Inside the Inflation Reduction Act: Drugs, electric vehicles, and taxes : The Indicator from Planet Money We assess the Inflation Reduction Act: Will there be unintended consequences from taking on Big Pharma? Will electric vehicles become cheap? And does the tax department need more money?

Drugs, electric cars, taxes

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SYLVIE DOUGLIS, BYLINE: NPR.

(SOUNDBITE OF DROP ELECTRIC’S "WAKING UP TO THE FIRE")

WAILIN WONG, HOST:

Inflation has gotten so big in recent months that, this week, Congress named a bill in its honor.

DARIAN WOODS, HOST:

It is the word of the year, I guess. This is the Inflation Reduction Act of 2022, a largely deflated version of President Biden's Build Back Better bill.

PADDY HIRSCH, HOST:

Yes, there's a proposed 15% minimum tax on corporations pulling in more than a billion dollars in annual profits. There's more than $350 billion for energy and climate programs and an extension of subsidies for health insurance plans through the Affordable Care Act.

WONG: We want to look at some of the items in this bill to see where our economy is going.

(SOUNDBITE OF MUSIC)

WONG: This is THE INDICATOR FROM PLANET MONEY. I'm Wailin Wong.

WOODS: I'm Darian Woods.

HIRSCH: And I'm Paddy Hirsch. And on today's Indicators of the Week, we're talking Medicare negotiating drug prices...

WONG: ...Tax credits for electric vehicles...

WOODS: ...And funding meant to help the IRS get its groove back. That's all coming up after the break.

(SOUNDBITE OF MUSIC)

WONG: Indicators of the Week, special edition, from the Inflation Reduction Act. You go first, Darian.

WOODS: All right. My indicator is the $288 billion that could be saved by allowing the government to directly negotiate some Medicare drug prices. So the status quo is that the government cannot negotiate directly with drug companies to bring down these Medicare prescription prices, and that contributes to drug prices being really expensive in the U.S. compared to the rest of the world.

HIRSCH: It's kind of unbelievable that the government would just tie its hands like that.

WOODS: But, to be fair, there is an argument that high drug prices are actually a good thing.

WONG: For the drug companies?

HIRSCH: Yeah.

WOODS: Well, for the world...

WONG: (Laughter).

WOODS: ...For the world, for the world - they could encourage innovation and new drugs. And to explain this, we need to cover some pharmaceutical economics 101.

WONG: Ooh. Buckle up, folks.

WOODS: All right. So most drugs - like pills and tablets - the actual production of a drug is super cheap. Like, you can just pump these out for pennies. But what is expensive is the research that goes into finding and testing a new drug and getting government approvals. And it takes, on average, over a billion dollars to develop a new drug. And the vast majority of drugs under development don't even make it to market. So just imagine you spend a billion on testing a new drug, Paddy, and then a competitor, Wailin Wong, comes in, and she starts selling the drugs for pennies. You're not going to make much money, right?

HIRSCH: I'd certainly - I'd be a fool to do that again for new drugs if I was just going to get burned all the time.

WOODS: Yeah. You're like - you're not a charity; you are a drug manufacturing company. And so that is why the government steps in to encourage innovation. And there's a few ways that it does this, and the main way is through patents. So patents are legal protections that, for drugs, last 20 years. They protect drug companies from those competitors undercutting them. Also, the government directly funds research. Plus, there are no price controls, like in other countries. So all of these things together give drug companies a reward for developing new and better drugs. But another way - and this is relevant to the new legislation - is through the sky-high amounts that drugmakers can charge Medicare. And so I wanted to know - do we expect fewer drugs to be made in the future because of this change?

HIRSCH: I'm going to guess that the answer is yes.

WOODS: Yeah, that's a sadly - yeah, it's yes. There isn't such a thing as a free lunch here. The Congressional Budget Office is a nonpartisan government agency, and it estimates that this would result in those cost savings to the government, but that it could lead to one fewer drug coming to market every two years. And that's out of about 100 drugs that would be typically approved over the same period. So it's not insignificant. Now, we don't know how revolutionary that new drug would have been - whether it would have been a teeth-whitening pill or a miraculous leukemia treatment - but it's worth noting the tradeoff.

HIRSCH: Wow, that's kind of sobering. Wailin, what have you got?

WONG: Well, a big focus of this bill is climate. That surprise joint statement on Wednesday from Senators Joe Manchin and Chuck Schumer said the legislation will help the U.S. reduce its carbon emissions - something we all want, right? The bill has incentives for consumers to switch to cleaner technology and for companies to make that technology. So my indicator focuses on this first category - what's in it for consumers?

WOODS: What's in it for me?

WONG: Yeah, exactly. And what's in it for you, Darian, are tax credits for buying electric vehicles.

