July 29, 2022
On Thursday, July 27, Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV) announced the framework for a reconciliation package dubbed the “Inflation Reduction Act.” The bill is focused on deficit reduction, domestic energy production and manufacturing, carbon emission reduction, drug pricing, and an extension of Affordable Care Act (ACA) subsidies. It proposes investing roughly $300 billion (B) in deficit reduction, $64B for ACA extensions, and $370B in energy security and climate change programs over the course of the next ten years. As for the proposed revenue raisers, the bill includes a 15% corporate minimum tax, prescription drug pricing reforms, IRS tax enforcement funding, and changes to the carried interest loophole. The intended tax increases would be implemented on taxpayers earning $400,000 or more. In total, based on JCT and CBO estimates, the bill would cost around $733B, while raising $739B in revenue. With Manchin’s support, Schumer can now start whipping Senator Krysten Sinema (D-AZ) in hopes of achieving a Democratic victory ahead of the midterms. The official text can be viewed HERE. The official summary can be viewed HERE. Key highlights are below.
If passed, the bill would impose a 15% corporate alternative minimum tax (AMT), commonly referred to as the book tax, on companies that have traditionally been able to pay little-to-no taxes due to credits and/or deductions. The book tax is typically applied to a company’s “book” or financial statement earnings, rather than the income calculation traditionally used for tax purposes. As written, the bill would allow corporations to generally be eligible to claim net operating losses and tax credits against the AMT and be eligible to claim a tax credit against the regular corporate tax for AMT paid in prior years, to the extent the regular tax liability in any year exceeds 15 percent of the corporation’s adjusted financial statement income. As currently proposed, this bill would leave much of the Tax Cuts and Jobs Act (TCJA) in effect, including keeping the 21% corporate rate in place. This provision would raise $313 billion.
The bill would allocate additional money to the IRS to add auditors, improve customer service, and modernize technology. The bill would invest $80 billion for the next ten years for an estimated $203 billion collected by the IRS that would raise approximately $124 billion in tax revenue through a crackdown on individuals cheating on their taxes and strengthening the power of the IRS. The IRS funding includes funding for taxpayer services, enforcement, operations support, and business systems modernization.
The bill would end the carried-interest tax break, used by private equity and hedge fund managers to lower their tax bills. The carried interest tax break has allowed for a share of an investment manager’s income to be classified as a capital gain, which is taxed at 23.8% instead of the top 37% rate for salary and wage earnings. This provision would raise $14 billion.
The proposed language comes from a bill Senate Finance Chairman Ron Wyden (D-OR) and Sen. Sheldon Whitehouse (D-RI) introduced last year. S. 2617, the Ending the Carried Interest Loophole Act, aims to tax individuals who acquire a carried interest upon receipt of the interest and require private equity, hedge fund and real estate managers to recognize a deemed compensation amount annually, taxed at ordinary rates and subject to self-employment taxes. This proposal would tax carried interest as ordinary income.
In addition, the language passed by the House Ways & Means Committee last year plan generally requires investment funds to hold assets for more than five years — up from three years — for managers to get a preferential tax rate on their share of the fund’s profits, known as carried interest. Assets that meet the holding period requirement are subject to the smaller long-term capital gains tax rate, rather than the rate for ordinary income.
CLIMATE CHANGE/CLEAN ENERGY
As for energy provisions, the bill proposes investing $369 billion in energy security and climate change programs over the course of the next ten years. The key components of the energy provisions aim to lower energy costs in the United States; increase American energy security; invest in decarbonizing all sectors of the economy via innovative solutions; invest in disadvantaged communities; and support resilient rural communities.
Lower Consumer Energy Costs
This bill proposes direct consumer incentives to buy energy efficient and electric appliances, clean vehicles, and rooftop-solar, and invest in home energy efficiency, with a significant portion of the funding going to lower income households and disadvantaged communities. This includes: $9 billion for consumer home energy rebate programs; 10 years of consumer tax credits for energy efficient homes and for clean energy; $4,000 consumer tax credit for lower/middle income, and up to $7,500 tax credits for new clean energy vehicles; and $1 billion grant program for energy efficient affordable housing.
