On August 12 we posted Inflation Reduction Act (aka Build Back "SOMEWHAT" Better) Passes Senate, where we discussed that the Senate debated a revised version of Democrats' Inflation Reduction Act (H.R. 5376), following changes made as a result of negotiations with Arizona Sen. Kyrsten Sinema, which passed the Senate. The House of Representatives tested bill on August 12 and the president has since signed the bill.
What's in the Inflation Reduction Act?
Revenue and spending in the legislation breaks down as follows, according to the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT):1
|15% corporate minimum tax *
|Prescription drug pricing reform **
|Enhanced IRS tax enforcement **
|Total revenue raised
|Energy security and climate change investment ***
|Affordable Care Act extension **
|TOTAL DEFICIT REDUCTION
Following are highlights of some of the most notable features of the Inflation Reduction Act of 2022:
15% corporate minimum tax
The bill introduces a new 15% minimum tax on corporations to help pay for climate and health care measures. The tax applies to companies that generate $1 billion in annual earnings. The Joint Committee on Taxation (JCT) estimates the tax will raise $313 billion in revenue over the next decade. Exemptions from the tax demanded by Sen. Kyrsten Sinema (D-Ariz.) to secure her 'yes' vote include:
- Exemption for companies that use accelerated depreciation to help pay for new investments.
- Exclusion of small businesses that are subsidiaries of private equity firms.
Prescription drug pricing reform
The bill allows Medicare to negotiate prices for some drugs for the first time. This is a policy Democrats have attempted to enact, over objections from the pharmaceutical industry, for many years. The provisions are expected to save $288 billion over 10 years according to analysis by the CBO.
Specifically, the legislation would let Medicare negotiate lower prices for 10 high-cost drugs beginning in 2026.
This would jump to 20 drugs by 2029. Companies that refuse to negotiate will be subject to an up to 95% sales tax on that drug. The bill includes a ceiling on the negotiated price of the specified drug. Moderate Democrats, including Sen. Sinema, inserted a requirement that price negotiations only apply to older drugs (9 years for most/13 years for biologic drugs).
- 95% Sales tax penalty levied on companies that refuse to negotiate drug prices with Medicare.
- The bill caps out-of-pocket drug costs at $2,000 a year for Medicare beneficiaries, starting in 2025.
- It also caps insulin costs for people on Medicare at $35 a month. The original proposal called for a cap on both Medicare and private insurance patients, but Republicans voted against extending protection to those on private plans.
Other drug cost caps, which mostly apply to Medicare beneficiaries, are in the legislation as well. Those who get insurance under private plans are largely excluded from these caps because Senate rules limit how expansive such provisions can be.
A further protection mandates that drug companies that raise prices on Medicare faster than the rate of inflation must pay rebates to the government for the price difference.
Enhanced IRS tax enforcement
The Inflation Reduction Act of 2022 allocates $80 billion to increase enforcement by the IRS. Supporters of the measure hope that additional employees and better technology will allow the IRS to catch more tax cheats, especially among the ultra-wealthy. The CBO believes this could boost IRS revenue by at least $124 billion over the next decade.
Stock buybacks will be subject to an additional tax once the legislation becomes law. A 1% excise tax on buybacks is expected to generate $74 billion by 2031.
In a bid to recoup tax revenue lost to private equity, the act imposes a limit on losses businesses can deduct from their taxes. These measures are designed to prevent wealthy individuals from reducing or even wiping out their income tax liability.
Energy security and climate change investment
The largest investment made by the Inflation Reduction Act of 2022 is for energy security and climate change. It totals $369 billion and consists of the following:3
Business Incentives and Tax Credits
- Incentives to businesses to deploy lower-carbon and carbon-free energy sources.
- Tax credits for energy production and investments in wind, solar, and geothermal energies.
- Tax credits for investment in battery storage and biogas.
- Tax credits for investments in nuclear energy, hydrogen energy coming from clean sources, biofuels, and technology that captures carbon from fossil fuel power plants.
- Bonuses for companies based on worker pay and the manufacture of steel, iron, and other components in the U.S.
New tax credit rules make EV tax credit hard to get:3
- EV must be made in North America.
- Eliminates credits for pricey EVs, i.e., Hummer EV, Lucid Air, and Tesla Model S and Model X.
- Lowers tax credit on new EVs with battery minerals sourced from countries other than the U.S.
Business and Consumer Incentives
- Incentives to companies and consumers who make cleaner energy choices.
- Tax credits for residential clean energy costs including rooftop solar, heat pumps, and small wind energy systems. 30% credit through 2032—phases down after 2032.
- Electric vehicle tax credits of up to $7,500 on new EVs and $4,000 on used.
- Tax credit for energy efficiency in commercial buildings.
- Grants and loans to help companies reduce emissions of gas methane from oil and gas.
- Fees levied on producers with excess methane emissions.
- $27 billion toward additional incentives for clean energy technology.
Some provisions of the Inflation Reduction Act of 2022 actually increase fossil fuel production on public lands.
Use of Public Lands
- New requirements to hold lease sales that open up new oil and gas production.
- Reinstatement of a recent offshore oil and gas lease sale that was struck down on environmental grounds.
- Requirement that the Interior Department hold at least three more offshore oil and gas lease sales by next October.
- Minimum royalties increase for companies that extract oil and gas on public lands and waters.
- Added royalty for public land and water extraction of gas that is later burned off or released as waste instead of sold as fuel.
- $3 billion for environmental justice block grants—community-led programs that address harms from climate change and pollutants, including $20 million for technical assistance at the community level, through fiscal 2026.
- $3+ billion for air pollution monitoring in low-income communities with $117 million going to communities in close proximity to industrial pollutants.
- Excise tax increase from 9.7 to 16.4 cents per barrel on imported petroleum and crude oil products to fund the cleanup of industrial disaster site increases.
- Permanent extension of the tax on coal production that funds the Black Lung Disability Trust Fund, which finances claims from workers with the condition.
Affordable Care Act extension
The legislation extends financial assistance to help people enrolled in ACA through 2025.
Without this action, extra assistance would have stopped at the end of 2022. The provision also expands eligibility to allow more middle-class people to receive premium help. The extension of ACA help is estimated to cost $64 billion by the CBO.
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Read more at: Tax Times blog