WOODS: All right. I mean, I have no vehicle now, so an electric vehicle would be amazing.

WONG: So the bill extends the credit for new EVs that's already been in place for over a decade. That's still going on. What's new in the bill is a tax credit for used electric vehicles.

WOODS: That's more in my price range.

(LAUGHTER)

WONG: That credit is $4,000 or 30% of the sale price, whichever is less. So that's my indicator - $4,000.

HIRSCH: Not too shabby.

WOODS: All right.

WONG: Now, what's surprising is that Joe Manchin has very much been on the record about how much he dislikes tax credits for EVs.

(SOUNDBITE OF ARCHIVED RECORDING)

JOE MANCHIN: Thank you, Mr. Chairman, and...

WONG: Here he is at a Senate hearing just a few months ago saying it doesn't make sense to offer credits when there are waiting lists for these cars.

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MANCHIN: And we can't produce enough product for the people that want it, and we're still going to pay them to take it. It's absolutely ludicrous in my mind. But...

HIRSCH: Yeah, at first glance that does sound a little ludicrous. So how did this idea become less ludicrous for Manchin?

WONG: Well, first of all, there didn't used to be income maximums on who qualified for an EV credit. Now there are for both new and used purchases. And in addition, for those used vehicles, you have to buy the car from a dealer, and it has to be the first time that that car is resold. And there's also a price limit. So the used car has to cost $25,000 or less. And if you've looked at the prices for used EVs lately, you know that is way below what they are currently going for.

HIRSCH: (Laughter).

WOODS: Oh, I haven't looked at them, but that's depressing.

HIRSCH: Yeah.

WOODS: (Laughter).

HIRSCH: Don't look. It's depressing.

WONG: (Laughter).

HIRSCH: All right. So these tax credits might not lead to an EV shopping spree then.

WONG: At least not in the short term, but, you know, the credits go through 2032. Things could change. I will say, though, that if you were hoping to buy an e-bike, you know, something cheaper and less polluting than a car, you are out of luck. There was a proposed tax credit for e-bikes that was in Build Back Better, and it did not make it into this version.

WOODS: I'll go with my human-powered bike then.

WONG: (Laughter).

WOODS: Paddy, what else is in this Inflation Reduction Act?

HIRSCH: My indicator is 80 billion. That is the amount of money that this legislation would send to the IRS over 10 years. Now, I know nobody really likes the IRS that much, but this is an agency that really, really needs more funding. Its budget's been cut by 23% since 2010, and that means a couple of things. Firstly, it means it's not really doing its main job, which is, you know, collecting taxes. As much as a trillion dollars goes uncollected in taxes each year because the IRS simply hasn't got the people power either to audit taxpayers properly or to go after tax dodgers.

WOODS: That seems pretty important, for a civilization to be able to collect and enforce taxes.

HIRSCH: Yes. And they ain't doing it. And the second issue also has to do with resourcing. Because the IRS hasn't got enough people on staff, it is unable to process tax returns fast enough. There are as many as 9.6 million returns that haven't been processed, and that is obviously a real pain for those people who sent those returns in. But it's a really huge pain for those people who are expecting refunds, right? And it's not good for the economy either. A lot of people depend on tax refund money to pay their bills. And this is a serious drain on the economy, to have billions of dollars left unspent every year.

WONG: Yeah, it's like an anti-stimulus.

HIRSCH: It is indeed. And delaying refunds is really, really bad for the government, too, because the IRS has to pay interest on those unpaid refunds after 45 days. And at 4% interest, we're actually talking about billions of dollars here - just goes straight out the door. Last year, the IRS paid out $3.3 billion in interest alone. It's paid out $14 billion in interest over the last seven years. So if you spend $80 billion to fund the IRS, frankly, that seems like a really smart thing, just to keep some money coming into the Treasury. And Democrats who put this bill together say a bolstered IRS would eventually be able to collect an additional $203 billion, which would help reduce the deficit and fund measures to tackle climate change.

WONG: So it, like, takes money to collect money, to give money back to people.

HIRSCH: It absolutely does.

WONG: And so $80 billion, is that enough to do the job?

HIRSCH: Well, it's more than what President Trump proposed. He proposed $15 billion over 10 years. This is 80 billion over 10 years. But then the Donald's probably not a huge fan of the IRS. Although, it's kind of hard to say that, given that he's never actually showed us his tax returns.

WONG: Maybe they're still processing them.

(SOUNDBITE OF MUSIC)

WOODS: This episode was produced by Nicky Ouellet with engineering from Robert Rodriguez. Kathryn Yang checks the facts. Viet Le is our senior producer. Kate Concannon edits the show. And THE INDICATOR is a production of NPR.

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