IRA Changes Could Erase $500 Billion of Long-Term Savings

Recently, we estimated the original Inflation Reduction Act (IRA) would reduce deficits by roughly $1.5 trillion over two decades, or nearly $2 trillion with interest. However, a variety of changes and amendments to the bill – some put in place to comply with the Byrd Rule – have reduced those savings by a third to less than $1 trillion, before interest. The White House has the power to restore most of these lost savings by using its rule-making authority to permanently cancel a Trump-era prescription drug rebate rule. Repealing this rule would ensure adherence to the original Inflation Reduction Act agreement and restore $400 billion of savings in the second decade, while also preventing the creation of a new slush fund to enable short-term borrowing.

Updating Our Long-Term Estimate of the IRA

Earlier this month, we estimated the IRA would reduce deficits by $1.5 trillion through 2042, with $1.3 trillion of drug savings and $1.1 trillion of net revenue more than covering the $900 billion of spending and tax breaks. However, modifications made between the original and final version of the bill substantially reduced those savings. We now find the bill would reduce deficits (excluding interest) by roughly $1 trillion through 2042; those savings would fall to $400 billion if the temporary Affordable Care Act (ACA) subsidy expansions were made permanent.

Estimated Deficit Impact of IRA, 2023-2042

Sources: Congressional Budget Office, Joint Committee on Taxation, and Committee for a Responsible Federal Budget. Estimates are rounded to the nearest $50 billion and may not sum due to rounding.

The lower deficit reduction is driven in part by changes to the revenue-raising measures in the IRA and in part due to changes around the drug pricing and inflation cap rules. Most of the lost savings, however, come from the decision to delay the implementation of a Trump-era drug rebate rule, rather than to repeal it permanently. This change was apparently made in order to comply with the Byrd Rule that limits policies in reconciliation to ones that are relevant to the budget resolution, which covers ten years. However, it has serious budgetary implications.

We estimate that repealing the rule would have saved the federal government roughly $550 billion through 2042. Delaying its start date to 2032 will save less than $150 billion. Additionally, the delay of this rule will likely open the door for future Congresses to pass further delays as an offset for more near-term spending or tax breaks. Using continued delays of this rule as a "slush fund" in this fashion would result in higher near-term borrowing and could exacerbate inflationary pressures.

The White House Can Restore the Long-Term Savings

While changes to the Inflation Reduction Act reduced its long-term savings by roughly one-third, the vast majority of those savings can be restored through executive action. The IRA delayed the implementation of the drug rebate rule legislation, but because it is a rule, it can be canceled by the executive branch through the normal rulemaking process.

The Committee for a Responsible Federal Budget recently called on President Biden to cancel the rebate rule permanently, thus fulfilling the original intent of the Inflation Reduction Act. We estimate that doing so would increase deficit reduction under the bill to nearly $1.4 trillion through 2042, only slightly lower than the original bill's savings. As CRFB president Maya MacGuineas explained:

Policymakers agreed to end this rebate rule, and they should abide by that agreement. Because the rule was established by executive action, it can be repealed with similar action, and President Biden should begin the process of ending this rebate rule as was originally agreed to.

With debt on an unsustainable long-term trajectory, the President should use his authority to fulfill Congress's intent and begin to put debt on a better path.