Energy Security and Domestic Manufacturing
This bill includes investments of over $60 billion to onshore clean energy manufacturing, and incentives to reduce inflation and the risk of future price shocks by bringing down the cost of clean energy and clean vehicles and relieving supply chain bottlenecks. The investments include $10 billion investment tax credit to build clean technology manufacturing facilities; $500 million for the Defense production Act for heat pumps and critical minerals; $2 billion in grants for auto manufacturers; $20 billion in loans for new clean vehicle manufacturing; and $2 billion for National Labs for energy research purposes.
Decarbonize the Economy
The bill would invest in reduction of carbon emissions via tax credits for clean energy sources; $30 billion in targeted grant and loan programs; tax credits for clean fuels and commercial vehicles; grants and tax credits to reduce emissions, including $6 billion for a new Advanced Industrial Facilities Deployment Program; over $9 billion for Federal procurement; $27 billion for clean energy technology accelerator; and a Methane Emissions Reduction Program.
The bill includes over $60 billion for environmental justice programs including: Environmental and Climate Justice Block Grants; Neighborhood Access and Equity Grants; Ports Air Pollution Reduction Grants; $1 billion for clean heavy-duty vehicles; and additional programs focused on disadvantaged and low-income communities.
The bill would make investment in rural communities including over $20 billion to support climate smart agriculture practices; $5 billion in grants to support forest resiliency programs, conservation, and urban tree planting; tax credits to build infrastructure for sustainable aviation fuel and other biofuels; and $2.6 billion in grants for conservation and restoration of coastal habitats.
Provisions aim to boost electric vehicle makers and green energy companies.
Invests in the technologies needed for all fuel types, including hydrogen, nuclear, renewables, fossil fuels, and energy storage, to be produced and used in the cleanest way possible.
This bill does not arbitrarily shut off America’s abundant fossil fuels and invests heavily in technologies to help the U.S. reduce its domestic methane and carbon.
The bill includes a significant set of drug pricing reforms and an extension of higher subsidies for purchasing commercial insurance in the federal marketplace. The drug pricing reforms collectively represent a significant source of revenue for the bill through savings to the federal government, while the subsidies represent an expenditure.
The bill directs the Department of Health and Human Services (HHS) to negotiate with drug manufacturers on the price of a limited set of drugs provided through Medicare Parts B and D each year, while setting parameters for the range of acceptable prices. Under current law, HHS is prohibited under a non-interference clause from negotiating with manufacturers. The bill specifies the number of drugs subject to negotiation each year, and also limits the drugs that would be eligible for negotiation to those without generic competition.
The bill would require drug manufacturers who increase drug prices over the rate of inflation to pay the difference in a rebate to HHS each year.
Medicare Part D Reforms
Medicare provides prescription drug benefits to beneficiaries through Medicare Part D, under which Medicare contracts with commercial health plans to administer the benefit. Liability for costs of the drugs shifts over the course of the benefit between beneficiaries, Part D plans, and manufacturers. The bill includes the most significant overhaul of the Part D benefit since its inception, limiting beneficiary out of pocket costs at a lower amount, and shifting greater liability to plans and drug manufacturers in different phases of the benefit. The bill also broadens eligibility for the Low Income Subsidy, a program for beneficiaries in Part D under which Medicare pays for a significant portion of the beneficiary’s premiums and out of pocket costs. Finally, the bill also waves beneficiary cost sharing for vaccines covered under Medicare Part D (which does not include COVID-19 or flu vaccines, which are covered under Medicare Part B).
The Affordable Care Act established federal subsidies for consumers within a particular income range (133% – 400% of the Federal Poverty Level) that purchase insurance through the federal marketplace. The American Rescue Plan Act included a temporary but significant increase in the level of the subsidies available for consumers, and also waived the 400% FPL income cap. Those temporary provisions expire at the end of 2022. The bill would extend those provisions through 2025.
Majority Leader Chuck Schumer has committed to adding additional legislative language to the bill that would address consumer costs of insulin. It is yet unclear what specific provisions will be included. However, earlier iterations of the reconciliation package included a provision that would cap consumer out-of-pocket costs for insulin across commercial and government payers. Senators Susan Collins (R-ME) and Jeanne Shaheen (D-NH) have also released a longer legislative proposal focused on insulin that includes the price caps and other mandates on insurers related to insulin.