By Jarrett Renshaw
When President Joe Biden signed his signature Inflation Reduction Act last August, he hailed the collection of green energy tax credits as a major victory for climate change, and flagged “another win” for the American people: cutting the deficit.
"We’re cutting the deficit to fight inflation by having the wealthy and big corporations pay part of their fair share," Biden said, while signing the bill. The White House estimated, and independent budget analysts agreed, it could cut the deficit by $300 billion over the next decade.
The tax credits have been massively popular with companies, spurring new investments and boosting job growth, environmental benefits -- and the price tag. But the "pay-fors" to fund these credits face political and legal headwinds, fueling doubts about whether Biden's promise on deficits will ever materialize.
“Originally, this was supposed to be a deficit reducer, but now it has flipped. Instead of reducing the debt, it will add to it,” said Kent Smetters, the faculty director of the Penn Wharton Budget Model, which scrutinizes federal spending.
The bill will add $750 billion to the nation’s deficit over ten years, according to Smetters.
The Biden administration says that scenario is too bleak, but a White House official acknowledged that reductions to the
deficit could take longer than estimated.
Congressional researchers had estimated the legislation would have an immediate deficit reduction this year but would then add to the deficit until after year five, when reductions would ramp up significantly.
“I think we can say with pretty good certainty that this is the bill overall is going to be deficit reducing in the long run," a White House official said. "It may not start hitting the deficit until year eight or nine, not year four or five."
White House officials say revenue will outpace original congressional estimates, and they point to the millions of jobs the IRA is expected to create. Ultimately, it will fulfill its promise of tackling climate change while cutting the deficit, officials say.
The issue is a key one for Biden and his fellow Democrats, who plan to argue he should be reelected in 2024 in part for balancing key policy goals with being good stewards of the nation's finances. U.S. employment is booming, inflation is declining but voters are not confident about Biden or the economy.
ENVIRONMENTAL IMPACT, TAX CREDIT COSTS
Democrats underestimated the cost of the tax credits by as much as 300%, thanks to generous rulemaking and greater demand, analysts at Goldman Sachs, Credit Suisse and the budget model by University of Pennsylvania’s Wharton Business School say. Most of the credits are uncapped, meaning they can swell even higher.
U.S. Senator Joe Manchin, the Democrat who was the linchpin vote for the IRA bill, says he blames the administration for rewriting legislative intent during the rulemaking to grow the price tag, including not imposing any caps on spending.
"They busted everything," said Manchin, who faces the prospect of a tough re-election in a deep red state. "Now we've got to put hard stops on everything," he said, referring to imposing caps on the credits that would contain costs and dampen impact.
The landmark legislation, as written by Democrats, sought to raise $739 billion over ten years through increased IRS tax enforcement, a new 15% minimum corporate tax on large corporations and allowing the federal government to negotiate drug prices.
The money would be used to pay for $369 billion worth of tax credits for industries like electric vehicles and wind and solar power and fund some $300 billion in deficit reduction.
With those costs come benefits.
Goldman Sachs, which predicts the credits will now cost $1.2 trillion, but note it a significant U.S. economic boost, to the tune of $11 trillion of total infrastructure investments by 2050.
Credit Suisse estimates total federal spending under the IRA will be over $800 billion, fueling total public and private investment to nearly $1.7 trillion
The popularity of the bill's clean energy tax credits will have a significant environmental impact, analysts say.
Without the IRA bill, the Congressional Budget Office, the non-partisan research arm of the legislative branch, estimated when that U.S. greenhouse gas emissions would decrease by 24% to 35% by 2030 compared to 2005 levels. The same estimates said the bill could reduce emissions by 32% to 40% by 2030 compared to 2005 levels.
ELECTRIC VEHICLES ADD COSTS
One decision, allowing leased electric vehicles, including those not manufactured in the U.S., to qualify for up to $7,500 in tax credits is a big driver of new costs.
It placated allies Japan and the European Union, who were angered by what they saw as overly-protective economic policies
In addition, Tesla, the nation’s largest EV manufacture, began to slash prices more quickly to get under the $55,000 eligibility cap, Smetters said. That means many more EV drivers will receive the tax credit than expected.
“We underestimated just how quick Tesla was going to respond,” Smetters said.
Penn’s model now says the EV credit program alone will cost $393 billion over 10 years.
“We’re going to have more deployment and achieve more emissions reductions than we initially thought,” the White House official said.
DRUG PRICES, NEW TAX REVENUES
The bill grants Medicare new authority to negotiate prices with drug companies and reduce the portion that patients must pay for their prescriptions, something the CBO estimated will save the federal government roughly $100 billion over 10 years
But, earlier this month, global drugmaker Merck sued the Biden administration over Medicare’s new powers, then the powerful business lobby filed a similar lawsuit last week, raising doubts about the long-term impacts of the new authority.
The White House has said it is confident it will succeed in the courts, but the effort is likely to draw more lawsuits as it continues to add drugs to be negotiated, as the law envisions.
Republicans have sought to demonize Biden's effort to use $80 billion to hire IRS auditors to scrutinize the tax returns of wealthy Americans, estimating that boost in funding would net $120 billion over ten years.
The debt ceiling deal scales back the plan by $20 billion, a move administration officials say will have no short-term impact. However, the CBO estimates that the debt ceiling IRS cuts would shrink revenues by $40.4 billion and add $19 billion to the deficit over ten years.
The IRA also planned to raise $313 billion with a 15% corporate minimum tax on the largest U.S. corporations, but how and when remains opaque.
The minimum tax will only impact a small number of companies, analysts say, and it could be years before this money rolls in because of loopholes that allow companies to offset taxes with COVID losses.
A Reuters review of shareholder disclosures of the largest 25 U.S. companies in recent months, including Amazon, Pepsi and Home Depot - found that none said the tax would have a material impact on their 2023 finances.
Eight explicitly said it would no material impact, 13 were silent and two said they were still reviewing the situation.
(Reporting By Jarrett Renshaw; Editing by Heather Timmons and Alistair Bell)
