The House of Representatives today passed in a party line vote the Inflation Reduction Act (H.R. 5376, text here), enacting a cluster of signature Democratic policies incentivizing the clean energy transition, reducing healthcare costs, and raising taxes on the highest-earning corporations. The bill is a dramatically slimmed version of the earlier Build Back Better Act, which couldn’t win enough support from the party’s conservative wing to advance. Unexpectedly, the Senator who rejected Build Back Better, Sen. Joe Manchin (D-WV), returned to negotiating this year and surprised DC with a deal. Democrats– despite making many compromises along the way – are thrilled to enact another massive domestic policy bill before the midterm elections.
For such a large bill, the House’s debate and approval was low-key. Despite some internal concerns, all the major House Democratic groups fell in line backing the bill: the Congressional Progressive Caucus, the conservative Blue Dogs, the moderate and pro-business New Democratic Coalition, and more all announced support for the bill early this week. The House chamber was also quiet: the House only returned from its August recess for one day, and more than 175 members of the House opted to vote by proxy.
Now, the hard work of implementing the IRA and its most ambitious programs falls back on the Biden Administration and executive branch agencies, who are already implementing last year’s American Rescue Plan (ARPA) and Infrastructure Investment and Jobs Act (IIJA), as well as the recent CHIPS and Science Act.
Major provisions of the IRA:
- The bill sets a new 15% corporate alternative minimum tax starting in 2023 on the “adjusted financial statement income” of U.S. corporations with more than $1 billion in average annual earnings ($100M in average annual earnings for U.S. corporations that are part of a foreign-owned multinational group) over a three-year period in any of the previous three years. (“Adjusted financial statement income” is generally defined as: financial statement income, reduced by amortization deductions with respect to qualified wireless spectrum acquired after December 31, 2007 and by depreciation deductions, disregarding any amortization and depreciation expenses taken into account on the taxpayer’s applicable financial statement with respect to such property.) Corporations would pay the larger of the new 15% corporate alternative minimum tax or the amount of tax that would be owed under the standard corporate income tax of 21%, as adjusted for applicable tax credits and deductions. The new corporate alternative minimum tax does not apply to S-corporations, regulated investment companies (RICs), and real estate investment trusts (REITs), nor does it apply to corporations owned by a private equity company as part of a portfolio. The new corporate alternative minimum tax is expected to apply to approximately 150 of the world’s largest corporations and is expected to generate approximately $222 billion in tax revenue over the new 10 years, according to the non-partisan Joint Committee on Taxation.
- The bill imposes a 1% excise tax on stock buybacks starting in 2023. The excise tax will apply to buybacks of stock by U.S. corporations whose stock is traded on established securities markets, but will not apply to buybacks of stock that do not exceed $1 million in a taxable year; contributions of stock to an employer-sponsored retirement plan, stock ownership plan, or similar plan; buybacks that are part of a tax-free reorganization on which no gain or loss is recognized; buybacks made by a regulated investment company (RIC) or a real estate investment trust (REIT); and buybacks treated for U.S. federal income tax purposes as dividends.
- The bill extends for two years (from 2026 to 2028) the limitation on the use of excess business losses of non-corporate taxpayers, including pass-through businesses, to offset the non-business income of the individual owners of such businesses. The limitation is indexed to inflation and applies to business losses above $270,000 per individual taxpayer for 2022 ($540,000 in the case of married individual taxpayers filing joint returns).
- The updated bill draft drops earlier proposals to close the carried interest “loophole” under request from Sen. Kyrsten Sinema (D-AZ) and heavy lobbying from the financial services industry.
- The bill also adds several billion in funding over the next ten years for the Internal Revenue Service for upgrading its technology and taxpayer services, as well as improving enforcement and operations support. Large portions of the IRS are understaffed and running on outdated technology; the non-partisan Congressional Budget Office estimates the IRS will collect an extra $203 billion in taxes, currently lost due to lack of enforcement, with these improvements.
- The Inflation Reduction Act would extend and upgrade many “green” energy tax credits, providing either a “base rate” or a “bonus rate” of five times the base amount for projects that meet certain prevailing wage and apprenticeship requirements. An additional increased credit amount could be claimed in certain cases if projects comply with domestic content requirements, such as ensuring that any steel, iron, or manufactured product is produced in the US. Credits updated in the bill include the Production Tax Credit for electricity generation; the Investment Tax Credit for renewable energy property, credits for carbon capture and sequestration, credits for home and commercial building energy efficiency upgrades, and various credits supporting biofuel and other alternative fuels.
