Biden's IRA climate bill won't cut deficit as expected
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[June 16, 2023]
By Jarrett Renshaw
(Reuters) - 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.
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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.
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"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
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![](../images/061623PIX/news_z38.jpg)
U.S. President Joe Biden delivers
remarks as he celebrates the enactment of the "Inflation Reduction
Act of 2022," which Biden signed into law in August, on the South
Lawn at the White House in Washington, U.S., September 13, 2022.
REUTERS/Kevin Lamarque/File Photo
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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
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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)
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