PL 117-169: A Summary of Its Key Provisions

Public Law 117-169, the Inflation Reduction Act of 2022, was signed into law on August 16, 2022. As a budget reconciliation bill, it passed the Senate with a simple majority. The law’s objectives are to lower healthcare costs by addressing prescription drug prices, invest in domestic and clean energy production, and reduce the national deficit through tax reforms.

Healthcare and Prescription Drug Provisions

The law reforms prescription drug pricing within Medicare by granting the federal government authority to negotiate the prices of certain high-cost drugs covered under Part B and Part D. This negotiation power is designed to lower costs for the government and reduce out-of-pocket spending for seniors. The process is scheduled to be phased in over several years.

The first negotiated prices for an initial list of 10 Part D drugs will take effect in 2026. The number of drugs subject to negotiation will expand over time, with up to 15 Part D drugs added for 2027, up to 15 Part B and Part D drugs for 2028, and up to 20 Part B and Part D drugs for 2029 and subsequent years.

Another provision restructures the Medicare Part D benefit. Starting in 2025, the law establishes a $2,000 cap on annual out-of-pocket prescription drug costs for beneficiaries. This measure eliminates the previous coverage gap phase and protects individuals with high drug costs from catastrophic levels of spending. The law also requires drug manufacturers to pay rebates to Medicare if they increase the prices of certain drugs faster than the rate of inflation.

Beyond Medicare, the legislation extends enhanced premium subsidies through 2025 for individuals and families purchasing health insurance through the Affordable Care Act (ACA) marketplaces. These subsidies were originally set to expire at the end of 2022. This extension prevents a premium increase that would have affected millions of people who rely on the marketplace for their health coverage.

Climate and Clean Energy Incentives

The law represents a large federal investment in climate and clean energy, using tax credits to accelerate the adoption of clean technologies and boost domestic manufacturing. These provisions are aimed at both individual consumers and businesses.

For individuals, the law modifies and extends several tax credits. The Clean Vehicle Credit provides a tax credit of up to $7,500 for the purchase of a new qualifying electric vehicle (EV). To qualify, vehicles must undergo final assembly in North America and meet limitations based on the manufacturer’s suggested retail price, the taxpayer’s modified adjusted gross income, and requirements for the sourcing of battery components and critical minerals. A separate credit of up to $4,000 is available for used clean vehicles.

Homeowners can also benefit from credits for making their homes more energy-efficient. The Energy Efficient Home Improvement Credit provides a 30% credit for certain qualified energy-efficient improvements like new windows and insulation, with an annual credit limit of $1,200. The Residential Clean Energy Credit provides a 30% credit for the cost of new, qualified clean energy property, including solar panels, wind turbines, and battery storage technology.

For businesses, the law expands tax credits to spur investment in clean energy. The Investment Tax Credit (ITC) and Production Tax Credit (PTC) provide incentives for facilities that generate electricity from sources like solar, wind, and geothermal. The law establishes a two-tiered credit system, with a base rate and a higher bonus rate available for projects that meet specific prevailing wage and apprenticeship labor requirements. Other credits include:

• The Advanced Manufacturing Production Credit for the U.S.-based manufacturing of components like solar cells and batteries.
• Provisions to encourage investment in clean hydrogen production.
• Provisions to encourage carbon capture technologies.

The law also introduces “direct pay” and “transferability” options. These allow certain tax-exempt entities like local governments and non-profits to receive the value of these credits as a direct payment from the IRS and allow businesses to sell their credits to other companies.

Corporate and Individual Tax Reforms

The law enacts several changes to the corporate tax system. A central measure is a new 15% corporate alternative minimum tax (AMT). This tax targets large corporations with high profits that may have previously paid little federal income tax.

The corporate AMT is calculated based on a corporation’s “book income”—the profits reported to shareholders on financial statements—rather than the taxable income reported to the IRS. The tax applies to corporations with average annual adjusted financial statement income exceeding $1 billion. This structure is intended to ensure that the most profitable corporations contribute a minimum level of tax, regardless of the tax strategies they employ.

Another reform is a 1% excise tax on the net value of stock repurchases by publicly traded corporations. A stock buyback occurs when a company buys its own shares from the marketplace, which reduces the number of outstanding shares and tends to increase the value of the remaining ones. The tax is levied on the fair market value of the stock repurchased by the corporation during the taxable year. This provision is designed to encourage corporations to invest in their operations and workforce instead of using profits for buybacks.

The law also allocates a substantial increase in funding for the Internal Revenue Service (IRS) over ten years. This funding is designated for taxpayer services, enforcement, operations support, and business systems modernization. The goal is to close the “tax gap”—the difference between taxes owed and taxes paid—by improving the agency’s ability to audit sophisticated tax returns.

Deficit Reduction Impact

The law is structured so that the revenue generated from its tax reform provisions and the savings from its healthcare measures are projected to exceed the cost of its investments in clean energy and ACA subsidy extensions. According to an analysis by the non-partisan Congressional Budget Office (CBO), the law is estimated to achieve a reduction in the federal deficit.

The CBO’s scoring projected that the tax and drug pricing reforms would raise hundreds of billions of dollars in new revenue and savings for the government. When this new revenue is weighed against the outlays for the clean energy and climate tax credits and the extension of the ACA subsidies, the CBO projects a net deficit reduction over the 2022-2031 budget window. The general consensus from official scoring agencies is that the law’s fiscal structure is deflationary in nature.