Tax and spending bill scaled down to pass Senate

Bill Cass, CFP®, CPWA®

Bill Cass, CFP®, CPWA®, 08/03/22


(Updated 8/8/2022)

On August 7, 2022, the Inflation Reduction Act passed the Senate by a vote of 51 to 50. The final version included several modifications from the original proposed version including:

  • The addition of a 1% excise tax on corporate stock buybacks
  • Removal of a provision that would have extended the time for carried-interest income to benefit from long-term capital gains tax treatment
The House is expected to consider the legislation later this week.

Following months of negotiations, Democratic leadership in the Senate announced last week they reached a deal on a tax and spending bill. In contrast to the broad Build Back Better bill that passed the House last year, the current package is much narrower in scope. The proposal, named the Inflation Reduction Act of 2022, is being pursued under the Senate's budget reconciliation procedure. The bill will only require a simple majority to pass in that chamber.

The legislation pairs spending increases for health care and energy-related provisions (including green energy tax credits) with additional corporate taxes and other revenue raisers. Although there could be some slight modifications, the latest reports suggest a vote may occur on the Senate floor in the next week.

Here's a summary of the current bill:

Spending items

Health care
  • Three-year extension of enhanced premium subsidies to purchase insurance on ACA exchanges. These additional subsidies, originally introduced through pandemic-related legislation, were scheduled to expire at the end of 2022.*
  • Additional spending for health care-related items, including vaccine coverage
Climate and energy
  • Tax credits and rebates designed to promote green and renewable energy, including a $4,000 consumer tax credit for lower/middle income individuals to buy used clean vehicles, and up to a $7,500 tax credit to buy new clean vehicles.
  • Incentives to promote green energy manufacturing such as wind turbines and solar
  • Provisions to reduce carbon emissions and the environmental impact of agriculture

Revenue raisers

  • 15% corporate minimum tax applied to companies with at least $1 billion in income
  • Additional funding for the IRS to increase enforcement activities
  • Prescription drug reform including negotiation of certain prescription drug pricing by Medicare
  • Longer holding requirement for investment partnerships and other organizations to benefit from long-term capital gains treatment on carried interest

*The American Rescue Plan of 2021 expanded premium subsidies for individuals and families earning above 400% of the federal poverty limit (FPL) and increased subsidies for those between 100% and 400% of the FPL. Previously, those earning above 400% of the FPL were not eligible for subsidies to purchase health insurance on the ACA exchanges.

What's NOT in the legislation?

This legislative proposal still has hurdles to overcome and may be modified at some point. However, the current bill is a scaled-down version from the House proposal. There are some provisions that were previously proposed by lawmakers and are not included in this latest proposal:
  • Changes to the $10,000 cap on deducting state and local taxes (SALT)
  • Surtax on higher-income earners
  • Expansion of the 3.8% net investment income surtax to apply to certain S-corp net income
  • Elimination of the "backdoor Roth" strategy
  • Limits on the size of account balances within IRAs
Since the budget window for the Senate reconciliation package expires at the end of September, Congress must act relatively quickly to advance this proposal. Though Democratic leadership in both the Senate and the House are expressing optimism on the chances of passing legislation, the margin of error along party lines is very thin. That said, the overall prospects on a bill passing Congress has increased significantly with this most recent development.

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