Who doesn’t love a summer surprise? Like a phoenix rising from the ashes, the Inflation Reduction Act of 2022, comes courtesy of Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV).  So, what’s in it and will it live up to its name? TCS President Steve Ellis and Senior Policy Analyst Joshua Sewell have the details in this episode of the Budget Watchdog AF podcast.

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Episode 26 – Transcript

Intro:

Welcome to Budget Watchdog All Federal. The podcast dedicated to making sense of the budget, spending, and tax issues facing the nation. Cut through the partisan rhetoric and talking points for the facts about what’s being talked about, bandied about, and pushed in Washington. Brought to you by Taxpayers for Common Sense. And now the host of Budget Watchdog AF, TCS president, Steve Ellis.

Steve Ellis:

Welcome to all American taxpayers seeking common sense. You’ve made it to the right place. For over 25 years TCS, that’s Taxpayers for Common Sense, has served as an independent non-partisan budget watchdog group based in Washington, DC. We believe in fiscal policy for America that is based on facts. We believe in transparency and accountability because no matter where you are in the political spectrum, no one wants to see their tax dollars wasted. It’s August 5th and who doesn’t love a summer surprise. This one, like a Phoenix rising from the ashes, is the Inflation Reduction Act of 2022. And it comes courtesy of Senate majority leader, Chuck Schumer and Senator Joe Manchin. And just today, dear podcast listeners, Arizona Democrat, Senator Kyrsten Sinema, affix the bow, making the package ready for delivery. So what’s in the Inflation Reduction Act of 2022, and will it actually live up to its name? Joining me to unwrap this revenue, raising reconciliation bill is none other than TCS senior policy analyst, Joshua Sewell. Welcome back to the podcast, Josh.

Josh Sewell:

Thanks. I’m happy to reconvene to reconcile some things.

Steve Ellis:

Okay. Well, speaking of reconcile. Josh, this bill has this name in Inflation Reduction Act, but it’s really the fiscal year 2022 budget reconciliation. Remind our listeners, what is reconciliation and why is it being used here?

Josh Sewell:

Reconciliation is a accelerated process in the House of Senate where they can pass legislation with their razor-thin majority. So in the Senate, you don’t need to get your 60 plus votes. You simply need 50 plus the tie break, which is the vice president. So the Democrats can pass a very large bill that can make consequential changes with only the 50 senators. And that’s important because it prevents a filibuster and it allows some of these very major changes to occur. Now in mid-July Mr Manchin, and the Senate majority leader sort of threw their hands and said this was done. And publicly, we all thought this process was probably dead for the year. Next thing you know, we all come to work on a Tuesday and pop, we have a deal.

Steve Ellis:

Then getting Senator Sinema on board and really has been a Phoenix rising from the ashes. And so let’s get into what’s going on right now. As we understand it at this moment in time, the impact of the Inflation Reduction Act will actually reduce deficits, according to the congressional scorekeepers. And these are the non-partisan scorekeepers, the congressional budget offices, and the joint committee on taxation. But we know dash the devils in the details, because a lot of that spending will be in the near term and the savings we amassed over a decade, but really, after a decade of emergency spending packages, budget deals, and tax cuts that didn’t even try to reduce the deficit, a budget score of reducing the 10-year deficit by more than $100 billion, there’s nothing to sneer at right, Josh?

Josh Sewell:

No, it’s not. And I think it is a big deal. It not the biggest, costliest package that we’ve seen even in this Congress, but at this point in time, it’s a big deal for a number of reasons that you mentioned. And also the fact that this is the last really big thing to happen before the midterm elections in less than three months. And so, again, a lot of Democrats, the President himself ran, saying, we’re going to fix some problems. We’re going to focus on issues that we think the previous administration did not focus on. Climate change, some of the so-called human infrastructure, and some other issues. And this is how the Democrats are going to deliver, whether you like it or not. This is what they’re going to run on, say, if they pass this, if we get to the end, the finish line, which is not here yet, then this is going to be what they run on in November.

Josh Sewell:

And it’s important. It is a big deal. So politically, it’s a big deal. But also, as you said, we’ve seen package after package, not in this Congress and the previous administration. And even back to the Obama administration, dealing with the massive recession and the economic collapse in 2008 and 2009. And frankly, they almost never even pretend to cut the deficit. It was always spend, spend, spend, and under a previous reconciliation process done under President Trump, it was cut taxes, cut taxes, cut taxes. And they didn’t even do creative accounting or pretend to cut the deficit.

