Cut Inflation Act Won’t Help West Virginia
Senators Joe Manchin (WV) and Chuck Schumer (NY) recently accepted a slimmed down version of the failed Build Back Better plan they call the Inflation Reduction Act (IRA). Manchin and other IRA supporters say it will spur economic growth and reduce inflation, but that’s unlikely, especially in states like West Virginia that face unresolved issues. ‘IRA.
The IRA spends nearly $400 billion in energy tax credits and around $100 billion in health care subsidies, mostly for people who buy Affordable Care Act (ACA) insurance plans . These proposed expenditures would be funded by increased corporate taxes, “better” IRS enforcement, increased taxes on investment returns, and savings through the implementation of price controls on certain drugs purchased by the government through Medicare and other programs. Tax increases and cost savings are expected to generate $305 billion more than spending, and this surplus would be used to reduce the deficit.
In itself, deficit reduction is a great idea. The Congressional Budget Office (CBO) projects that deficits will rise from 4% of GDP this year to 11% of GDP by 2052. As the Committee for a Responsible Federal Budget warns, high debt levels, that result in high annual deficits, threaten economic growth, contribute to inflation, create geopolitical risks, make it more difficult to respond to pandemics and other emergencies, and are unfair to future generations who must bear the burden.
But if deficit reduction is necessary, not all deficit reduction plans are good, and the IRA is not a good plan for several reasons.
First, IRA tax credits for things like elective vehicles (EVs) are more likely to raise prices than lower them. The credits will increase the demand for electric vehicles without doing anything to facilitate their manufacture. With inflation already high and supply chains still recovering from the pandemic, tax credits that stimulate demand are a bad idea.
This is also true for building new energy infrastructure such as solar panels or wind turbines and additional ACA subsidies – tax credits and subsidies without increasing supply will make things more expensive, not less. . Consistent with this reasoning, the Penn-Wharton budget model predicts that the IRA will slightly increase inflation until 2024.
Real price reductions happen when companies find cheaper ways to make things or provide services, not when governments try to hide higher prices from consumers through subsidies and tax credits. Since nothing in the IRA makes it easier to build or craft items, or encourage more people to become doctors or nurses, it’s unrealistic to expect it to reduce the cost of production. energy or health care. Instead, the actual costs will simply be obscured.
Inflation is already costing West Virginia households between $400 and $500 more per month, according to the Joint Economic Committee of the US Congress. The last thing West Virginians need is higher prices caused by subsidies and IRA tax credits that demand for juice as supply struggles to keep up.
Second, the tax increases in the IRA will discourage production and investment, further weakening the supply side of the economy. As I’ve written before, research shows that higher corporate taxes are largely paid for by workers and consumers through lower wages and higher prices. Real incomes have fallen 3.6% over the past year, so even lower wages and higher prices are not what people need right now.
The US Congressional Joint Committee on Taxation estimates that 50% of the corporate tax increase proposed by the IRA will hit manufacturers. Democrats often say they want to boost America’s manufacturing industry, but the IRA will hurt it as companies face complex new tax rules that reduce their ability to invest in their workers and facilities. West Virginia has 47,000 manufacturing workers who are more likely to be hurt than helped by IRA tax increases.
West Virginia’s labor force participation rate is 56.2%, one of the lowest in the country. The state needs private sector investment to create badly needed jobs. Government officials are doing some things to spur economic growth, such as reforming their regulatory analysis capacity so that burdensome regulations are thrown out or reformed, but they need to do more.
Changes in federal policy would also help. West Virginia is ranked 8e on the Mercatus Center of George Mason University’s FRASE index which ranks states based on their impact on federal regulation. That means federal regulations are a bigger barrier to economic growth in West Virginia than in most other states. If Senator Manchin wants to help the people of West Virginia, he should focus his energy on cutting federal bureaucracy that is hurting his state’s economy.
The IRA is smaller than the failed Build Back Better plan, but it’s not better. It still contains too many government interventions that distort the economy by subsidizing some industries and taxing others. It is also more likely to increase inflation than decrease it since it would encourage demand without increasing supply. If Congress wants to help the economy, it should go back to the drawing board.