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What is the Inflation Reduction Act?

By Sara Kraft

Last month, the US government passed the Inflation Reduction Act, or IRA, which may be the most significant piece of legislation issued by the United States government in over 50 years. The IRA seeks to address and ease the lifestyle changes necessitated by four major issues facing US households: income inequality, climate change, health care, and inflation. The IRA is the largest investment made by any government toward confronting climate change to date. The bill seeks both to reduce carbon emissions and make the United States a world leader in clean energy technology, using these investments to help combat the effects of inflation.[1] The estimated cost of these lofty ambitions is $737 billion dollars, paid for primarily, the Biden Administration claims, through the profits of prescription drug pricing reform and IRS tax enforcement, not new revenue sources.[2] No new government debt will be issued to pay for the bill, and, in fact, deficit reduction is included in its goals. Although a heavily politicized issue, we at AFC believe that an $80 billion investment in green technology by the US government represents a significant opportunity for the well-poised investor to benefit over the next decade.

Experts debate what the bill’s actual impact on the rate of inflation will be. Marc Goldwein, economist at the Committee for a Responsible Federal Budget, told Yahoo! News in an interview, “Really, this is a 2023, 2024, 2025 game… What this is supposed to do is help stop inflation from persisting over the long term.” [3] Of course, with climate change a major theme of the Inflation Reduction Act – the goal is to reach net zero carbon emissions in America by 2050 – many of the intended impacts of the bill won’t be noticeable for several years. The IRA does still seek to provide some short-term inflation relief to families by reducing prescription drug costs, providing home energy savings, and offering tax credits toward investing in electric vehicles.

More specifically, in the shorter term, the bill extended a provision in the Affordable Care Act which will keep healthcare premiums down for 13 million low-income Americans. Reducing prescription drug costs is largely a longer-term goal, with “a major provision allowing Medicare to negotiate for prescription drug prices not [going into effect] until 2026.”[4] Likewise, in order to lower the price of gas for drivers on the road in 2022, the bill offers an olive-branch to traditional fossil fuel companies by providing provisions to increase domestic oil production in the short-term. A new methane emissions reduction program will push natural gas providers to react more quickly to leaks and decrease the waste associated with the fossil fuels currently vital to American industry.

Also immediately taking affect are clean energy credits to incentivize an upgrade to greener technologies in homes and businesses. A 30% tax credit is available for families upgrading their homes, appliances, and vehicles to be more energy efficient. Another credit will help foot the upfront costs of upgrading or installing solar panels on homes and businesses. Existing electric car tax credits have been extended indefinitely. In the long-term, these lifestyle changes will not only help to save households money on their utilities, but, by removing the old, methane- and oil-burning models common in most American homes, will also impact overall carbon emissions. It is possible that all of these measures will have a relieving effect on the impact of inflation, but only time will tell.

However, all tax credits mentioned above are, controversially, only offered if the manufacturer meets new “Made in America” standards. NPR's Arezou Rezvani elaborated in an interview, “If you want to qualify for the full $7,500 [credit] today, the car has to be assembled in North America. And this one requirement alone has already disqualified dozens of EVs from the tax credit… Those all-important EV batteries - not only must some of the components be in North America. A lot of what's in those batteries have to come from the U.S. or a trading partner… [This] is part of a really big push to reorient the supply chain and bring production back to the U.S. The administration wants to reduce dependency on China.”[5]

Government-mandated changes to the supply chain are, for good reason, deeply controversial. From AFC’s perspective, this decision may actually represent a boon for investors who, like us, prefer domestic holdings in our portfolios to foreign. This bill designates a large portion of its dollars toward “non-prescriptive” funding. The EPA Administrator Michael Regan explained, “A lot of these grant dollars [are given] to community groups who are partnering with universities and incubation centers. The matching dollars and low-interest loans are available to people who have never been at the table. If we get these universities and these incubation centers really tackling these issues with community groups on the ground, these solutions can look 1001 different ways.”[6] AFC’s philosophy has long been that we believe the solutions to the climate crisis will come from developing and investing in new cutting-edge ideas. It seems the lawmakers behind the Inflation Reduction Act agree.

In all, the expected cost of the Inflation Reduction Act is about $737 billion. The Biden Administration intends to afford the bill primarily through reduction of spending and diversion of those funds. Specifically, through repealing the drug rebate rule, the IRA will allow Medicare to negotiate prescription drug prices. Americans pay two- to three-times what other countries pay for drugs. This alone is estimated to save Medicare between $100 and $300 billion over the next ten years without cutting benefits.[7] Those funds will be funneled toward paying for other aspects of the IRA.

The Inflation Reduction Act will empower the IRS to begin closing tax loopholes as another means of funding the legislation. In 2021, 55 major corporations paid no taxes, and the top 1% of earners evaded paying $175 billion in taxes. The IRA will invest $80 billion into the IRS to hire more agents and purse that lost income. This investment will pay for itself and fund an addition $124 billion for the IRA over the long-term. A loss limit deduction extension, aiming to prevent those same high-income earners from deducting certain losses and artificially lowering their income, is expected to bring in another $52 billion.[8] A 15% minimum tax on corporations making over $1 billion annually and a new 1% excise tax on stock buybacks would raise $222 billion of the funding for the IRA.[9] No additional money will be printed to pay for the Inflation Reduction Act at all.

When choosing stocks, AFC looks for those companies producing a quality product or service with prospects for significant growth. Finding the winning companies that will come from this investment by the US government in “the clean technology revolution” may, in our opinion, be a big win for investors. Over the next ten years, this bill will invest around $80 billion dollars in green energy technology alone. That is four times what was invested in climate change and green technology between 2009 and 2017.[10] Think of the significant advances we made during the last decade; with such a massive investment in 2022, we believe that growth could become exponential.

AFC is optimistic what the Inflation Reduction Act means for American industry and our climate both.

Notes:[1] The Biggest Climate Bill of Your Life - But What Does It DO!? YouTube. vlogbrothers, 2022. [2] Conde, Arturo. “Inside Biden's $740 Billion Inflation Reduction Act.” SmartAsset. SmartAsset, August 18, 2022. [3] Werschkul, Ben. “Inflation Reduction Act: 4 Ways It Will Kick in Right Away.” Yahoo! News. Yahoo!, August 16, 2022.

[4] Werschkul, 2022.

[5] Kelly, Mary Louise. Interview with Arezou Rezvani. “What the Inflation Reduction Act means for electric car buyers and auto companies”. NPR, August 19, 2022.

[6] vlogbrothers, 2022.

[7] “IRA Would Lower Medicare Costs, Not Cut Benefits.” Committee for a Responsible Federal Budget, August 2, 2022.

[8] Werschkul, 2022.

[9] Conde, 2022.

[10] vlogbrothers, 2022.

Article Written by:

Sara Kraft, Administrative Manager,

Adams Financial Concepts LTD

1001 Fourth Ave, Suite 4330, Seattle WA 98011

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