Josh Sewell:

And on this thing, we actually have, at least it’s on paper, it’s real reduction because it’s real tax changes and it’s real spending changes. And so a lot of it is still subject to reality to the future, but it is compared to the other packages we’ve seen, this is an actual deficit reduction. Now, our publicly owned debt is more than $23 trillion. That’s the size of our economy. And if you count the amount of money that the government owes itself is closer to $30 trillion. So $100 billion doesn’t solve everything, but we have to start somewhere. And I think this kind of approach is what we need to do more of.

Steve Ellis:

So let’s dig into some of these revenue razors, Josh, some of the ways that they’re getting this deficit reduction. There was a 15% minimum tax that was set on corporate income. And so, Josh, can you talk a little bit about that and what some of the adjustments have been done?

Josh Sewell:

Yeah. So this goes back to that issue of corporate taxes versus individual taxes in the income code. And so one of the things that Democrats ran on again was you may remember headlines of large corporations, very profitable corporations paying $0 in taxes. And so Senator Warren of Massachusetts is one of the leads of trying to find a way of getting corporations to pay their fair share. So one of the, I think, it’s actually the largest revenue razor in the package. It would set a 15% minimum on corporations that make over a billion dollars in revenue. And so the CBO, the Congressional Budget Office, estimated this would raise $313 billion in revenue over the next decade. That’s a lot of money, right? That’s a big deal. Well, it didn’t have complete unanimity in the party. While everybody was focused on Senator Joe Manchin from West Virginia, the silent Senator from the Southwest Kyrsten Sinema, who’s basically never said much publicly about this whole process. And they’ve had to make some adjustments.

Steve Ellis:

Right, namely, they changed some of the accelerated depreciation, allowed companies to write off goods faster. So that was one of the tweaks that came out of Senator Sinema, get her green light on it. And speaking of other tweaks, and this isn’t actually not a tweak, but jokingly calling the investment, the hedge-fund managers, and investment managers that they can carry on with their carried interest. That was one of the offsets, right, Josh, that got asked by Senator Sinema, what is carried interest?

Josh Sewell:

Yeah. So carried interest is, it’s a tactic that primarily hedge-fund managers use to shield their actual income on an annual basis. So because they’re managing all this money and these assets and these big hedge-funds, instead of claiming income and claiming a wage or a salary for their actions of doing that management, they say, they’re getting paid in the capital gains from that capital, from the increase in value of the stuff that they’re managing. So anybody looking at it knows you’re getting paid for what you’re doing. So it should be part of your salary or wage equivalent.

Josh Sewell:

They’re being taxed instead at the lower rate, which is the capital gains, which is what you would pay if you own stocks, and other sort of investments. And so this is another thing that many Democrats primarily have been trying to reign in for years. And so, again, it was in the base bill, it’s released in the base agreement that came out, but Senator Sinema appeared to really not like this at all. So it has now been replaced with a tax of 1% on these massive stock buybacks, which is another other way of people can make a significant amount of income that’s not treated like a wage or salary income, like most people make.

Steve Ellis:

Right. And I guess she’s never been shy about not liking this provision. I mean, even though she’s been pretty reticent to talk about things, this is one that she’s crapped on before to put it finely.

Josh Sewell:

No, exactly. And this is what’s interesting to me about a lot of this process is that it has been done behind closed doors. I think, and it was a surprise to most of us, that Senator Manchin and majority leader Schumer came out and had this agreement. But this has been a public process for almost two years also. This has been hashed out. I mean, the house has a whole different bill, that they pass through all their committees and then they pass on the house floor. And that has some of these same provisions in it. So it’s not like nobody ever thought this would happen, or this is not unexpected. It just came at a time when people, I think, had been so tired that we didn’t think it would ever happen. It’s been a long process.

Steve Ellis:

Yeah, it has. It has. And I think there was a lot of pressure on Senator Manchin because he was so public. And so once he cut his deal, put a lot of pressure on Senator Sinema to not be the only person who was collapsing this. And so to some extent you can almost see that maybe they put in the carried interest provision, even though Democrats have wanted to close that for a long time, just as something to give to Sinema. I mean, she got, Senator Sinema, got some other stuff as well in the bill, but so it’s almost like they knew it was going to be a negotiating tactic. And so they brought that in there, but that’s $13 billion worth of revenue that got asked from the bill, even though it appears that that stock buyback, that 1% tax will actually generate more revenue than the carried interest. But it’s still ridiculous that these people who are going to make money, whether they lose money for their hedge-fund or they make money for their hedge-fund. So pretty clearly it’s a salary, it’s income. It’s not capital gains.

Steve Ellis:

You’re listening to Budget Watchdog All Federal, the podcast dedicated to making sense of the budget, spending, and tax issues facing the nation. I’m your host, TCS President, Steve Ellis. And we continue now with Josh Sewell, senior policy analyst. So one other big piece of this puzzle has been about prescription drugs, Josh, and Medicare. What are they doing there both to limit costs and to put out some spending?

