By a vote of 220-207, the United States (US) House, on 12 August 2022, cleared for President Joe Biden's signature the Senate Amendment to the Inflation Reduction Act (IRA) of 2022 (H.R. 5376). The bill would finance over US$430 billion¹ in climate and energy provisions and an extension of enhanced Affordable Care Act (ACA) subsidies. It is projected to raise more than $700 billion in revenue by:

• Imposing a 15% corporate alternative minimum tax (CAMT) on adjusted financial statement income for corporations with profits over $1 billion
• Introducing a new excise tax on corporate stock buybacks
• Increasing Internal Revenue Service (IRS) enforcement funding
• Reforming prescription drug pricing, including allowing Medicare to negotiate prescription drug prices

All 220 Democrats voted for the measure and 207 Republicans voted against. On 7 August 2022, the Senate passed the bill by a vote of 51-50 under budget reconciliation rules, which allowed it to pass with a simple majority. President Biden is expected to sign the bill in the coming days.

Before final passage, House Speaker Nancy Pelosi said, "Today is a day of celebration. A day we take another giant step in our momentous agenda. Our Inflation Reduction Act is a robust cost-cutting package that meets the moment, ensuring that our families thrive and that our planet survives." During floor debate, Minority Leader Kevin McCarthy called the IRA a "misguided, tone-deaf bill" and said Democrats are "choosing to end this session by spending half a trillion dollars more of your money, raising taxes on the middle class, and giving handouts to their liberal allies."

The full text of the bill is available here.

Climate, energy and tax

The IRA would enact climate and energy provisions, including new, extended and expanded tax credits. Its revenue provisions include a 15% CAMT on adjusted financial statement income for corporations with profits over $1 billion, a stock buyback tax, increased IRS enforcement funding, and a two-year extension of the limitation on excess business losses.

A Joint Committee on Taxation revenue estimate of the bill released 9 August provided the following scores, over 10 years:

• CAMT provision: +$222 billion
• Stock buyback excise tax: +$74 billion
• Two-year extension of limitation on excess business losses of noncorporate taxpayers: +$53 billion
• Reinstatement of Superfund : +$11.7 billion

The Congressional Budget Office (CBO) estimated that revenues would increase by $204 billion over the 2022/2031 period as a result of increases in outlays for tax enforcement activities.

The revised text of the measure released 6 August changed the CAMT language to allow MACRS depreciation for tangible assets, as well as amortization deductions allowed for qualified wireless spectrum, to reduce adjusted financial statement income for purposes of computing the tax, and for other purposes. The Senate approved an amendment late in the "vote-a-rama" process to narrow the CAMT so that portfolio companies owned by private equity companies would not be considered part of the common ownership of the private equity companies, which was ultimately offset by a two-year extension, through 2028, of the excess business loss limitation for pass-throughs.

The stock buyback excise tax proposal included in the 6 August version didn't include significant substantive changes compared with the House-passed Build Back Better Act. However, the effective date was changed to apply to repurchases of stock after 31 December 2022. The provision imposes a 1% excise tax on publicly traded US corporations for the value of any stock that they repurchase during the tax year. For additional information on the new tax, see Tax Alert 2022-1206.

Regarding energy tax provisions, the IRA would extend the Internal Revenue Code (IRC) Section 45 production tax credit for electricity from renewable resources, the IRC Section 48 investment tax credit, and biodiesel and alternative fuels credits through 2024, then transition to technology-neutral emissions-based credits. It includes extensions of the 45Q carbon oxide sequestration credit, 48C advanced energy property credit, and credits for energy efficient homes, plus new credits for nuclear power, hydrogen and sustainable aviation fuel. EV credits would be offered for new, used, and commercial vehicles with income and MSRP limitations. The bill would also reinstate the Superfund tax at 16.4 cents per gallon. The IRA also would create a new regime to make many of these tax credits transferable. For additional information on these provisions, see Tax Alert 2022-1169.

Health care

Regarding health care provisions, the IRA would authorize the Secretary of Health and Human Services (HHS) to negotiate a limited amount of prescription drug prices for Medicare (and require HHS to do so); require the payment of inflationary rebates from drug manufacturers to Medicare; redesign the Part D benefit, including a $2,000 out-of-pocket cap; and set a $35 monthly cap on out-of-pocket costs for insulin for Medicare beneficiaries. The bill would also extend the enhanced ACA subsidies established in the American Rescue Plan Act (ARPA) for three years — through 2025.

According to the CBO, extending the ARPA policy would result in about 4.8 million more people having marketplace coverage and is expected to cost $64 billion. The drug pricing provisions are projected to save $288 billion over a decade. A provision struck by the Senate parliamentarian — which would have included the commercial market in the inflationary rebate calculation — could, however, reduce those savings by around $40 billion. The CBO also predicted the bill will lead to higher drug launch prices to offset losses from inflation rebates and Medicare price negotiation, and result in two fewer drugs being introduced into the US market over the 2023/2032 period, about five fewer drugs over the subsequent decade, and about eight over the decade after that.

As initially written, the IRA would require manufacturers to pay rebates back for price increases outpacing inflation in both Medicare and the private market. The Senate parliamentarian ruled, however, that the rebates could not apply to the private market under the rules of reconciliation. The revised text of the measure released 6 August removed the inclusion of the commercial market from the inflationary rebates and added new insulin provisions that cap beneficiaries' out-of-pocket spending on insulin at $35 per month (taking effect in 2023). While the updated draft included a $35 out-of-pocket cap on insulin for both Medicare and privately insured individuals, a Republican amendment in the Senate "vote-a-rama" garnered enough votes to remove it. The parliamentarian had previously ruled that the private plan language violated budget rules and thus would have required 60 votes to remain in the bill.

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For additional information with respect to this Alert, please contact the following:

Washington Council Ernst & Young

• Any member of the group at (202) 293-7474.

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Endnotes

1. Currency references in this Alert are to the US$.