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By Sid Vaidya
• Sep 16, 2022
Chief Investment Strategist at TD Wealth
TD Bank, AMCB

The Inflation Reduction Act (IRA) was signed into law last month and is focused on a series of progressive objectives. It includes $433 billion in spending on climate and healthcare while offsetting those expenditures with $739 billion in proposed revenue.

Sid Vaidya, Chief Investment Strategist at TD Wealth, took a closer look at the legislation to find out what's in it and whether it will have any impact on inflation. He provided these key takeaways.

Climate

More than 85% of the spend ($369 billion) will go towards climate incentives in the form of investments, grants, and loans to support the adoption of clean energy and decarbonization. $80 billion is earmarked for electric vehicle rebates and to decarbonize residential buildings. $9 billion goes toward home energy rebates for low-income households and a 10-year consumer tax credit to perform clean energy retrofits.

Healthcare

Affordable Care Act insurance subsidies will extend to 2025, including some insurance premiums lowered to $10 per month. Healthcare costs in the bill are $64 billion.

Drug Pricing

For those on Medicare, the Act puts a $2,000 cap on out-of-pocket prescription drugs costs, effective in 2025, as well as allowing the federal government to negotiate the price of certain expensive drugs each year.

IRS

The IRS is getting $80 billion in funding for oversight and audit functions. The funding for the IRS is expected to result in nearly $125 billion in net new revenue.

Buyback Excise Tax

The IRA includes a new excise tax of 1% on share buybacks. Since the new tax won't go in effect until 2023, there could be a flurry of share repurchases before year's end as corporations look to pull-forward buyback activity.

Corporate Tax

The Act imposes a new 15% minimum corporate tax on all corporations making over $1 billion. This is estimated to generate more than $300 billion in revenue over the next decade. The new minimum tax is expected to lower 2023 S&P 500 earnings per share by roughly 1.0 to 1.25%, with larger declines possible in low effective tax rate sectors, such as information technology and healthcare.

Conclusion

While the Act introduces some ambitious climate and healthcare-focused objectives, its net impact on the broad economy and financial markets is expected to be less dramatic. Scoring by the Congressional Budget Office on a previous iteration of the bill suggests the Act will reduce the deficit by approximately $300 billion over the next decade. Despite its name, the IRA is expected to have little impact on current inflationary pressures, with some early estimates by the Penn Wharton Budget Model suggesting a very small disinflationary effect in the latter half of the decade.

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