On Wednesday evening, Senators Joe Manchin and Majority Leader Chuck Schumer announced that they had reached an agreement on a bill imposing a 15% minimum tax on certain large corporations, providing clean energy tax subsidies, incentives for consumers to conserve energy and appropriating significant sums for enhancement of the Internal Revenue Service enforcement efforts. The Inflation Reduction Act of 2022 would raise an estimated $739 billion and provides for $433 billion in estimated spending, resulting in a projected decrease in the federal deficit of approximately $300 billion. The bill, while much smaller than the $3 trillion initially sought by the Biden administration, would bring significant change to large sectors of the economy while impacting millions of Americans.
Inflation Reduction Act: Revenue Raisers
While the Inflation Reduction Act of 2022 leaves the majority of the Trump-era corporate and individual income tax cuts intact, it would also be the largest increase on corporate taxes in decades.
Under the proposal, corporations having “Book Income” in excess of $1 billion would be subject to a 15% alternative minimum tax (AMT). “Book Income” is defined generally as the net income reported on such companies’ financial statements. Many large corporations often report significantly higher income on their financial statements than they report on their federal income tax returns as a result of tax deductions and exclusions that are not taken into account for financial statement purposes. As a minimum tax, it would be due only if it exceeds the corporation’s regular tax. This provision is expected to raise $313 billion.
Another large revenue raiser is a projected $124 billion from a major enforcement investment at the Internal Revenue Service. The bill provides the largest increase in the budget of the IRS in history. This amount is more than paid for, according to Democrats, by closing the “tax gap” – the difference between what people and businesses owe in taxes and what they actually pay. The “tax gap” is estimated to be in the range of almost $400 billion.
In addition, the Inflation Reduction Act attempts to close the “carried interest” tax loophole. Under current law, private equity managers are compensated two ways: a straight percentage management fee and a share of any gain realized on exit from the investment. This second element is what is known as the “carried interest” and is currently taxed at the very favorable, long term capital gains rate. This provision would tax these amounts as short-term capital gains, taxed as ordinary income. This change is estimated to generate $14 billion.
Further, according to the Congressional Budget Office, the bill would raise an estimated $288 billion through reform of prescription drug pricing. This provision allows Medicare to negotiate drug prices with pharmaceutical companies and caps out-of-pocket costs for those on Medicare at $2,000 per year.
Inflation Reduction Act: Expenditures
On the expenditure side, the Inflation Reduction Act provides “over $60 billion for clean energy manufacturing and incentives for wind, solar and battery production.” It also includes another $60 billion to invest in low-income communities to reduce pollution from factories and ports as well as $30 billion in grants and loans to states and utility companies to transition to cleaner forms of electricity. There is also more than $420 billion to support carbon reducing agricultural practices. According to Schumer and Manchin, the bill would result in a 40% reduction of carbon emissions by 2030 and spur American energy independence.
For the consumer, the bill provides a $7,500 tax credit on the purchase of new electronic vehicles and a $4,000 credit for used EV’s by low- or moderate-income taxpayers. In addition, homeowners could receive up to $10 billion in grants and rebates in return for home improvements that increase energy efficiency. There would also be 10 years of tax credits to offset the cost of installing rooftop solar panels.