if those savings were not based on budget gimmicks—which they are.30-32

The “Inflation Reduction Act” is nothing more than a thinly veiled attempt to pass pet priorities ahead of the midterm elections under the guise of reducing inflation. In reality, it is reckless congressional spending and raises costs for consumers.

The “Inflation Reduction Act” would increase reckless spending

Under the “Inflation Reduction Act,” hundreds of billions of dollars in reckless new spending would be dedicated to wish list items ahead of the midterm elections. This includes $385 billion towards “green” energy subsidies and credits, $65 billion to expand wasteful ObamaCare subsidies for an additional three years, and $35 billion for an expansion of Medicare, among other measures.33-35

Several of these items are part of the Biden administration’s long-term goal to dramatically increase the size, scope, and cost of the federal government. For example, the expansion of ObamaCare subsidies has already driven-up premiums, crowded out employer health coverage, increased inflation, and been geared towards the financially well-off over the most vulnerable.36 The long- term goal is not to just expand these subsidies for three years under the “Inflation Reduction Act,” but to make them permanent.37 The Congressional Budget Office predicts that permanently extending the expanded ObamaCare subsidies would increase the federal deficit by $250 billion over the next decade.38

The legislation would also dedicate roughly $80 billion to the Internal Revenue Service (IRS) for hiring more auditors and increasing tax enforcement.39 Under the plan, the IRS would spend nearly 70 percent more over the next decade on tax enforcement.40 Giving more manpower to the IRS to go after Americans is the last thing taxpayers need when faced with a rising cost of living and a struggling economy. This will only serve to excuse further tax-and-spend programs by Congress.

Unsurprisingly, the negative effects of this reckless spending on the economy will be clear and harsh: The Tax Foundation estimates that, if the legislation is passed, both long-run GDP and wages would decline, while 30,000 full-time jobs would be lost.41

The “Inflation Reduction Act” would hike taxes on Americans, especially the working and middle classes

In addition to a weaker economy, Americans across all income groups will face higher taxes. This proposal would break President Biden’s campaign promise not to raise taxes on individuals earning less than $400,000.42

Next year alone, the effects of the legislation will raise taxes on every single income category, including those earning less than $10,000 per year.43 In fact, those earning less than $10,000 per year will face a higher tax hike than millionaires under the legislation.44 The proposal would hike taxes on Americans earning less than $200,000 per year by a whopping more than $16.5 billion next year alone.45 By the end of the decade, roughly half of the new taxes raised by the plan would come from families earning less than $200,000.46-47

In total, the “Inflation Reduction Act” will increase taxes and tax collections by roughly $470 billion.48 In addition to the increased size and scope of the IRS and higher fees on gas and oil, the legislation would impose a 15 percent minimum corporate tax rate.49 Undoubtedly, these increases would eventually be passed along to American consumers in the form of higher prices.

Ironically, the same manufacturers Congress recently voted to subsidize via the CHIPS and Science Act will face some of the highest tax consequences of the proposed “Inflation Reduction Act.” Half of the entire burden of the new minimum corporate tax would fall on manufacturers—including computer chip manufactures, far higher than any other industry.50

Unfortunately, the higher prices Americans face will only be worsened by higher taxes under the “Inflation Reduction Act.”

THE BOTTOM LINE: Congress should reject the so-called “Inflation Reduction Act”

Instead of continuing down the path of reckless spending and higher taxes that will raise costs for Americans rather than taming inflation, Congress should take meaningful steps to actually get its fiscal house in order. For example, Congress should allow the expanded ObamaCare subsidies to expire on time, which are currently costing billions of dollars each year in deficit spending.51

Congress should also consider adopting the REINS Act to curtail costly federal regulations that impose unnecessary restrictions on the American economy and drive up both federal spending and costs for businesses and consumers.52

Americans do not need budget gimmicks, higher taxes, and more spending. Instead, they need Congress to exercise fiscal discipline and avoid making life more costly for consumers.

REFERENCES

1. Inflation hit a 40-year high in 2022. See, e.g., Jonathan Ingram et al., “Congress must rein in President Biden’s regulatory spending spree to tame inflation,” Foundation for Government Accountability (2022), https://thefga.org/paper/congress-must-rein-spending-to-tame-inflation.

