The inflation pressure in the US has been escalating heavily. In June 2022, the consumer price index (CPI) rose 9.1% from a year earlier, the highest mark in four decades. That’s why, on August 16, president Joe Biden signed the Inflation Reduction Act (IRA) as a possible measure to bring relief over the next few years.
The major objectives of the IRA are to push down the cost of key consumer expenses, shorten the federal government deficit and push forward climate change countermeasures. That’s why the bill covers a lot of subjects, from lowering medicine cap prices and extending the Affordable Care Act (widely known as Obamacare) to new corporate taxes for businesses earning more than U$ 1 billion of annual profit.
The act also brought a landmark with the largest investment in US history in pro-environmental initiatives, including a series of incentives for businesses and people to adopt clean energy and tax credits, and funding for the supply chain to cover expanding of new vehicles and machinery.
In this article, you are going to understand deeply what is the purpose of the Inflation Reduction Act, which areas it covers, and, most importantly, the practical effects on the supply chain!
Enjoy your reading!
- What is the Inflation Reduction Act (IRA)?
- What’s in the Inflation Reduction Act (IRA)?
- What is the impact of the Inflation Reduction Act (IRA) on the supply chain?
- Explaining the Tax Credits
- Explaining the Funding for logistics companies and ports
- 3 ways the Inflation Reduction Act (IRA) might affect the supply chain
What is the Inflation Reduction Act (IRA)?
The Inflation Reduction Act, also known by the acronym IRA, is a law package that addresses different sectors of the economy. It was signed by US president Joe Biden on August 16th, 2022, aiming at fighting inflation, lowering the federal budget deficit, reducing the price of prescription drugs for seniors, and lowering the country’s carbon emissions.
Per the Committee for a Responsible Federal Budget, there is an estimation that the legislation could help raise U$738 billion, through savings and revenue, to fund U$499 billion of new spending and tax breaks. This would mean the federal budget deficit would be reduced by U$238 billion over a decade.
Who wrote the Inflation Reduction Act (IRA)?
The IRA is essentially a slimmed version of the Build Better Act, which was rejected in 2021. The new legislation was a product of the Biden administration and its allies on Capitol Hill.
The final text was the result of a compromise between the Majority Leader’s representative, Senator Chuck Schumer, and Senator Joe Manchin – who was responsible for the rejection of the Build Better Act because of concerns over increased government spending.
Will the IRA really reduce inflation?
According to the Congressional Budget Office (CBO), the IRA is a long-term plan and will more likely have a “negligible effect” in the calendar year 2022. In 2023, there is an expectation the plan will change the inflation between 0.1% lower or even nudge 0.1% above.
Even if the legislation won’t affect consumer expenses immediately, its creators believe that the actions will help reduce the inflation pressure on the US economy. The key efforts to do so are:
- a proper tax collection from the wealthiest corporations and individuals
- relieving the supply chain bottlenecks by investing in domestic manufacturing and clean energy (to reduce long-term costs)
- The aforementioned decrease in the federal government budget deficit
By contrast, some specialists, like the Penn Wharton Budget Model, from the University of Pennsylvania, conducted studies that show the new legislation will have no valid effect on consumer prices and the Gross Domestic Product (GPD) will see no gains until 2031 – they estimate the GDP will see a 0.2 percent increase only in 2050, projecting the IRA will be extended.
What’s in the Inflation Reduction Act (IRA)?
The IRA covers a lot of broad sectors of the US economy, synthesizing it these are the major provisions:
- Medicare benefits
- Affordable Care Act’s extension
- New corporate tax and stock buybacks fees
- Cuts in the cost of home energy and rebates
- IRS funding and tax enforcement
We explained each one of those below, check it out!
There are a lot of provisions dedicated to Medicare recipients, the federal health insurance for those 65 years old or older. The brand-name insulin prices, for example, will be capped at U$35, beginning in 2023.
