Jason Yoder, Adobe Stock
Last updated on August 12, 2022

Details & Analysis of the Inflation Reduction Act Tax Provisions

See Full Timeline of Changes

Preliminary Revenue and Economic Estimates

Net Revenue

$324B

Long-run GDP

-0.2%

Wages

-0.1%

FTE Jobs

-29,000

Source: Tax Foundation General Equilibrium Model, August 2022.

The Inflation Reduction Act (IRA), successor to the House-passed Build Back Better Act of late 2021, has been touted by President Biden to, among other things, help reduce the country’s crippling inflation. Using the Tax Foundation’s General Equilibrium Model, we estimate that the Inflation Reduction Act taxes would reduce long-run economic output by about 0.2 percent and eliminate about 29,000 full-time equivalent jobs in the United States. It would also reduce average after-tax incomes for taxpayers across every income quintile over the long run.

By reducing long-run economic growth, this bill may actually worsen inflation by constraining the productive capacity of the economy.

Our analysis contains estimates of the budgetary, economic, and distributional impacts of the Inflation Reduction Act taxes as specified in bill text that was amended and passed in the Senate on August 7 and agreed upon in the House on August 12.

Using the General Equilibrium Model, we estimate that the tax provisions, IRS enforcement, and drug pricing provisions in the bill would increase federal revenues by about $676 billion over the budget window, before accounting for $352 billion in expanded tax credits for individuals and businesses, resulting in a net revenue increase of about $324 billion from 2022 to 2031.

Excluding the anticipated revenue from increased tax compliance and the drug pricing provisions, the bill would lose about $84 billion in revenue over the budget window.

Table 1. Combined Long-Run Effects of the Inflation Reduction Act Tax Provisions
Gross Domestic Product (GDP) -0.2%
Gross National Product (GNP) Less than -0.05%
Capital Stock -0.3%
Wage Rate -0.1%
Full-Time Equivalent Jobs -29,000

Source: Tax Foundation General Equilibrium Model, August 2022.

 

Major Tax Provisions

The updated draft legislation of the Inflation Reduction Act would include the following major changes, effective beginning after December 31, 2022, unless otherwise noted:

Individual Income Taxes

  • Extends the limitation on pass-through business losses enacted in the 2017 Tax Cuts and Jobs Act (TCJA) for two years through 2028.

  • Extends the expanded health insurance Premium Tax Credits provided in the American Rescue Plan Act (ARPA), including allowing higher-income households to qualify for the credits and boosting the subsidy for lower-income households, through the end of 2025.

Corporate and International Taxes

Other Modeled Tax Proposals

  • Modifies, extends, and creates a variety of tax credits for green energy and other efforts primarily through 2031 or 2033.
  • Raises the Superfund tax on crude oil and imported petroleum to 16.4 cents per barrel (indexed to inflation) and increases other taxes and fees on the fossil fuel sector.

Significant Proposals Not Modeled

  • Expands IRS enforcement funding by about $80 billion over 10 years.
  • Imposes a 95 percent excise tax penalty on drug manufacturers to lower drug prices.
  • Increases the research & development tax credit amount that can be claimed against payroll taxes for small businesses by $250,000.

Economic Effects

While the latest proposal steers clear of some of the major tax rate increases contained in the House-passed Build Back Better Act, this proposal would raise taxes on work and investment, disincentivizing productive activity. We estimate the Inflation Reduction Act would reduce long-run GDP by about 0.2 percent.

The bill would decrease long-run American incomes (as measured by gross national product, or GNP) by less than 0.05 percent. The bill’s reduction in the budget deficit over the long run increases long-run GNP by about 0.1 percent, but this is offset by a slightly greater than 0.1 percent decrease in GNP from the tax increases. The bill would reduce the capital stock by about 0.3 percent and wages by about 0.1 percent, while eliminating about 29,000 full-time equivalent jobs.

The proposed 15 percent minimum tax on corporate book income is the most economically damaging provision in the bill, reducing GDP by 0.1 percent and costing about 20,000 jobs. While it now exempts accelerated depreciation, tax credits, and certain other items, the book tax remains a substantial tax increase on corporate income as it hits several other book-tax differences and limits the ability to carry forward losses. The excise tax on stock buybacks also eliminates about 7,000 jobs.

