On Tuesday, President Joe Biden signed into law the Inflation Reduction Act of 2022 (IRA 2022), a large tax and spending package which was recently passed in party line votes via budget reconciliation in Congress. The final legislation falls far short of what was initially proposed in the President’s Build Back Better program, but advances some key priorities, notably provisions to address climate change, energy security, and affordability of medical care. It also provides, largely at the insistence of centrist Democratic Senators like Joe Manchin of West Virginia, for reduction in the Federal deficit.
Despite media reports that peg its size variously at $740 billion or $440 billion (or other values), the total amount of additional tax revenue and outlay savings is still undergoing analysis by the Congressional Budget Office. Various analysts come to somewhat different conclusions, but it appears the best estimates are actually about $817 billion over the next 10 years. Using these offsets, the program authorizes about $517 billion in additional spending over that period, leaving $300 billion for deficit reduction. (The more widely reported numbers follow analysis by Senate Democrats that nets the spending on and collections from increased IRS tax enforcement.)
So what’s in this major piece of legislation? Let’s take a look (amounts cited represent estimated total impact over the upcoming 10 years).
• Corporate Minimum Tax ($222 billion): U.S. corporations report both “book” profits and taxable profits. Book profits are generally derived from Generally Accepted Accounting Principles and are those that are, for example, reported in the quarterly statements of publicly traded companies. Income for tax purposes is often significantly lower because of various write-offs and other incentives authorized by Congress. The IRA 2022 generally imposes a 15% minimum tax on worldwide book profits for corporations with more than $1 billion in profits over the previous 3 years.
There are some carve-outs. Notably, accelerated depreciation (typically used by companies to write off the cost of investment in equipment more quickly than the equipment’s expected lifespan) can be used to take companies below the 15% payment level. This was preserved to support U.S. manufacturers.
The minimum tax is expected to impact different companies and industries to varying extent with at least one analysis predicting that Utilities & Agriculture will face much higher hikes in their effective tax rate than other industries.
• Enhanced IRS Tax Enforcement ($204 billion): The tax collection agency is provided additional resources that is expected to generate additional revenue via enforcement. Officials have pledged (and the legislation indicates) that these efforts will focus exclusively on high-income households and corporations.
• Stock Buyback 1% Excise ($74 billion): Corporations will pay 1% tax on the value of their own stock that they buy back from shareholders. Share buybacks are a popular way for corporations to return capital to shareholders because of their tax efficiency. This only partially erodes that by adding an additional cost to the acquiring corporation.
• Loss Limitation Extension ($52 billion): Part of the Tax Cuts and Job Act of 2017 restricted the amount of reported business losses owners can use to offset non-business income. Those caps ($250,000 for an individual, $500,000 for a married couple) were set to expire after 2026 under an extension imposed by the CARES ACT in 2020. The IRA 2022 extends them for an additional 2 years, through 2028.
• Energy Security & Climate Change ($369 billion): By far the largest new spending authorized under the IRA 2022 is a cluster of programs to promote alternative energy sources, improve energy efficiency and address climate change. They include a series of tax credits, loans and grants to companies for production of and investment in clean energy, greenhouse gas emission, and other alternative technologies including nuclear energy and biofuels (along with battery storage). In some cases, there are additional benefits to these companies based on worker pay and domestic manufacturing.
On the consumer side, tax credits are available for clean energy spending such as solar panels and wind. The legislation also provides for tax credits of up to $7,500 for qualifying consumers to purchase electric vehicles. However because of provisions that restrict sources of certain minerals used in the vehicle batteries, a great many vehicles will not qualify. China, a non-permitted supplier, is a major source for the necessary minerals.
The package also includes spending for conservation, drought resiliency and support of communities and individuals affected by pollution and climate change.• Enhanced IRS Enforcement ($80 billion): After a decade of cuts to the tax collection agency’s budget, it now has fewer auditors than at any time since World War II. In order to realize the enhanced collections mentioned above, the IRA 2002 authorizes $80 billion in additional spending to bolster staffing and capabilities.
• Affordable Care Act Benefit Extension ($64 billion): The American Rescue Plan Act of 2021 provided enhanced subsidies for health insurance premiums for almost 30 million Americans. Those benefits were set to expire at the end of this year. They receive a three-year extension under the IRA 2002. In addition, the legislation caps out-of-pocket drug costs for seniors on Medicare.
• Deficit Reduction ($300 billion): After netting out the spending provisions, the legislation provides for about $300 billion in deficit reduction over the 10-year period.
As always, you should consult a professional about your particular situation. If you would like to discuss potential economic or market impacts of the act or other financial issues, please reach out to us at Hancock Whitney Wealth Management.
Sources: Associated Press, The Hill, Institute on Taxation and Economic Policy, Tax Foundation, senate.gov, tradingeconomics.com, Piper Sandler, Kaiser Family Foundation
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