On Aug. 7, the U.S. Senate passed reconciliation bill H.R. 5376, the Inflation Reduction Act. The House of Representatives passed the reconciled bill on Aug. 12. The bill ended up being a slimmed-down version of President Biden’s $2.2 trillion “Build Back Better” bill. The original bill stressed a tightened social net and expanded green initiatives.
Swing Democrat Sens. Joe Manchin (W.Va.) and Kyrsten Sinema (Ariz.) managed to achieve concessions that limited social giveaways and some tax increases. But what’s in the bill, and how does it affect you?
Corporate Taxes Applied
There are some increases in taxes for corporations and stockholders.
The Inflation Reduction Act imposes a minimum 15 percent tax on the “average annual adjusted financial statement income of domestic corporations.” The tax applies to those statements that exceed $1 billion. This is applied over a specified three-year period.
It does not include regulated investment companies, real estate investment trusts, and S corporations. The tax comes into effect in taxable years after Dec. 31, 2022.
Excise Tax on Corporate Stock Repurchase
An excise tax of one percent will be levied on a domestic corporation’s fair market stock value of repurchased stock. This takes place after 2022. A repurchase, or buyback, uses a publicly traded corporation’s cash to buy back its own stock. When this happens, there is an increase in the stock price.
Often corporations will repurchase stock to create additional value for shareholders. Since numerous 401(k) plans are invested in stocks, this repurchase often helps middle-class fund owners.
Stock owners are taxed on dividends but rising stock prices are not taxed. This creates additional untaxed wealth for stockholders.
The jury is out whether the excise tax will hinder a corporation’s willingness to repurchase stock.
Superfund Excise Tax Passed
A superfund excise tax will be reinstated on crude oil and designated petroleum products effective Jan. 1, 2023. This applies to oil imported to U.S. refineries for U.S. consumption. In addition, warehousing imported oil for consumption will also be taxed.
The tax is 16.4 cents per barrel, indexed annually for inflation. The last superfund excise tax expired in 1995 and was 9.7 cents per barrel. The question is, will this excise tax be passed on to U.S. consumers?
Green Energy Expenditures
The total bill expenditure is over $700 billion, but the green energy portion of the bill includes $369 billion in climate and energy programs. These are the highlights.
Electric vehicles (EVs) will continue to receive tax credits. Currently, the credit is up to $7,500 on the first year’s EV purchase. It fades out at 50 percent the next year and 25 percent the third year. As of June 2022, the average price of an EV in the United States was $66,000 according to Kelley Blue Book estimates, and this price has been steadily rising.
Tax Credits for Zero Emissions
The bill allows for tax credits after 2023 for qualifying zero-emission nuclear power. It also has tax credits for producing and selling qualified wind and solar components. Other tax credits include clean hydrogen power production and investment in zero-emissions electricity generation facilities.
Tax credits have been extended through 2024 for producing wind, biomass, geothermal, and solar electricity. This also includes marine and hydrokinetic resources.
The Inflation Reduction Act also provides funding for the Department of Energy’s national laboratories. This includes funding to increase the availability of “high-assay low-enriched uranium used in advanced nuclear reactors.”
Oil and Gas Leasing on Public Lands
Provisions related to public lands oil and gas leasing were modified. The bill increases minimum royalty rates for oil and gas leases on federal land and the outer continental shelf. It also requires royalties to be paid for methane extraction on federal lands. This adds to the expense of domestic energy production.
Additional Funding for the IRS
The Inflation Reduction Act will restore the Internal Revenue Service (IRS) to its 1995 staffing levels. The plan is to hire over 80,000 new IRS agents. The Treasury Department says these new positions will include information technology specialists, experienced auditors, and support staff. Biden has said that enforcement will be targeting corporations and those making more than $400,000 a year.
In an interview with Time magazine, Natasha Sarin, a treasury department counselor for tax policy and implementation, said that it’s “wholly inaccurate to describe any of these resources as being about increasing audit scrutiny of the middle class or small businesses.” But the numbers may say differently.
The additional enforcement revenue is projected to be $35.3 billion per year by 2031 according to the Congressional Budget Office (CBO). But those individuals earning $400,000 or more per year make up 1.8 percent of the U.S. population. If every one of those 1.8 percent were audited and found to owe money, would that be enough to generate that $35.3 billion projection?
According to The Heritage Foundation, about 30 percent to 40 percent of audits require additional taxes owed. This brings the 1.8 percent number down further when it comes to making up that $35.3 billion in projected revenue.
Prescription Pricing Reforms
The bill requires the Centers for Medicare & Medicaid Services (CMS) to negotiate, under Medicare, prices for specific prescription drugs beginning in 2026. Prices for brand-name drugs that don’t have generic equivalents must be negotiated. Any drug manufacturer that fails to comply with negotiation requirements is subject to excise taxes and civil penalties.
Eliminating Some Cost Sharing for Medicare
Cost-sharing under the Medicare prescription drug benefit for specified vaccines is eliminated. The bill also eliminates cost sharing for Medicaid recipients and the Children’s Health Insurance Program (CHIP).
Insulin products will receive a cap on cost-sharing with the Medicare prescription drug benefit. The cap is $35 a month.
Affordable Care Act Subsidies
More individuals will be subsidized through the Affordable Care Act (ACA). The current subsidies have been extended. But beyond poverty-level recipients, an individual may now be 400 percent above the poverty level to qualify for ACA premium subsidies. The poverty level for an individual is currently $12,880 or less in annual income.
Upon closer scrutiny, it’s clear that there are more questions raised than solutions proposed. Each item has a question mark as to the positive or negative effect on consumers.
And like any federal legislation, it’s implemented over the years, not months. So the viability of this bill may not withstand the future.
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