2. Real GDP has fallen for two consecutive quarters. See, e.g., Bureau of Economic Analysis, “Gross Domestic Product: Second quarter 2022 (advance estimate),” U.S. Department of Commerce (2022), https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022-advance-estimate.

3. Carmen Reinicke, “Stocks fall a second day on U.S.-China tensions, hawkish comments from Fed leader,” CNBC (2022), https://www.cnbc.com/2022/08/01/stock-futures-are-flat-after-first-trading-day-in-august.html.

4. Labor force participation remains near a 45-year low. See, e.g., Hayden Dublois and Jonathan Ingram, “The ‘Bidenflation’ crisis: How expanded welfare benefits and labor shortages are driving up prices,” Foundation for Government Accountability (2022), https://thefga.org/paper/bidenflation-crisis.

5. Jonathan Ingram et al., “Congress must rein in President Biden’s regulatory spending spree to tame inflation,” Foundation for Government Accountability (2022), https://thefga.org/paper/congress-must-rein-spending-to-tame.inflation.

6. Ibid. 

7. Ibid. 

8. Bureau of Economic Analysis, “Gross Domestic Product: Second quarter 2022 (advance estimate),” U.S. Department of Commerce (2022), https://www.bea.gov/news/2022/gross-domestic-product-second-quarter-2022.advance-estimate.

9. Joseph A. Wulfsohn, “Biden White House talking points redefining recession quickly embraced by media outlets,” Fox News (2022), https://www.foxnews.com/media/biden-white-house-talking-points-redefining-recession-quickly.embraced-media-outlets.

10. Breck Dumas and Jon Michael Raasch, “Retirement accounts lose trillions in stock rut,” Fox Business News (2022), https://www.foxbusiness.com/markets/retirement-accounts-lose-trillions-stock-rut.

11. The S&P 500 had fallen to 4,130.29 by July 29, 2022, down from 4,766.18 on December 31, 2021. This is an annualized loss of approximately 22 percent. See, e.g., Yahoo Finance, “S&P 500 (^GSPC),” Yahoo Finance (2022), https://finance.yahoo.com/quote/%5EGSPC.

12. The NASDAQ composite had fallen to 12,390.69 by July 29, 2022, down from 15,644.97 on December 31, 2021. This is an annualized loss of approximately 33 percent. See, e.g., Yahoo Finance, “NASDAQ Composite (^IXIC),” Yahoo Finance (2022), https://finance.yahoo.com/quote/%5EIXIC.

13. The Dow Jones Industrial Average had fallen to 32,845.13 by July 29, 2022, down from 36,388.30 on December 31, 2021. This is an annualized loss of approximately 16 percent. See, e.g., Yahoo Finance, “Dow Jones Industrial Average (^DJI),” Yahoo Finance (2022), https://finance.yahoo.com/quote/%5EDJI.  

14. The Russell 2000 had fallen to 1,885.23 by July 29, 2022, down from 2,245.31 on December 31, 2021. This is an annualized loss of approximately 26 percent. See, e.g., Yahoo Finance, “Russell 2000 (^RUT),” Yahoo Finance (2022), https://finance.yahoo.com/quote/%5ERUT.

15. The New York Stock Exchange composite had fallen to 15,327.71 by July 29, 2022, down from 17,164.13 on December 31, 2021. This is an annualized loss of approximately 18 percent. See, e.g., Yahoo Finance, “NYSE Composite Index (^NYA),” Yahoo Finance (2022), https://finance.yahoo.com/quote/%5ENYA.

16. Paul R. La Monica, “More than $7 trillion has been wiped out from the stock market this year,” CNN (2022), https://www.cnn.com/2022/05/12/investing/stocks-bear-market/index.html.

17. Vivien Lou Chen, “‘Growth scare’ strikes U.S. stocks as estimated $5 trillion to $8 trillion of household wealth evaporates in five months,” Market Watch (2022), https://www.marketwatch.com/story/growth-scare-permeates-u-s.stocks-as-estimated-5-trillion-to-8-trillion-of-household-wealth-evaporates-in-five-months-11653073692.

