In a surprise to most observers, Senate Majority Leader Chuck Schumer, D-N.Y., and Sen. Joe Manchin, D-West Virginia, announced a proposed reconciliation bill named the Inflation Reduction Act of 2022. Manchin had blocked previous attempts to pass Build Back Better, which was similar but more extensive in scope.
"It would be an understatement to say the announcement was unexpected," remarked Jim Guarino, managing director at Top 100 Firm Baker Newman Noyes.
"There does not appear to be all that many provisions that would have a direct impact on most individuals, at least as initially proposed," he said. "That said, there are provisions that would impact particular taxpayers, both corporate and individual, as well as those concerned about drug pricing and energy and climate incentives."
The main areas of the proposed legislation include, according to Guarino:
- A 15% corporate minimum tax on company book/financial statement income;
- Additional funding for the IRS;
- Changes to the carried-interest tax break;
- Health care changes (prescription drug pricing and Affordable Care Act extension); and,
- Incentives for renewable and clean energy.
"The additional IRS funding would be designed to enhance governmental enforcement by increasing tax examinations for corporations as well as high-income individual taxpayers," said Guarino. "It would also be used to improve IRS customer service and modernize technology."
"The carried-interest changes would eliminate favorable capital gain rates for private equity and hedge fund manager income and subject it to ordinary tax rates as high as 37%. Interestingly, this was a provision that was previously opposed by fellow Democratic Sen. Kyrsten Sinema, D-Arizona. It is unclear at this time whether Senator Sinema would oppose the inclusion of this provision." (Click
There's another possible sticking point in the legislative process, according to Guarino. "The proposed reconciliation bill does not include any SALT cap relief, which was urged by a number of legislators," he said.
Although the bill itself is a surprise, it does not contain a lot of surprises, according to Edward Renn, partner in the private client and tax team at law firm Withers.
"The minimum tax is a book tax, and would only affect a relatively small number of corporations —those with more than $1 billion in revenue," he said. "There are about 200 corporations of that size, and many of them already pay more than 15% in tax. There will have to be significant regulations before we know how it will work. The idea is that everyone should contribute, and pay at least 15%."
The repeal of the carry rule is scored at saving $14 billion. "That's for optics," said Renn. "It's to prove that the rich are paying their fair share. It's symbolic; they're getting more than that by negotiating drug prices."
But Sinema may oppose this, Renn believes. "I'm not convinced that she won't have a problem with it. It will be interesting to see if she's willing to let it go, or decides to prove that she's just as important as Senator Manchin."
House Democrats who have wanted repeal of the SALT cap will likely support this despite the absence of repeal, Renn suggested: "They agree with the climate goals and social policy, so most will go along with it. They had said they would block it if it didn't repeal the cap, but this is not deemed to be individual tax legislation."
"If you asked me two weeks ago, I didn't think anything like this would get done by the midterms," Renn said. "But it looks like this might have some life — just move a handful of votes in the House, and one in the Senate and they might actually get it through."
Roger Harris, president of Padgett Business Services, agreed. "If I had to bet, I would bet on getting it passed," he said. "It's hard to imagine that Sinema would say 'No.' If she demands something in return, that might lose some votes in the House. There are some in the Senate that are out with COVID, and they're not allowed to vote unless they're present in the chamber, but my sense is that they wouldn't have announced this publicly unless they were confident they had the votes."
The biggest impact for the average tax practitioner will be the increased funding for the IRS, Harris believes. "A big part of why it's in there is to help pay for the climate change provisions, through increased enforcement and compliance," he said. "But it will also help the IRS modernize their systems, and work more efficiently."
Sen. Manchin has said that he received a promise that the Biden administration would reduce red tape on energy production. "It would aid the increased production of fossil fuels in the short term as a bridge to alternate sources of energy," Harris observed. "But the fact that it's not in the bill, it's just a 'promise,' bothers me."
