Inflation Reduction Act: How Biden’s Latest Signature Bill Will Save Californians Money

While the $740 billion “Inflation Reduction Act,” signed on Aug. 16, was broadly designed to cause at least a modest reduction in inflation, the bill contains what the nonpartisan environmental law group Earth Justice called “the biggest climate investment in history.” 

The IRA puts the country on “a real path to climate solutions,” Earth Justice says. But while slowing climate change is of course a laudable and essential goal, the bill also contains provisions that could save Californians on their energy bills and other household costs—health care expenses in particular—almost immediately. 

Here are some ways that the new law could save money:

Energy Savings

The new law allocates a pool of $9 billion to save homeowners cash through rebates on energy-saving changes and upgrades. The biggest rebates are being offered to homeowners who ditch their old-fashioned, fossil-fuel-burning furnaces and electricity-draining air conditioners and install a device known as a heat pump instead.

Heat pumps can be a more efficient way to both heat and cool indoor spaces, according to Consumer Reports. Though they run on electricity, much of which is still generated by fossil fuels, they use less of it than traditional air conditioners and can inexpensively replace gas-burning furnaces.

That’s because they accomplish both heating and cooling functions by pulling heat from the air and pumping it either into the house, when a home needs warming, or out of the house into the outdoors, in much the same fashion as a traditional air conditioner. 

Under the High-Efficiency Electric Home Rebate Program established by the IRA and running through 2031, homeowners can receive up to $8,000 in rebates for purchasing a heat pump that both cools and heats. Each homeowner could also receive up to $6,000 in additional rebates for other upgrades under the program—a $4,000 max rebate for upgrading a home electrical panel to accommodate the new heat pumps; an $850 rebate for a heat-pump clothes dryer; and $1,750 for a heat-pump water heater.

Though the bill doesn’t specify how the rebate program will be administered, or exactly it will be ready to begin (likely, the start times will vary by state) the rebates are intended to be offered at the point of sale, acting as discounts on the purchase price, rather than as tax credits which take until the end of the tax year to show up in homeowner bank accounts.

Cheaper Electric Vehicles

For Californians, specifically those with middle or low incomes, the IRA’s upgrades to the already-existing Electric Vehicle Tax Credit program likely rank among the bill’s most appealing features. 

The new law extends the EV credit program by a  decade, from a previous phase-out in 2024 to 2034. For now, the EV rebate is available only as a tax credit. Starting in 2024, however, car buyers will be able to use the credit right away. The IRA transfers the credit from buyer to car dealer, allowing sellers to knock up to $7,500 (depending  on certain conditions, such as whether the car is assembled in North America) off the purchase price.

The new version of the EV credit program is aimed at middle-income buyers, who are otherwise likely to see an electric vehicle as out of their price range. As of 2021, the average sticker price of an EV was $56,437, or about $10,000 more than a gas-powered car, which went for an average $46,329. The new rebate helps to cover that price difference, but to qualify, buyers must be a single person with an income no higher than $150,000, or a couple with a combined income of $300,000.

The EV credits can also be used to purchase used electric cars, but the rebate is capped at $4,000 and the used vehicle must be for personal use, not a resale. The used-car EV credit is only good for the first time a car is resold.

Converting to ‘Cleaner’ Homes

The IRA makes it at least somewhat cheaper to heat your home with solar panels, or other renewable energy. The federal government already had a program in place called the Residential Energy Efficient Property Credit. Under the new bill signed by Biden, that program gets a new name, the Residential Clean Energy Credit, and an extension through 2034. Under the previous program, the tax credit for installing solar, wind or other clean energy sources in a home was 26 percent.

The IRA bumps that credit up to 30 percent, but only through 2032. For the final scheduled two years of the program, the percentage drops back down to 26. Previously the credit was set to drop to 23 percent in 2013 then expire a year later.

For fuel cell equipment, which generally uses hydrogen to produce electricity, the credit is limited to $500 per half-kilowatt (i.e. 500 watts) of capacity.

IRA Also Targets Wildfire Threat

Though it may not directly affect most homeowners’ everyday expenses, the IRA contains provisions that deal directly with a problem plaguing California in the age of climate change—wildfires.

The massive bill sets aside $2 billion to clean up “hazardous fuels,” that is, dead and excess vegetation that intensifies fires in fire-prone areas under the jurisdiction of the National Forest Service. Of that cash, $1.8 billion is earmarked for “hazardous fuel reduction,” with another $200 million going toward “vegetation management,” and $50 million for protecting old-growth forests.

That money comes on top of the $5 billion for federal forest fire management in the Infrastructure Investment and Jobs Act, also known as the Bipartisan Infrastructure Bill, which was passed by Congress in 2021 and signed into law by Biden in November.

Money from the two bills taken together constitute “the largest investment that we’ve had in forest health and hazardous fuels … in a generation,” the National Wildlife Federation’s David Dreher told the San Francisco Chronicle. 

Health Care Savings in the IRA

The sprawling IRA contains other savings that could help struggling Californians as soon as they take effect, particularly in the crucial area of health care. Low and middle income residents—those who fall within 400 percent of the federal poverty line—who get their health coverage through the Affordable Care Act will continue to receive beefed-up subsidies on their monthly premiums. The additional subsidies were part of a previous COVID relief bill and set to be cut off at the end of 2022.

The IRA extends those subsidies through 2025. Health insurance plans under the Affordable Care Act, also known as “Obamacare,” are available through the “Covered California” program in the state. 

Californians who get their insurance through Medicare Part D, and who need the lifesaving but expensive drug insulin will see their monthly co-pays for the drug capped at $35 starting in 2023, and total out-of-pocket expenses for prescription drugs will be limited to $2,000 annually starting in 2025 for Medicare Part D recipients.

The new law also requires the federal government to negotiate drug prices on certain high-cost drugs for Medicare recipients starting in 2026. The new power to negotiate is expected to bring prices of those drugs down by anywhere from 25 to 65 percent.