The Inflation Reduction Act — the much-ballyhooed tax and energy bill that the House passed on Friday, sending it to the White House — has few if any of the long-feared taxes on individuals that Democrats had originally called for a year and a half ago.
To reach consensus, Senate Democrats purged the tax provisions from the bill.
The House passed the Senate version without change late on Friday. “It is now ready for President Biden to sign,” said Aliya Robinson, who tracks legislation for T. Rowe Price (TROW). That signature triggers enactment.
Inflation Defense Strategies
By the time they voted, Senate Democrats killed several major individual tax hikes they had originally sought. They did so to achieve the 50-vote consensus they needed for passage of the Inflation Reduction Act, along with Vice President Kamala Harris’ tiebreaking vote.
The tax-hike compromises were crucial to obtaining buy-in from centrists like West Virginia Sen. Joe Manchin and Arizona’s Sen. Kyrsten Sinema.
In the House, the vote was along party lines. The bill passed 220-207.
Actions On Tax Hikes
Defeated tax hikes included the doubling of the capital gains rate, an increase in taxes on inheritances and a new tax on millionaires.
One tax that did survive the compromise gauntlet is a 1% levy on stock buybacks. Many corporations boost earnings per share by reducing the number of their outstanding shares. “The long-term impact on individual investors is hard to anticipate,” T. Rowe Price’s Robinson said. “But in the short term, businesses are expected to do more buybacks before the tax comes into play.”
Tax Credits In Inflation Fighting Bill
Also absent from the Senate’s final version of the Inflation Reduction Act was an extension of the child care tax credit. The proposal would have boosted the credit to as much as $3,600 per child from its current $2,000. And it would have extended the credit’s life to 2027.
Lawmakers also shot down a proposal for tuition-free college.
One tax credit whose extension did make it into the Senate’s Inflation Reduction Act was the popular $7,500 per vehicle consumer income tax credit for the purchase of new electric vehicles.
Buyers of used EVs get a new $4,000 credit.
Still, the bill caps the price of eligible new cars at $55,000. That would exclude many of Tesla’s (TSLA) Model 3. It also excludes all Model S and X vehicles.
Trucks and vans must cost less than $80,000 to be eligible.
Another requirement for buyers to be eligible for credits: Their EVs and battery components must be largely manufactured in the U.S. or its free-trade partners.
Credit eligibility on Chinese components and minerals will be phased out beginning in 2024.
Capping Health Care Costs
There are more provisions likely to make consumers’ bank accounts smile in the Inflation Reduction Act. The final bill caps out-of-pocket costs for seniors’ prescription drugs at $2,000 a year.
“There is a rather complicated mechanism behind this that draws the funding from different sources,” said James Gelfand, president, the ERISA Industry Committee. “But from the patient point of view, the drug is simply covered with no cost-sharing after the $2,000 limit is reached.”
The bill also allows Medicare to negotiate the prices on 10 medications four years from now.
Democrats were only partially successful with a bid to cap monthly out-of-pocket expenses for insulin at $35. The medicine treats diabetes.
The Senate passed the cap for patients on Medicare. But the seven Republican supporters and all 50 Democrats were three short of the 60 senators needed to extend the ceiling to the private insurance market as well.
Funds For The IRS
Once the Inflation Reduction Act is enacted, even the IRS will get more money. The Senate voted to give the tax agency $80 billion to beef up audits and enforcement.
The Inflation Reduction Act does not expand the $10,000 cap on the state and local tax deduction, or SALT. That will hurt homeowners in high property tax states in the Northeast and West Coast.
Inflation Bill Ignored Carried Interest
Another populist tax that did not survive the grueling intraparty negotiations was a proposed tax rate increase on what’s known as carried interest.
Carried interest is a type of compensation paid to investment executives in private equity funds, hedge fund and venture capital funds.
Carried interest is a portion of the fund’s profit. It’s also known as the “carry.” Fund managers pay a maximum of 20% federal tax on those profits. Taxes similar to a long-term capital gain apply. In contrast, regular federal tax rates on ordinary income are as high as 37%.
As a result, those fund managers are taxed at a rate on carried interest that is often lower than lower-paid office workers and blue-collar employees. Controversy surrounds carried interest as a result.
But with Sinema adamantly opposed to a higher tax, law makers did not vote it through.
The Inflation Reduction Act is separate from the Senate’s two versions of proposed upgrades to retirement savings rules known as Secure 2.0. That package of retirement rule upgrades for the House and Senate versions will most likely be reconciled into a single package. That combined proposal then faces a likely end-of-the-year vote, Robinson says.
An earlier version of this story was published Aug. 11, 2022.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform.
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