What We Do and Do Not Know About the Inflation Reduction Act of 2022
At the beginning of last week it appeared that Senator Joe Manchin (D-WV) had walked from negotiations over a broad reconciliation package in favor of a more narrow bill addressing prescription drug pricing and the extension of expanded Obamacare subsidies. Last Monday Senator Manchin also announced that he, like multiple other Senators, had tested positive for COVID 19, raising further questions about what, if anything, the Senate might be able to get done before its August recess.
Then on Wednesday, Senator Manchin and Majority Leader Chuck Schumer (D-NY) made a surprise announcement that they had reached an agreement on a broad bill that has the very timely title – the Inflation Reduction Act of 2022.
Here’s what we know:
- The legislation is estimated to raise $739 billion, expend $433 billion and reduce the deficit by around $300 billion.
- The largest pay-for is a new 15% minimum corporate tax (commonly known as a book tax) which alone is estimated to raise $313 billion. This tax will only hit those mega C Corporations with profits exceeding a billion dollars. [Technically, the 15% tax will be on “book income” which is the profit that is reported on financial statements for shareholders, subject to certain adjustments.] While the poster child for this tax is Amazon, there are apparently another 199 mega corporations who could be subject to the tax. Additional funds will be raised through new provisions allowing Medicare to negotiate drug prices, increasing IRS tax enforcement and changing the carried interest rules, particularly for investment professionals with an adjusted gross income in excess of $400,000. Even though the charge has been made that this bill could increase taxes for individuals who make less than $400,000, it is not clear what provisions are being referred to in in making this claim.
- $369 billion of expenditures in the bill will go towards clean energy and climate provisions. These include a range of energy targeted tax credits among them electric car credits, renewable energy credits and consumer energy credits. In announcing the bill, Senators Schumer and Manchin emphasized that the provisions would be estimated to cut greenhouse gas emissions by approximately 40%? by 2030. Key to getting Senator Manchin (hailing from a coal state) on board with these provisions, the bill also includes carbon capture credits and provisions on federal oil and gas leases (opposed by the environmental community).
- The bill will also extend expanded Affordable Care Act (ACA or Obamacare) premium subsidies through the end of 2025. This, along with the drug pricing provision, was part of the narrower bill that we were all expecting to pass.
- The bill does not address the state and local tax (SALT) deduction but that is not likely to prevent its passage. In the House numerous members from high tax states have previously insisted that any reconciliation bill must address the current cap on the SALT deduction (put in place by the Tax Cuts and Jobs Act). However, when presented with the Inflation Reduction Act this week, these members seemed generally willing to support the bill. The fact that the bill doesn’t touch personal taxes in any way seems to make the package palatable (and will presumably help with messaging at home). As we get closer to January 1, 2026, the need to get SALT relief becomes less important since the entire provision expires on December 31, 2025. The SALT deduction is 100% restored as of January 1, 2026 to how it stood before the Trump tax cuts.
- The Republicans will try to use the vote-a-rama to force hard votes for at-risk Democrats. While the time for debate on reconciliation bills in the Senate is limited (which is what prevents a filibuster and allows the bill to pass on a majority vote), a reconciliation bill cannot be passed until all amendments have been considered. Thus, consideration of a reconciliation bill typically triggers a “vote-a-rama” process during which any Senator can introduce an amendment to the bill as long as it is deemed to be germane by the Senate Parliamentarian. Not only do Republicans oppose the reconciliation bill on its merits, but the timing of the new bill – announced just shortly after the Senate passed the $280 billion China completion package which Minority Leader McConnell had previously been using as a bargaining chip to prevent a larger reconciliation bill – has certainly added flame to the fire. The Republicans will do what they can in vote-a-rama to put forth amendments that will split the party or create tough decisions for vulnerable Democrats looking ahead to reelection this fall.
Here’s what we don’t know:
- Whether Senator Kyrsten Sinema (D-AZ) will support the bill. As you’ll recall, Senator Sinema was the other vocal holdout who stood in the way of the Senate taking up the House-passed Build Back Better bill. Senator Sinema has made it clear that she’s not thrilled at having been left out of the secret negotiations (when asked, Senator Manchin said this was because he didn’t think they would come to fruition) and has been non-committal about whether she will support the bill or demand changes. Any changes could prove the breaking point to the fragile peace that Senators Schumer and Manchin have negotiated. Don’t be surprised if the carried interest tax provision is dropped to keep Senator Sinema in the deal (some of us wouldn’t be surprised to learn that it was included for just this reason). This provision is a very minor revenue raiser when compared to the other two revenue raisers. What we do know now is that we can breathe a sigh of relief that there will be no increase in the capital gains tax rate, no reduction to the 199 deduction for pass-throughs, no elimination of the stepped-up in basis for assets going through an estate, no change to the 3.8% net investment income tax (NIT) and no change to 1031 like-kind exchanges. This represents a huge win for the SBLC and all of our members.
- Whether all the provisions will be deemed reconciliation eligible. Last Wednesday, Senator Schumer turned the 700+ page draft of the bill over to the Senate Parliamentarian for review. Because the Democrats are trying to pass the bill through reconciliation all provisions must be related to spending, revenue or the debt limit and cannot increase the deficit outside the 10 year budget window. The role of the Senate Parliamentarian and her team will be to review each provision of the legislation to determine if any fail to meet this criteria. The proponents of the bill can work with the parliamentarian to tweak provision to make them pass muster or to try to convince the parliamentarian that the provisions qualify. Technically, the Senate Parliamentarians decision can be overruled by a majority in the Senate but this can be politically dicey.
- The timing for taking up the bill. Senator Schumer told his caucus Thursday that they should be prepared to work through next weekend and that the start of recess may be delayed a few days. Senator Schumer clearly wants to move the bill as quickly as possible but there are a few complicating factors. First is the review by the Senate Parliamentarian discussed above. The Parliamentarian was already reviewing the smaller drug pricing and ACA subsidies package that has now been rolled into this bill and Senators Schumer and Manchin are clearly hoping that the Parliamentarian’s review of the larger bill will be expedited with Senator Manchin most recently saying that they are hoping to have the decisions back by next weekend. Additionally, COVID could throw a wrench in things because the Democrats will need every single member of their caucus (plus the two Independents who caucus with them) to vote for the bill and the Senate does not allow for proxy voting. Just this past Thursday, Majority Whip Dick Durbin (D-IL) announced he had COVID. The Democrats will need to hold their breaths (and wear their masks) in hopes of being able to have all members available for a vote.
- What will happen in the House. It is likely that the House will go out on recess next week as scheduled and then reconvene in the event that the Senate passes the Inflation Reduction Act. Unlike the Senate, the House rules do allow for proxy voting which makes things a bit easier when it comes to rounding up votes. Speaker of the House Nancy Pelosi (D-CA) has generally proven very adept at wrangling the various factions of the Democratic party together and most Democrats see this package as key for helping the party’s prospects in the mid-term. That said, assuming the vote will occur after August 9 (when a Republican is projected to win a special election for the vacant seat in Minnesota’s 1st district), the Democrats will only hold an eight vote margin, meaning Speaker Pelosi can only afford three no votes or abstentions from her caucus. On the more expansive Build Back Better Act (when the Democrats had one more voting member than they do now) there was only one Democrat (Rep. Golden from Maine) who voted no and no Democrats abstained.