Josh Sewell:

So the big thing in here is the federal government, through Medicare and Medicaid, and some other programs, is by far the largest healthcare provider in the country. There is no hospital group. There’s no private health insurance plan that purchases the amount of healthcare that we do as taxpayers. And in the prescription drug realm, Medicare is for people 65 and older. And you tend to have a lot more prescriptions than people who are younger than 65 on average. And so this has been a sticky point for a long time as prescription drugs, especially name brand drugs, have far exceeded the rate of inflation, even the rate of healthcare inflation, which annually exceeds the rate of non-healthcare inflation for decades.

Josh Sewell:

And so what this bill would allow, it would allow Medicare to negotiate prices, which is the same thing that every health insurance company does with the hospitals and the other medical providers. There isn’t a sticker price for name your prescription drug, that then everybody just pays. These things are negotiated between these companies all the time. And so what this bill would allow, is, would allow Medicare to do that. The same thing that all these private sector companies do. And it’s really important. It’s a big deal because, again, as the largest purchaser of these products, this will, one, allow taxpayers to save a lot of money, but also could influence the overall price environment for prescription drugs.

Steve Ellis:

And so what’s interesting to this is it’s not a tax increase to generate revenue. It’s actually a means to control spending or to reduce spending by the federal government on these drugs. And then there’s also some provisions about inflation as well, and pharmaceutical prices. Isn’t that right, Josh?

Josh Sewell:

Yeah, there’s actually, I mean, I want to say close to 20 healthcare provisions in here when it comes to prescription drugs and different parts about disallowing rebates, some of these things that these companies would do, it’s really complicated. And frankly, I don’t study healthcare that much, so I don’t know all the details. But when you look through all the things that are in here, there’s also, maybe we generate almost $200 billion in savings, but then we turn around and use some of that savings to increase spending in certain areas, like you said. And one of those would be to put an annual cap on how much more expensive a prescription drug can be from one year to the next.

Josh Sewell:

And so that’s going to cost, I think, close to $25 billion over the next 10 years. And there’s also an extension of Obamacare premium subsidies for another three years under this. And so when you tack all those things on there, some of that revenue that’s going to be generated by this renegotiation, and some of these other limitations on price increases will be plowed back into expanding healthcare. The net effect is less deficits for taxpayers.

Steve Ellis:

Right, right. Another area where it looks like we’re doing some spending to get savings, and this didn’t even get calculated into the official score. But we do know the back-of-the-envelope score from the Congressional Budget Office is putting more money into the IRS. So what’s going on there and how does this work, Josh?

Josh Sewell:

Yeah. So the IRS, everyone’s least favorite agency, arguably. At least many people, and frankly, there’s disagreements on the value of the IRS on our own staff in some respects. But I think one of the things about the IRS is it has been starved of money for 15 to 20 years. So while much of the rest of the government has grown, the IRS was stagnant. Its budget was stagnant for many years. And so now you have a lot more taxpayers and a lot more complex code, but not a much larger IRS. And so if you’ve ever had to try to call the IRS, it’s very unlikely your call will even be answered. And they’re months, and now almost years behind in doing certain filings on paper, on responding to people.

Josh Sewell:

And so what this bill is going to do is it provides tens of billions of dollars to some of that staffing, to some of that customer service realms. But its biggest increase is going to be to give money to enforcement. And so the idea here is now, this is where reconciliation makes things a little weird. A little tough is they don’t have this really, the Democrats didn’t have this really extensive legislative language that says here’s the money and here’s exactly how you do what we want. They had to, under the reconciliation rules, say, here’s a pot of funds, use it for enforcement. Don’t focus on people making less than $400,000 a year. So this idea here is that you provide more funds so that we can have more audits and more controls, more valuations of really complex income schemes. So really complex, the multimillion dollar tax shelters.

Josh Sewell:

And so this idea is that if you do this better enforcement and you look at these really complicated tax shelters, you’ll find ones where they’re not just sheltering, but they’re actually breaking the law. And so then you’ll be able to bring in more revenue, it’s a little squishy and under the rules they don’t include, and Congression Budget Office does not include an official, this is how much we think you will generate in revenue. But there is a number, $200 billion is what they roughly estimate now is they think that would increase revenues buying. That’s not even included in the overall savings of the bill.