For purposes of estimating the bill’s impact on federal budget deficits, interest payments, and resulting changes in GNP, we used estimates from the Congressional Budget Office (CBO) indicating about $150 billion in additional spending over the budget window (2022 to 2031), in addition to scored tax provisions.

We estimate that the bill would result in a $224 billion reduction in the deficit (including interest payments) during the first decade and continue to reduce deficits thereafter, leading to a decrease in payments to foreign owners of the national debt and a 0.1 percent increase in long-run GNP. We treat the nontax outlays as transfer payments with no associated impact on the economy in the long run.

Table 2. Long-run Economic Effects of the Inflation Reduction Act
Provision Change in GDP Change in GNP Change in Capital Stock Change in Wages Change in Full-time Equivalent Jobs
Raises taxes in the federal Superfund program Less than -0.05% Less than -0.05% Less than -0.05% Less than -0.05% -2,000
           
Impose a 15 percent minimum tax on corporate book income for corporations with profits over $1 billion -0.1% -0.1% -0.2% -0.1% -20,000
Create a 1% excise tax on net stock buybacks Less than -0.05% Less than -0.05% -0.1% Less than -0.05% -7,000
           
Impact of spending and budget deficit   0% +0.1% 0% 0% 0
           
Total Economic Effect -0.2% Less than -0.05% -0.3% -0.1% -29,000

Note: We treat spending as transfer payments with no associated impact on the economy in the long run. Economic effects do not include about $1.2 billion in other tax provisions scored by JCT.

Source: Tax Foundation General Equilibrium Model, August 2022. Items may not sum due to rounding.

Revenue Effects

On a conventional basis, the House bill would raise about $324 billion in federal revenue from 2022 to 2031. The bill includes about $676 billion in gross revenue raisers, comprised of about $213 billion in corporate tax increases, $54 billion in individual tax increases, $130 billion net from additional IRS tax enforcement, $278 billion from the drug pricing provisions, and about $1.1 billion in net revenue from items scored by the Joint Committee on Taxation (JCT).

The gross revenue is reduced by about $352 billion in tax credits, resulting in about $324 billion in increased revenue net of tax credits.

We relied on estimates provided by the JCT and the CBO for provisions we did not model. The bill includes about $150 billion in additional spending, and when combined with the $352 billion in tax credits, the bill increases spending by about $502 billion over 10 years.

Table 3. Additional Spending in the Inflation Reduction Act, 2022-2031
Spending Item Spending (Billions)
Other Health Care Spending $34 billion
Energy & Climate Spending (Excluding Tax Credits) $116 billion
   
Total Spending Excluding Tax Credits $150 billion
   
Total Spending Including Tax Credits $502 billion

Source: Congressional Budget Office.

The largest tax provision is the 15 percent minimum tax on corporate book income for corporations with average annual adjusted financial statement income that exceeds $1 billion for any three consecutive prior tax years, effective beginning in 2023. While we estimate that the provision raises $153 billion over the budget window, this may be an upper bound, as it does not account for any behavioral responses—that is, avoidance—since the structure of the tax is unique. Actual revenue could be less if, for instance, companies respond by reducing reported financial income.

A second revenue raiser is a 1 percent excise tax on stock repurchases made by domestic publicly traded corporations. We estimate this provision would raise $48 billion over the next decade.

On a dynamic basis—that is, accounting for the reduced size of the economy resulting from the tax increases—we estimate the bill would raise in total about $308 billion in revenue net of tax credits over the next decade.

