Senate passes “Inflation Reduction Act” reconciliation bill

In brief

The Senate on August 7 voted 51 to 50 along party lines to pass the “Inflation Reduction Act'' budget reconciliation bill (the bill). The tie-breaking vote in the evenly divided Senate was provided by Vice President Kamala Harris. 

The Senate action clears the way for the House to return from its August recess on Friday, August 12 to consider the bill. President Biden and Democratic leaders hope to see the narrowly divided House approve the bill without change so it can be signed into law before the end of August.

Key revenue-raising provisions include: 

• a 15% book-income alternative minimum tax on corporations with financial accounting profits over $1 billion, which has been estimated to raise $258 billion over 10 years prior to a Senate floor amendment described below;
• a 1% excise tax on a publicly traded US corporation for the value of its stock that is repurchased by the corporation during the tax year, which is estimated to raise $74 billion over 10 years; 
• an $80 billion increase in IRS tax enforcement funding, which is projected to increase federal tax receipts by $204 billion over 10 years; and
• a two-year extension of the excess business loss rules under Section 461(l), adopted under a Senate floor amendment which was stated by its sponsor to raise $55 billion over 10 years.  

Observation: The stock repurchase excise tax was added to a revised version of the bill that had been released on August 6 to make up for revenue lost by removing a “carried interest” provision and by disregarding certain accelerated cost recovery expenditures from the book-income alternative minimum tax provision. These changes were made to secure the needed support of Senator Kyrsten Sinema (D-AZ), who had objected to the original July 27 version of the Inflation Reduction Act proposed by Senate Majority Leader Chuck Schumer (D-NY) and Senator Joe Manchin (D-WV).

The Senate adopted an amendment to drop a modification to an aggregation rule from the bill’s book-income alternative minimum tax provision. The change was offset by a two-year extension of the limitation on Section 461(l) business loss deductions incurred by noncorporate taxpayers, which under current law is set to expire after 2026. The Senate rejected all other amendments that were offered to modify or strike provisions of the revised August 6 bill text. A provision dealing with an insulin price cap was modified in response to a procedural challenge.

The bill features $370 billion in spending and tax incentives on energy and climate change provisions. These provisions are intended to spur investments not only by traditional energy companies but also by companies in the transportation, real estate, and manufacturing industries, and include significant enhancements if the projects meet certain wage, domestic content, or location requirements. The bill also reinstates certain Superfund excise taxes, imposes a fee on methane-related emissions, and includes various other excise taxes.

The bill features significant changes to federal prescription drug pricing policies that seek to reduce costs for individuals receiving care through Medicare. The bill also includes a three-year extension of expanded Affordable Care Act (ACA) health care benefits through 2025.  

At this writing, the Congressional Budget Office (CBO) has not released an updated score for the bill as passed by the Senate. According to a CBO score of the initial legislation that was proposed on July 27, the bill was projected to reduce federal budget deficits by $90.5 billion over 10 years. This score does not include the $204 billion in CBO’s projected additional revenue from increased IRS tax enforcement funding, since those savings are excluded from consideration under Senate budget reconciliation procedures. The combined deficit reduction savings of the initial legislation would total roughly $295 billion over 10 years.

Note: Additional PwC Insights will follow to provide further analysis of key provisions in the bill. 

Action item: Stakeholders should analyze the bill and communicate with policy makers on the potential effects of tax increase proposals on their employees, job creation, and investments in the United States.