President Joe Biden signed into law Aug. 16 a sweeping tax reconciliation bill with more than $450 billion in tax increases and $260 billion in energy tax incentives.
The legislation, known as the “Inflation Reduction Act” (H.R. 5376), passed the House on Aug. 12 by a vote of 220-207, after passing the evenly divided Senate on Aug. 7. Democrats used the reconciliation process in the Senate to bypass procedural hurdles and pass the bill with the barest 51-50 majority after Vice President Kamala Harris cast the deciding vote. The bill was unanimously supported by congressional Democrats, while no Republicans voted for the package.
The bill’s enactment is a major victory for Democrats after a tortured legislative process that stretched more than 18 months. The effort appeared doomed at least twice when Sen. Joe Manchin, D-W.V., walked away from negotiations, though Senate Majority Leader Chuck Schumer, D-N.Y., was finally able to cut a deal with Manchin on July 27. The last remaining holdout, Sen. Kyrsten Sinema, D-Ariz., agreed to support the bill after Democrats struck a carried interest provision from the package and softened the 15% minimum tax on financial statement income. Sinema pledged to work with Sen. Mark Warner, D-Va., on future reform of the tax treatment of carried interest, but Warner said he was not confident of success.
Financial statement income for the minimum tax now will be adjusted for accelerated tax depreciation, with the lost revenue from the adjustment replaced by a 1% excise tax on stock buybacks from publicly traded companies. Democrats also stripped out an expansion of the common control test for the minimum tax that targeted private equity. They instead extended the loss limitation under Section 461(l) for two years.
The deal falls well short of the massive Build Back Better tax bill originally envisioned by Democrats, but still includes a handful of targeted tax provisions that will have a significant impact, including provisions that:
The legislation leaves many Democratic and bipartisan tax priorities unfinished. More than $1 trillion in additional tax increases previously proposed by Democrats were left out—though it is possible that specific provisions pick up traction in the future. Stand-alone revenue raisers, once proposed, are always in danger of being repurposed for other priorities. But barring unexpected election gains, there seems to be little hope for Democrats to resurrect anything approaching the scale of their original ambitions in the next two years. Although results should not be taken for granted, most pollsters currently expect Republicans to win the House and possibly the Senate in November.
Lawmakers will likely now turn their focus to bipartisan tax priorities. The reconciliation bill does not address the amortization of research expenses under Section 174, as many lawmakers hoped. Significant bipartisan support remains for restoring full expensing retroactively for 2022, but the provision still needs a legislative vehicle. The best opportunity may be a year-end bipartisan agreement on other expiring and expired tax “extender” provisions. Such an effort could also include extending 100% bonus depreciation, which is scheduled to revert to 80% for property placed in service in 2023. Democrats are less likely to support relief from the interest deduction limit under Section 163(j) without major concessions from Republicans.
The biggest hurdle to a potential extenders package may be flagging momentum. The list of expiring provisions has been getting shorter every year, and the reconciliation bill addresses many of the temporary energy credit provisions that drive Democratic participation in extender deals. Lawmakers have unfailingly managed to address the extenders in recent years, but the dwindling list of important provisions raises questions over whether that remains sustainable.
The more long-term source of contention among lawmakers may be implementation of the global minimum tax deal the Biden administration reached with the Organisation for Economic Co-operation and Development (OECD) on the Pillar 2 framework. The administration originally hoped to get the U.S. compliant as part of the reconciliation legislation, but Manchin opposed the changes over worries that early U.S. implementation would hurt domestic companies. Now the Biden administration could have difficulty enacting the needed changes as the rest of the world works toward implementation beginning in 2024.
Most Republican lawmakers oppose the international deal and seem disinclined to work with the administration on U.S. implementation. The Biden administration is hoping that U.S. businesses will begin lobbying for implementation once the rest of the world moves forward, as U.S. businesses could potentially suffer adverse consequences if implementation is widespread without the United States. The new 15% minimum tax on financial statement income could be amended to fit an undertaxed profits rule as part of implementation, but full compliance would require major legislative changes. The fight over implementation of Pillar 2 in the U.S. could be the defining tax policy issue of the next two years.
The tax provisions in the Inflation Reduction Act are discussed in more detail below.