Table 4. Revenue Effects of the Inflation Reduction Act (billions of dollars)
Provision (Billions of Dollars) 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2022-2031 2023-2032
Individual Provisions                          
Extend the limitation on passthrough business excess losses for two years $0.0 $0.0 $0.0 $0.0 $0.0 $24.2 $29.7 $0.0 $0.0 $0.0 $0.0 $53.9 $53.9
                           
Corporate Provisions                          
Impose a 15% minimum tax on corporate book income for corporations with profits over $1 billion $0.0 $20.4 $15.4 $20.4 $11.2 $13.8 $18.0 $14.0 $22.6 $16.8 $29.9 $152.6 $182.5
Levy a 1% excise tax on stock buybacks $0.0 $4.7 $4.9 $5.4 $4.7 $4.4 $5.1 $5.9 $6.5 $6.5 $6.8 $48.1 $54.9
Raises taxes in the federal superfund program $0.0 $1.2 $1.2 $1.3 $1.3 $1.3 $1.4 $1.4 $1.4 $1.5 $1.5 $12.1 $13.7
                           
Items Scored by Joint Committee on Taxation                          
 Other unscored tax provisions  $0.0 $0.2 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $1.1 $1.2
                           
Other Revenue Raisers                           
Spend an additional  $80 billion in IRS enforcement (net revenue) $0.0 -$1.4 $4.8 $9.3 $13.5 $17.2 $20.3 $22.3 $22.6 $21.0 $21.9 $129.6 $151.5
Impose drug pricing provisions  $0.0 $2.8 $6.2 $15.9 $20.9 $41.8 $44.1 $47.2 $49.3 $50.1 $50.8 $278.2 $329.0
                           
Total Revenue Raisers  $0.0 $27.9 $32.7 $52.4 $51.6 $102.8 $118.5 $91.0 $102.5 $96.0 $111.0 $675.5 $786.6
                           
Scored Tax Credits                          
Provide tax credits for green energy    $0.0 -$16.6 -$17.1 -$22.2 -$27.5 -$33.2 -$36.6 -$39.9 -$43.1 -$46.1 -$49.7 -$282.3 -$332.0
Extend expanded Affordable Care Act healthcare subsidies through 2025 $0.0 -$22.8 -$23.7 -$19.5 -$3.7 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 -$69.6 -$69.6
                           
Total Tax Credits $0.0 -$39.4 -$40.8 -$41.7 -$31.2 -$33.2 -$36.6 -$39.9 -$43.1 -$46.1 -$49.7 -$351.9 -$401.6
                           
Total Conventional Revenue $0.0 -$11.5 -$8.1 $10.7 $20.4 $69.6 $81.9 $51.1 $59.4 $49.9 $61.4 $323.6 $385.0
Total Dynamic Revenue $0.0 -$11.8 -$8.5 $10.0 $19.8 $67.6 $78.9 $49.7 $54.1 $48.1 $53.2 $307.9 $361.1
                           
Remaining Net Outlays $0.0 -$6.2 -$15.6 -$24.7 -$29.1 -$27.1 -$20.4 -$14.0 -$8.4 -$4.5 $0.0 -$150.0 -$150.0
                           
Conventional Deficit Impact (before interest costs) $0.0 -$17.6 -$23.6 -$14.0 -$8.7 $42.4 $61.6 $37.1 $51.0 $45.4 $61.4 $173.6 $235.0
Dynamic Deficit Impact (before interest costs) $0.0 -$17.9 -$24.1 -$14.7 -$9.3 $40.5 $58.5 $35.7 $45.7 $43.5 $53.2 $157.9 $211.1

Note: “Remaining Net Outlays” include estimated spending on energy and health provisions scored by the Congressional Budget Office and adjusted for $5 billion in drought resilience funding added by the Senate. Negative deficit figures show an increase in the budget deficit.

Source: Tax Foundation General Equilibrium Model, August 2022. Items may not sum due to rounding.

The revenue table also presents the revenue impact from 2023 to 2032. Over the next 10 years, we estimate that the Inflation Reduction Act will raise about $385 billion in conventional revenue and about $361 billion dynamically after accounting for economic impacts.

Distributional Effects

Over the long run, the Inflation Reduction Act would raise marginal income tax rates faced by higher earners and corporations. The distributional results that follow do not include the impact of drug pricing provisions or IRS enforcement on after-tax incomes.

The proposals would increase the after-tax income of the bottom quintile by about 2.1 percent in 2023 on a conventional basis, largely due to expanded health-care subsidies. The top 1 percent of earners would experience a 0.1 percent increase in after-tax income in 2023, driven by expanded energy tax credits that offset reduced incomes from the corporate book minimum tax and the tax on share repurchases.