18. Penn Wharton Budget Model, “Inflation Reduction Act: Preliminary estimates of budgetary and macroeconomic effects,” University of Pennsylvania (2022), https://budgetmodel.wharton.upenn.edu/issues/2022/7/29/inflation.reduction-act-preliminary-estimates.

19. Ibid. 

20. Jonathan Ingram et al., “Congress must rein in President Biden’s regulatory spending spree to tame inflation,” Foundation for Government Accountability (2022), https://thefga.org/paper/congress-must-rein-spending-to-tame.inflation.

21. Gas prices averaged $2.46 per gallon in the week ending January 18, 2021, peaked at $5.11 per gallon in the week ending June 13, 2022, and remained at $4.60 per gallon in the week ending July 18, 2022. See, e.g., Energy Information Administration, “Weekly U.S. all grades all formulations retail gasoline prices,” U.S. Department of Energy (2022), https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=pet&s=emm_epm0_pte_nus_dpg&f=w.

22. Daren Bakst et al., “’Inflation Reduction Act’ is euphemism for big government socialism, higher prices,” Heritage Foundation (2022), https://www.heritage.org/budget-and-spending/commentary/inflation-reduction-act.euphemism-big-government-socialism-higher.

23. Alex Durante et al., “Details and analysis of the senate Inflation Reduction Act tax provisions,” Tax Foundation (2022), https://taxfoundation.org/inflation-reduction-act.

24. Institute for Energy Research, “The Manchin/Schumer “Inflation Reduction Act of 2022” will inflate fossil energy costs for Americans,” Institute for Energy Research (2022), https://www.instituteforenergyresearch.org/fossil.fuels/the-manchin-schumer-inflation-reduction-act-of-2022-will-inflate-fossil-energy-costs-for-americans.

25. America’s State Coal Associations, “The Schumer-Manchin agreement bad for American coal,” America’s State Coal Associations (2022), https://s3.amazonaws.com/wvmetro-uploads-prod/2022/08/Consolidated-Opposition-Manchin-Schumer-FINAL.pdf.

26. Alex Durante et al., “Details and analysis of the senate Inflation Reduction Act tax provisions,” Tax Foundation (2022), https://taxfoundation.org/inflation-reduction-act.

27. Brian Bushard, “CHIPS Act passes: House approves $280 billion bill to boost microchip production and counter China,” Forbes (2022), https://www.forbes.com/sites/brianbushard/2022/07/28/chips-act-passes-house-approves.280-billion-bill-to-boost-microchip-production-and-counter-china/?sh=711de3132bfd.

28. Chip Roy, “Rep. Roy explains how the PACT Act harms both veterans and America’s future,” U.S. Representative Chip Roy (2022), https://roy.house.gov/media/press-releases/rep-roy-explains-how-pact-act-harms.both-veterans-and-americas-future.  

29. CFRB, “Extending the Student Loan Payment Pause is Bad Policy,” Committee for a Responsible Federal Budget (2022), https://www.crfb.org/blogs/extending-student-loan-payment-pause-bad-policy.

30. Congressional Budget Office, “Estimated Budgetary Effects of H.R. 5376, the Inflation Reduction Act of 2022, as amended in the Nature of a Substitute (ERN22335) and posted on the website of the Senate Majority Leader on July 27, 2022,” Congressional Budget Office (2022), https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3.22.pdf.

31. The proposal currently extends the American Rescue Plan subsidies for only three years. Permanently extending those subsidies would cost nearly $250 billion. See, e.g., Phillip Swagel, “Health insurance policies,” Congressional Budget Office (2022), https://www.cbo.gov/system/files/2022-07/58313-Crapo_letter.pdf.  

32. The CBO score includes more than $122 billion in savings from repealing a drug rebate rule issued under the Trump administration that was frozen by the Biden administration and never implemented. See, e.g., Congressional Budget Office, “Estimated budgetary effects of H.R. 5376, the Inflation Reduction Act of 2022, as amended in the Nature of a Substitute (ERN22335) and posted on the website of the Senate Majority Leader on July 27, 2022,” Congressional Budget Office (2022), https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3-22.pdf.

33. Congressional Budget Office, “Estimated budgetary effects of H.R. 5376, the Inflation Reduction Act of 2022, as amended in the Nature of a Substitute (ERN22335) and posted on the website of the Senate Majority Leader on July 27, 2022,” Congressional Budget Office (2022), https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3.22.pdf.

34. Penn Wharton Budget Model, “Inflation Reduction Act: Preliminary estimates of budgetary and macroeconomic effects,” University of Pennsylvania (2022), https://budgetmodel.wharton.upenn.edu/issues/2022/7/29/inflation.reduction-act-preliminary-estimates.

35. Alex Durante et al., “Details and analysis of the senate Inflation Reduction Act tax provisions,” Tax Foundation (2022), https://taxfoundation.org/inflation-reduction-act.

36. Hayden Dublois, “Broken Promises: Why Expanded ObamaCare Subsidies Must Expire On-Time,” Foundation for Government Accountability (2022), https://thefga.org/paper/obamacare-subsidies-must-expire-on-time/.

37. Robert King, “White House aims to permanently extend ACA subsidy boost as part of $1.8 trillion package,” Fierce Healthcare (2021), https://www.fiercehealthcare.com/payer/white-house-aims-to-permanently-extend-aca.subsidy-boost-as-part-1-8-trillion-package.

38. Philip Swagel, “Health insurance policies,” Congressional Budget Office (2022), https://www.cbo.gov/system/files/2022-07/58313-Crapo_letter.pdf.

39. Congressional Budget Office, “Estimated budgetary effects of H.R. 5376, the Inflation Reduction Act of 2022, as amended in the Nature of a Substitute (ERN22335) and posted on the website of the Senate Majority Leader on July 27, 2022,” Congressional Budget Office (2022), https://www.cbo.gov/system/files/2022-08/hr5376_IR_Act_8-3.22.pdf.

40. Brendan McDermott, “IRS-related funding in the Inflation Reduction Act,” Congressional Research Service (2022), https://crsreports.congress.gov/product/pdf/IN/IN11977.

41. Alex Durante et al., “Details and analysis of the senate Inflation Reduction Act tax provisions,” Tax Foundation (2022), https://taxfoundation.org/inflation-reduction-act.

42. Andrew Solender, “Biden promises ‘no new taxes’ on incomes under $400,000, ‘mom and pop’ businesses,” Forbes (2020), https://www.forbes.com/sites/andrewsolender/2020/08/23/biden-pledges-no-new-taxes-on-incomes.under-400000-mom-and-pop-businesses/?sh=34b554447502.

43. Joint Committee on Taxation, “Distributional effects of Title I – Committee on Finance of an Amendment in the Nature to Substitute H.R. 5376, The ‘Inflation Reduction Act of 2022,’” U.S. Senate Committee on Finance (2022), https://www.finance.senate.gov/imo/media/doc/jct_distributional_effects_inflation_reduction_act.pdf.

44. Ibid. 

45. Ibid. 

46. Ibid. 

47. In 2031, approximately $2.4 of the $4.9 billion in new revenue stemming from the bill would come from tax filers with $200,000 or less in annual income. 

48. CFRB, “What’s In the Inflation Reduction Act?,” Committee for a Responsible Federal Budget (2022), https://www.crfb.org/blogs/whats-inflation-reduction-act.

49. Ibid. 

50. Thomas Barthold, “Proposed book minimum tax analysis by industry,” Joint Committee on Taxation (2022), https://www.finance.senate.gov/imo/media/doc/jct_analysis_book_minimum.pdf.

51. Hayden Dublois, “Broken Promises: Why Expanded ObamaCare Subsidies Must Expire On-Time,” Foundation for Government Accountability (2022), https://thefga.org/paper/obamacare-subsidies-must-expire-on-time/.  

52. Jonathan Ingram et al., “Congress must rein in President Biden’s regulatory spending spree to tame inflation,” Foundation for Government Accountability (2022), https://thefga.org/paper/congress-must-rein-spending-to-tame.inflation/.