On Sunday, August 7, 2022, the US Senate passed the Inflation Reduction Act of 2022 (H.R. 5376). The vote to pass the bill was strictly on party lines with the 50 Democratic senators voting in favour plus the tie-breaking vote of the President of the Senate and US Vice President, Kamala Harris. The House of Representatives passed the bill on Friday, August 12, 2022, by a vote of 220 to 207. The bill has been in gestation for about a year and corralling the votes of Senators Joe Manchin (D-WVa) and Kyrsten Sinema (D-AZ) required considerable compromise, cajoling and arm-twisting. In the end, the Senate passed the bill. President Biden signed the bill into law on Tuesday, August 16, 2022.
The name of the bill is misleading in that there is little to nothing in it specifically aimed at curbing inflation. Perhaps granting the Medicare agency authority to negotiate drug prices with the pharmaceutical companies may have the potential to lower drug prices, but any effect that that policy has on inflation is secondary. According to various official and semi-official budget scoring studies, the bill may reduce the budget deficit by several hundreds of billions of dollars over a ten-year period. At present, US federal government outlays are topping $6 trillion annually and rising fast with deficits expected to remain well above $1 trillion annually. This does little to alter the structural deficit in the US budget, which is secular and spans decades of both Democratic and Republican control of the federal government. Republicans have excoriated the bill as likely to cause unemployment (despite a critical labor shortage currently) and likely to cause a recession. If, instead of a political slogan, that were actually true, the bill might be a legitimate, albeit painful, use of fiscal policy aimed at curbing inflation. To whatever extent an arm of government may actually cause a recession rather than the normal economic cycle, it is more likely to result from the Federal Reserve missing the mark a bit in raising interest rates to cool an inflationary economy rather than from this act of Congress.
Pursuant to the bill, the US federal would expend or reduce revenues by up to $460 billion over the next ten years in an effort to reduce carbon emissions by about 40 percent from 2005 levels. The bill contemplates numerous renewable energy projects and incentives. The measures that are likely to attract the attention of the public expand existing incentives for the purchase of electric vehicles ("EVs"). The numeric limit of the number of vehicles eligible by manufacturer would be lifted. The credit is for $7,500 for new EVs and $4,000 for used EVs. However, luxury EVs do not qualify. The term "luxury" means a cost of $55,000 for sedans and $80,000 for SUVs and trucks. Moreover, purchasers will fail to qualify for the full credit if they are single and have modified adjusted gross income above $150,000 or if they are married and have income above $300,000. For used EVs, the price cap drops to $25,000 and the income caps fall to $75,000 for single and $150,000 for married. There are to be significant expenditures totaling roughly $374 billion for renewable energy, equipment for the reduction of emissions from coal and natural gas-powered plants and air pollution control measures. Supporters of the bill claim that these measures will produce numerous new jobs.
The bill earmarked $64 billion to assist Medicare participants in capping their annual out-of-pocket prescription costs at $2,000 per year starting in 2025. Beginning in 2023, the cost of insulin would be limited to $35 per month. The bill contemplates that Medicare will be able to pay for a significant portion of these measure by obtaining the right to negotiate drug prices with the pharmaceutical industry.
The bill will provide incremental funding of over $80 billion to the IRS, which is expected to use those funds to raise revenue well in excess of the expense. Time will tell. The IRS has fallen far short of its own revenue estimates many times in the past.
There are two major tax provisions intended to raise the revenue needed to fund the above-mentioned expenditures. One is a 1 percent excise tax on stock buybacks, effective January 1, 2023, expected to raise over $70 billion.
The second revenue measure is a corporate minimum tax of 15 percent. This tax represents the US implementation of Pillar Two of the OECD initiative agreed to in December 2021 by 137 nations. It is aimed at the largest multinational enterprises (MNEs). The corporate minimum tax will apply to the adjusted financial statement income of "applicable corporations." The tax base will be pre-tax net income according to generally accepted accounting principles with a number of complex adjustments certain to keep accountants up at night for years to come. A corporation that has average adjusted financial statement income over $1 billion over a three-year period is an applicable corporation subject to the tax. However, if the corporation is a member as defined of a foreign-parented multinational group the income threshold drops to an average of $100 million over the three-year period. The Joint Committee on Taxation has estimated that about 150 MNEs may be subject to the corporate minimum tax. It appears likely that this tax would be eligible for a deduction from Canadian tax or foreign accrual property income, as applicable since it will be imposed on net income.
Interesting times...we'll continue to stay tuned for any further changes that might happen.
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