Steve Ellis:

Right. So, I mentioned 100 billion in deficit reduction at the top of the show. Well, it’s with that added in its more like 300-plus billion deficit reduction, and that’s 200 billion is generated from $90 billion added to the IRS, 45 billion of which is for the enforcement. And I think that one thing you hit upon Josh, and I think it’s really important, is that they’ve got antiquated computer systems. The IRS has got one of the oldest workforces in the entire federal government. Like you mentioned, people aren’t getting calls back. And so the customer services is going down. And these are things that the national taxpayer advocate, the independent watchdog that works on behalf of all of us taxpayers, has been flagging for years. And so maybe it’s counterintuitive, but you make the investments in this agency and it’s going to have a better performance for taxpayers.

Steve Ellis:

Two things I think are important in this package, too, Josh, is that to get around the restrictions on policy in reconciliation, they’ve basically told the IRS to come back in six months and tell them how they’re going to implement this. So that’s the way they’re going to try to be able to adjust it on the fly, because it’s $90 billion on top of what they were going to get in regular appropriations anyway. And then also it has a provision just tucked in there that the IRS is supposed to develop their own free filing for simple tax filers.

Steve Ellis:

And so this is something that people have been fighting for years, that entities like H&R Block and Intuit that has TurboTax have stood in the way of, because they’re the ones who are doing it. But if, especially, when you look at, and you mentioned that 2017 tax cut done through reconciliation, well, that also dramatically increased the standard deductions. There’s a lot of people who maybe before would’ve itemized that now can have a very simple tax form and actually have access to it through the IRS. It’s actually producing it themselves. And so that’s a pretty significant win, I would say, for taxpayers.

Josh Sewell:

Yeah, I’d agree. And I think when you take that provision and you also increase customer service, it might make it easier for a lot of people to file. And then you have this money focused on the complex, it’s those folks who have that carried interest, that they can then shelter in these offshore accounts and whatnot. It is counterintuitive. Very few people want to pay taxes, but I think most importantly, is none of us want to pay more than our fair share.

Steve Ellis:

So we’ve talked a lot about revenue and there’s other revenue streams that aren’t big in the context of things, but they reinstate the Superfund tax. That’s $11 billion. They’ve permanently extended the Black Lung, which is for coal miners, that sort of tax, that’s another billion dollars, but there’s also $430 billion in spending. Is there anything you want to highlight out of that part of this package, Josh?

Josh Sewell:

Yeah, there are a few things. And I think the big thing in here is that there’s nearly 400 billion worth of spending on various provisions aimed at combating climate change. And so this, again, is one of the things that Democrats and the President had run on in saying, we need to do spending to address the real and important threat of climate change. And I think the House, if you look at the House bill, they spend more money and they had some more ambitious goals in some of these areas, but this is a deficit reduction package, but it’s also a climate package. And it’s a healthcare package. When you look at those Obamacare subsidies and the various changes to prescription drugs and other areas in there. One of the things that of course I would like to highlight is that this bill would include about $38 billion in increased investments in Farm Bill conservation programs.

Josh Sewell:

So these are programs that are authorized by our favorite package, the Farm Bill that comes out every five years, that will be debated next year and authorized in all likelihood. But this puts a boost of nearly $40 billion into those programs and saying, we’re not creating new programs. We’re not even changing those programs a whole lot. We are just giving a bunch of money to these programs that every year there’s more farmers who want to participate in these programs than money is available. And so this will do a real shot in the arm for some of these programs that help. They really do help farmers and ranchers adapt to climate change and implement some conservation practices that can save them money, save us money by helping them not lose their crops. And in the end, they can sequester carbon. They can do all kinds of great things for the environment, but it’s not just in Ag.

Josh Sewell:

We’re also seeing this in some of the infrastructure, physical infrastructure, and there’s some forestry money. There’s a lot of things that are really… And man, let’s be clear, there are some provisions we don’t like as much. Yeah, there is a lot of energy spending. And so some of that is good, arguably, but some of it’s on some failed or false climate solutions such as biofuels. And so it’s a mixed bag. It’s not the best bill in the world. There are some good attributes to it that we’ve mentioned. But I think at this state in the game, it’s pretty clear the calculation among the Democrats is this is the last real train moving the station in Washington. So they’re going to do everything they can to get on board, pass this, and then have their spike the ball moment before the election.

Steve Ellis:

As they say, politics is the art of the possible. And one thing that is remarkable to us is that there’s real deficit reduction. There you have it, listeners. Inflation Reduction, TBD. Deficit reduction, we think so. And the adage remains true, you got to spend money to make money. This is the frequency, market on your dial, subscribe, and share. And know this, Taxpayers for Common Sense has your back, America. We read the bills, monitor the earmarks, and highlight those wasteful programs that poorly spend our money and shift long-term risk to taxpayers. We’ll be back with the new episode and I hope you’ll meet us right here.