Congressional Democrats have asserted that their reconciliation bill will reduce inflation because it, supposedly, reduces the deficit. While there are several issues with this claim—namely that the bill itself contains several inflationary policies—one major issue is that this bill likely will not reduce the deficit at all.
The Penn Wharton Budget Model estimates that the (improperly) named “Inflation Reduction Act,” as written, “would reduce cumulative deficits by $248 billion over the budget window.” Unfortunately, Democrats have included budget gimmicks that only on paper raise revenues, but will not reduce the actual deficit.
The reconciliation bill contains an extension through 2025 of the American Rescue Plan’s expanded Obamacare subsidies. These enhanced benefits are set to expire later this year.
Once these expanded subsidies have been in place for five years, it will be extremely difficult to get rid of them. Given the high likelihood that these subsidies will be extended once they’re set to expire again, the three-year extension is a clear gimmick.
Ironically, in last year’s failed “Build Back Better Act,” Senator Joe Manchin opposed the expanded Child Tax Credit for using the same gimmick. The Washington Post explained his reasoning further:
His opposition isn’t to the CTC specifically. It’s that Manchin sees the sunsetting of the CTC — and the other BBB policies, which also sunset at various times to keep BBB’s cost down — as artificial budget gimmickry.
Instead, Manchin reportedly believes, we should presume the programs will last 10 years, in keeping with the bill’s time window as part of the Senate reconciliation process. Once we do that, Manchin fears, with the expanded CTC the cost of BBB would balloon far beyond his $1.75 trillion limit.
The reconciliation bill that Manchin has now backed would violate this principle, as it only extends expanded Obamacare subsidies for a few years despite reasonable expectations that the subsidies will be extended again. Is this not a budget gimmick, Senator Manchin?
If the expanded subsidies were extended indefinitely, the 10-year budget “deficit reduction” in the bill falls from $248 billion to $89 billion, according to the Penn Wharton Budget Model.
Further, the bill repeals the “rebate rule,” a rule that never was, nor never will be, in effect. Under the Trump administration, the HHS released the rebate rule which sought to lower drug prices by altering payments from drugmakers to pharmacy benefit managers. The Trump administration abandoned the rule and the Biden administration certainly has no intentions to take it back up again. Even so, Democrats claim the repeal would reduce the deficit by $120 billion. Clearly, it would not.
If we do the math on just these two budget gimmicks, this bill does not reduce the deficit. In fact, it seems the bill would increase the deficit by about $30 billion.
To be clear, it is likely that other revenue raisers in this bill are overstated as well.
For example, an additional $80 billion in funding to the IRS is estimated to raise tax revenue by $125 billion. In reality, the tax gap is overestimated, an unreformed IRS will remain ineffective, and wealthy and large corporations—the targets of increased enforcement—are almost always in compliance with the law.
The entire marketing campaign behind the so-called “Inflation Reduction Act” is reliant on ignorance. Democrats’ bill will not reduce the deficit, and it certainly will not reduce inflation.