The Democratic inflation legislation would have little effect on combating inflation in the near term, according to a Congressional Budget Office analysis.
The CBO released the report Thursday at the request of Sen. Lindsey Graham (R-SC). Graham had asked the CBO to analyze how the legislation, dubbed the Inflation Reduction Act, would influence prices this year and in 2023. He notably did not request data beyond that time.
The CBO found that, in 2022, the legislation would have a “negligible effect” on the country’s red-hot inflation. The bill would also do very little to influence the inflation situation next year as well, according to the nonpartisan agency. In 2023, the bill is expected to alter inflation in a range of 0.1% lower or 0.1% higher, the CBO said in its report.
“That range of likely outcomes reflects uncertainty about how various provisions of the bill would affect overall demand and output, the supply of labor, the persistence of disruptions in the supply of goods and services, and how the Federal Reserve would respond to offset any increase in inflationary pressure,” the CBO report reads.
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Since last summer, inflation has accelerated to crippling rates not seen in 40 years. Inflation, as gauged by the consumer price index, clocked in at a blistering 9.1% in the 12 months ending in June.
The Democratic legislation, spearheaded by Sens. Joe Manchin (D-WV) and Chuck Schumer (D-NY), includes a few big changes to America’s tax code, including levying a 15% minimum tax on the book income of companies, a provision Democrats say would raise $313 billion in new tax revenue.
The CBO report said the most important factor boosting inflationary pressure in the proposed legislation is responsiveness to the enhancement of health insurance subsidies established by the Affordable Care Act and that the biggest factor in reducing pressure is the book tax.
“Enacting the bill would also reduce some businesses’ incentives to invest through changes in the after-tax return on private investment, pushing down output and inflation,” the CBO said. “In addition, enacting the bill would reduce the incentives of some people to work, mainly because of the enhanced health insurance subsidies, pushing down output and pushing up inflation.”
While the Democratic legislation highlights inflation reduction as a key priority, modeling from the Tax Foundation released this week also found that while its effect on inflation is particularly uncertain, it would be “likely close to zero.”
Additionally, the Penn Wharton Budget Model, calculated at the University of Pennsylvania’s business school, concluded that the legislation’s effect on inflation would be “statistically indistinguishable from zero.”
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The legislation contains other big provisions, such as major incentives for clean energy (which Democrats argue will lower energy prices) and new powers for the federal government to negotiate lower drug prices. The proposal also includes hiking taxes on carried interest, a form of income earned by private equity funds that is subject to a lower tax rate, and increased funding for the Internal Revenue Service — something that is projected to raise revenue.
The bill becoming law faces hurdles, even with Manchin’s support. Sen. Kyrsten Sinema (D-AZ) is another centrist who has been hesitant to go along with some of her party’s tax and spending initiatives in the past. She is looking to nix the legislation’s carried interest provision, and Democrats are reportedly prepared for possible changes to the 15% minimum tax as well.