But, perhaps the major change will be in the whole Medicare Part D for brand-name medicines. At first, in 2024, the 5% enrollee share at the Catastrophic coverage stage will be eliminated (making the cost of insurance being paid by the Medicare and Part D Plans themselves), this will put the cap for out-of-pocket spending at U$3,250 at the coverage gap phase.
By 2025, the Coverage gap phase will be extinguished, and Medicare Plan D’s share will amount to 60% during the Catastrophic phase and 65% during the Initial coverage. Also, the 70% share insured by the drug manufacturers will become 10% at the Initial coverage and 20% at the Catastrophic phase. Finally, the out-of-pocket cap for brand-named drugs will be U$2,000.
To understand the impact of the IRA on Medicare, check this brief put together by the Kaiser Family Foundation.
Affordable Care Act’s extension
It is easier to explain, this Inflation Reduction Act’s provision extends the Affordable Care Act (ACA) through 2025. With this, enrollees will maintain the medical insurance premium subsidized by the federal government.
Per the Department of Health and Human Services, approximately 3 million Americans could lose their health insurance if the ACA wasn’t extended.
New corporate tax and stock buyback fees
The IRA introduces a 15% corporate minimum tax rate for corporations that earn at least U$1 billion of annual profit. The taxes on individuals and households won’t change. On top of that, there is a new 1% fee on stock buybacks for publicly-traded companies.
With this, the federal government aims to raise U$296 billion in tax revenue.
Cuts in the cost of home energy and rebates
One of the major agendas pushed through the Inflation Reduction Act was to accelerate adherence to clean energy. Aside from the domestic production and supply chain provisions (that we will cover later), there were many aimed at households and businesses.
The rebates were some of the novelties that brought attention. Homeowners can get partial refunds such as:
- New energy-efficient heat pump water heaters can be eligible for up to U$1.750 in rebate
- Purchasing a breaker box, that will assist in the preparation of an all-electric home, can get back values as high as U$4.000
- Getting electric stoves, cooktops, ranges, or ovens, can get rebates of up to U$840.
There is a cap of U$14.000 for each eligible entity (families and businesses). This measure, according to the White House representatives, will assist families in saving at least U$350 a year in energy costs.
In addition, families that use clean energy and electric vehicles will have access to the tax credits, which are expected to grant savings of more than U$1.000 a year.
Finally, The Residential Clean Energy Credit part of the bill included a new law that provides up to 30% tax credits to households that install solar panels in their homes. Considering the installation, which is about U$19.000 depending on the provider, it would help families save around U$5.700, per the Environmental Defense Fund.
IRS funding and tax enforcement
The U.S. Treasury Department estimates that more than half of all unpaid taxes come from the top 5% earners in the country. This amounts to about U$307 billion a year, or a little over 53% of the sum. The total unpaid amount of about U$600 billion would translate to U$7 trillion in lost tax revenue to the government – a sum equal to 3% of the GDP.
The Inflation Reduction Act then provides U$80 billion to the IRS over the next ten years for tax enforcement and compliance. The sum will be used to rebuild antiquated systems and hire auditors, agents, and taxpayer support staff.
In a letter, the IRS Commissioner, Charles Rettig, reinforced that no family making under $400.000 per year will see increased audits.
What is the impact of the Inflation Reduction Act (IRA) on the supply chain?
Now that we explained the overall provisions, we still need to address the supply chain-specific ones. The most important aspects introduced by the Inflation Reduction Act were related to investing in clean energy alternatives for vehicles and terminal machinery.
Substituting truck fleets with electric ones, for example, can have a sizable impact on CO2 emissions. According to the Environmental Protection Agency’s Inventory of U.S. Greenhouse Gas Emissions and Sinks, medium and heavy-duty vehicles are responsible for about 25% of the total gas-polluting releases by the U.S. transportation sector.
On top of that, both the transportation sector (27%) and electricity generation (25%) represent 52% of greenhouse gas emissions. That is a lot of the IRA laws focus on them.
Two provisions that jump to the eyes are the tax credits and funds granted to state municipalities and businesses.
Explaining the Tax Credits
Tax credits are a form of incentive to be claimed on the company’s federal tax return. The IRA included a new provision in which they cover the price difference between a diesel truck and an electric or fuel cell one, or 30% of the truck’s full price, whichever is lower. But, there is a cap of U$40,000 for it.
Be aware, that the tax credit is valid only for those put in service after December 31st, 2022.
The U.S. Department of Energy issued a list of electric vehicles assembled in North America (2022 models and early 2023) that are eligible for those who are looking for the Clean Vehicle Credit. Check it by clicking here!
Explaining the funding for logistics companies and ports
Aside from the tax credits, the IRA has specified a U$1 billion dollar fund distributed amongst states, municipalities, tribes, and businesses to replace Class 6 and class 7 vehicles with low- or zero-emission ones.
Also, U$3 billion dollars was allocated to port authorities and marine terminals in order to fund the purchase and installation of zero-emission equipment, such as cargo dealing machinery, batteries, and dock vehicles.
Both of those measures to green the ports are expected to address issues, especially, for those communities living around terminals, rail yards, and freight corridors, as they are usually overexposed by harmful pollutants generated from port activity. The usage of heavy fuel oil in those areas has a high polluting impact, as it contains 2700 times more SO2 than road fuel.
The catch on the Clean Ports Investment is that the technology being replaced must be “human-operated equipment or human-maintained”. Since automated tech is excluded from this part, it might hinder the adoption of zero-emission at the terminals.
3 ways the Inflation Reduction Act (IRA) might affect the supply chain
The Biden administration has high expectations of IRA. The goal is to not only reduce the consumer-price index in the long term but to make historic advances in climate change policies and reduce the federal budget’s yearly gap.
On the other side, specialists predict that the new law will have very little effect on inflation pressure. Instead, some are worried about the addition of more government spending.
For the supply chain provisions, the most optimistic analysts expect positive impacts like:
- Support domestic supply chain
- More environmentally friendly ports
- Reduce the excessive demands
Support domestic supply chain
There is a large amount of fund allocation and tax credits within the legislation to support the adoption of clean technologies.
This increases exponentially the demand of the domestic supply chain, which might generate jobs in this sector. Also, there is an expectation that expanding clean energy capacity will make the prices of energy generation less vulnerable to global supply shocks in the future (like what is happening with the oil barrels around the world).
That being said, some limiting factors that will impose obstacles on the clean energy adoption by logistics and transportation companies.
One of the most relevant is the immaturity of the supply of the electric vehicle chain, which may not be able to respond to demands. The very National Association of Manufacturers opposes the IRA, pointing out that not only are they facing a major disruption in this area, but the increased taxation can undermine their competitiveness in such an unstable economic moment.
More environmentally friendly ports
Sustainability and adoption of green technologies are in high demand in the business world. While it sometimes can be more of a requirement from the B2C market, there is a global need for logistics and terminals to lean towards this approach.
Elaine Nessle, executive director of the Coalition for America’s Gateway and Trade Corridors said that “freight projects often have economic benefits for the entire country, but they can also negatively impact local communities, so it’s good to have resources at the federal level to offset those negative impacts”.
There is a broad understanding that those incentives will likely take years to be installed, and even more, years for us to observe real effects on the environmental footprint of the transportation sector. Yet, they’ll certainly accelerate the adoption from shippers, which helps even to raise a positive perception from the public about those companies.
Reduce the excessive demands
Through the corporate tax increase, reinforced audits, and fees on buybacks, there is an expectation that the excessive demands will decrease. Consequently, with there would be less disposable income and consumption, relieving the supply chain bottlenecks and allowing the domestic manufacturing and deployment of clean energy to flourish.
While it is still soon to predict precisely what the impacts of IRA will global supply chains will be, we certainly expect it to change the way logistic leaders think about their impact on the environment and to bring more efficiency to every link of the chain.