- The bill creates new tax credits supporting clean hydrogen production, sustainable aviation fuel, and zero-emission nuclear power generation.
- The bill also updates existing tax credits for purchases of passenger and heavy-duty electric vehicles. For passenger vehicles, the bill restricts tax subsidies to lower and middle-come buyers, vehicles assembled in the U.S., and vehicles containing a certain percentage of critical minerals extracted or processed in the U.S. or a U.S. trade partner. Automakers have already signaled concerns with the critical mineral requirements and may soon petition the IRS for exemptions as these requirements come online in 2024.
- The bill sets billion more in loan program guarantees and tax subsidies to stimulate clean energy manufacturing.
- The bill imposes a fee on oil and gas methane emissions, charging $900 per metric ton above a federally set threshold starting in 2024 and increasing to $1,500 per excess metric ton in 2026.
- The bill reinstates and indexes for inflation the Superfund tax 16.4 cents per barrel on crude oil and imported petroleum to clean up EPA-designated hazardous sites.
- The bill would increase royalty rates for new offshore oil and gas leases to around 16 – 18%.
- The bill directs the Department of Energy to proceed with offshore wind projects on the Outer Continental Shelf near Georgia, Florida, North Carolina, and South Carolina.
- The bill also orders the executive branch to accept leases bids in Alaska and the Gulf of Mexico that the Biden Administration previously withdrew.
- The bill provides $18.1 billion from 2023 through 2026 for the USDA’s Commodity Credit Corporation and Rural Energy in America Program to advance renewable energy and environmental stewardship in rural areas.
- The bill includes a signature drug pricing reform move to allow the Center for Medicare and Medicaid Services (CMS) to negotiate prices for a limited number of high-cost drugs covered under Medicare Part B and Part D. This new regime would take effect starting in 2026.
- The bill requires drugmakers to repay the government the different between profits and cost on inflation on Part B and Part D drugs if drug prices rise faster than inflation, starting in 2023.
- The bill would also limit out-of-pocket costs for prescription drugs under Medicare Part D at $2,000 per person starting in 2025.
- The bill would also cap the monthly cost of insulin under Medicare Part D at $35 per month starting in 2023.
- An earlier version of the bill attempted more price controls for drugs covered by private insurance. However, some of these were found not to comply with complex Senate rules. Senate Republicans also moved to remove a proposed $35 per month price cap for privately covered insulin during Senate’s consideration.
While Congress is now done with the Inflation Reduction Act, it must soon turn to another component of leaders’ deal with Sen. Manchin: a Manchin-authored permitting reform proposal intended to shorten long environmental reviews of new energy and infrastructure projects. Senate Majority Leader Chuck Schumer (D-NY) announced earlier this month a permitting reform proposal will be tied to a must-pass funding bill due by September 30. However, today, Sen. Manchin’s House counterpart Rep. Raul Grijalva (D-AZ) announced “grave, grave” concerns with the Manchin plan: “By limiting public input for federally permitted projects, what we’re doing is fast-tracking primary fossil fuel extraction…Destroying NEPA [the National Environmental Policy Act] has long been on Republicans’ wish list. But now, in a bizarre twist of history, Democrats are in a position to deliver on the agenda. And I wasn’t party of any handshake agreement, so I don’t feel obligated to support it merely because it’s a deal. Not at all.”
There has been intense lobbying this week by some sectors of the energy industry that were left out of the deal or have specific tax or energy concerns that weren’t addressed. Democratic members of the Texas congressional delegation are working on fixes that could be included in an end of year Omnibus appropriation bill in exchange for their support of this package.
As the Biden Administration implements the Inflation Reduction Act starting in 2023, and Congress turns to developing the new permitting reform proposal, stay tuned to your Michael Best client team for the latest.
Preview Attorney's Biography
Lucia is an experienced government relations professional with more than 10 years of experience effectively advocating for her clients on Capitol Hill. She helps clients develop and execute short- and long-term policy strategies to achieve their business objectives. Lucia’s areas of expertise include homeland security, defense, transportation, tax, immigration, workforce, education, healthcare, economic development, and appropriations.
Lucia M. Alonzo*
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Preview Attorney's Biography
Sean assists clients with a range of tax and transactional matters, including mergers and acquisitions, tax restructuring, tax-free reorganizations, debt and equity financing, repatriation planning, REIT formations and acquisitions, real estate transactions, and more. He has significant experience drafting and negotiating the tax aspects of contracts such as purchase agreements, including representations and warranties, forward-looking covenants, tax allocation provisions, and joint venture agreements between U.S. and foreign parties.Before joining Michael Best, Sean was a tax associate in ...