Table 5. Distributional Effects of the Inflation Reduction Act (Percent Change in After-Tax Income)
Income Group Conventional, 2023 Conventional, 2032 Dynamic, long-run
0% to 20% 2.1% 0.1% -0.2%
20% to 40% 0.8% 0.1% -0.2%
40% to 60% 0.5% 0.1% -0.2%
60% to 80% 0.2% 0.1% -0.2%
80% to 90% 0.1% 0.2% -0.2%
90% to 95% 0.1% 0.2% -0.2%
95% to 99% 0.1% 0.2% -0.2%
99% to 100% 0.1% 0.5% -0.3%
Total 0.3% 0.2% -0.2%

Note: This table omits the impact of additional spending on after-tax incomes.

Source: Tax Foundation General Equilibrium Model, August 2022.

After the expanded health-care subsidies expire in 2026, the bottom 20 percent of filers would see a smaller increase in after-tax incomes, reflecting the remaining expanded credits. The bottom quintile would experience a 0.2 percent increase in after-tax income by 2032 on a conventional basis.

After-tax incomes in 2032 would increase the most at the top of the income distribution due to the rising value of energy tax credits by the end of the budget window. The top 1 percent of earners would see an increase in after-tax income of 0.5 percent in 2032. However, increased IRS enforcement and drug pricing provisions not modeled in the distribution would put downward pressure on after-tax incomes in 2032.

On a long-term dynamic basis, the smaller economy reduces after-tax incomes relative to the conventional analysis and most of the expanded tax credits will have expired. On average, tax filers in every quintile would experience a drop in after-tax incomes.

Impact of the Inflation Reduction Act on Inflation

Inflation is driven by expectations regarding the liklihood that the federal government will be able to repay its debt over the long term, which is a function of the expected performance of the economy, tax collections, and spending. By reducing long-run economic growth, the bill worsens inflation by constraining the productive capacity of the economy.

To the extent the revenue raisers are seen as long-lasting sources of revenue, the bill reduces inflation, but projected revenues are not certain and may be less than we are forecasting. For example, the history of the corporate alternative minimum tax indicates the book minimum tax may be a diminishing source of revenue. By increasing spending, the bill worsens inflation, especially in the first four years, as revenue raisers take time to ramp up and the deficit increases. We find that budget deficits would increase from 2023 to 2026, potentially worsening inflation.

To the extent the tax credits and health-care subsidies are expected to be extended on a permanent basis, these policies put upward pressure on inflation.

Lastly, to the extent the durability of the bill’s provisions are in doubt—that is, due to the lack of bipartisan support—it may have little impact on expectations about the fiscal outlook and therefore inflation. On balance, the long-run impact on inflation is particularly uncertain but likely close to zero.

Modeling Notes

We use the Tax Foundation General Equilibrium Tax Model to estimate the impact of tax policies, including recent updates allowing a detailed modeling of U.S. multinational enterprises. The model produces conventional and dynamic revenue and distributional estimates of tax policy. Conventional estimates hold the size of the economy constant and attempt to estimate potential behavioral effects of tax policy. Dynamic revenue estimates consider both behavioral and macroeconomic effects of tax policy on revenue.

The model also produces estimates of how policies impact measures of economic performance such as GDP, GNP, wages, employment, the capital stock, investment, consumption, saving, and the trade deficit.

Banner image attribution: Jason Yoder, Adobe Stock

A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

Inflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power.

A pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates.

Tariffs are taxes imposed by one country on goods or services imported from another country. Tariffs are trade barriers that raise prices and reduce available quantities of goods and services for U.S. businesses and consumers.

The Tax Cuts and Jobs Act in 2017 overhauled the federal tax code by reforming individual and business taxes. It was pro-growth reform, significantly lowering marginal tax rates and cost of capital. We estimated it reduced federal revenue by $1.47 trillion over 10 years before accounting for economic growth.

An excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.

An individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.

After-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income.

A tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly.