Winners and Losers in the 2022 Inflation Reduction Act
Laws enacted by those ladies and gentlemen we send to Congress are seldom a panacea for all. The 2022 Inflation Reduction Act certainly fits that mold, as will be evident when we summarize the winners and losers under the Act. But first, here’s a quick editorial note—as with all of our articles, the author strives for political agnosticism with no ideological bias. Hence, our focus is on the tax and Medicare facts, not the headline-grabbing hyperbole by political commentators on either side of the aisle. For example, you will find a reference in this article to the Congressional Budget Office—widely considered a nonpartisan agency—but not to political pundits. We begin our discussion with those who may lose under this legislation.
- The Medicare drug-price negotiations under the Act may put downward pressure on profits. The degree to which profits suffer over the long term is yet to be determined.
- A 15% minimum income tax will be levied against corporations with $1 billion or more in annual income. This provision is intended to collect more income tax from those corporations that (legitimately) report relatively low taxable income for tax purposes but significantly higher income for financial accounting income. Financial accounting income is that income reported to the SEC and is generally a factor in calculating the all-important earnings per share metric.
- Stock buybacks will incur an excise tax of 1%. For reference, a stock buyback is a corporate strategy to increase earnings per share. Here’s how it works—a corporation buys back its stock to reduce the number of outstanding shares. Even if profits remain the same, fewer shares outstanding shares mean higher earnings per share. Before you dismiss this 1% as irrelevant in the grand scheme of corporate profits consider this—the IRS would have collected almost $1 billion from this excise tax during the 12 months ended March 31, 2022, had the tax been in effect.
- Medicare is now authorized to negotiate the price for certain prescription drugs. The list of drugs that may be price-negotiated is limited initially but is scheduled to expand significantly over time.
- Retirees and others receiving Medicare prescription drug coverage will have their out-of-pocket drug costs effectively capped at $2,000 annually beginning after 2025.
- Affordable Care Act insureds will continue to receive premium subsidies through 2025. Before the Act, these subsidies were scheduled to expire at the end of 2022.
- New tax credits will be available for households to offset energy costs and purchase certain energy-efficient products.
- The 1% excise tax on stock buybacks, if it proves effective in reducing stock buybacks, may result in increased dividends to shareholders (counterpoint—the funds could also be used to fund corporate capital projects or reduce debt).
- Tax incentives will be offered to consumers for the purchases of new and used electric vehicles, potentially driving up demand.
- Solar and wind energy manufacturers should benefit from a full decade of related tax credits.
Oil and Gas Industry
- Compared to the current energy policy, the Act includes favorable provisions for the oil and gas industry.
- The statute includes funding for “carbon capture and storage.” Power plants fueled by oil and gas can capture the carbon dioxide generated by the process and store the carbon dioxide in below-ground storage facilities.
- Increased federal leases for oil and gas production may be available on a contingent basis—contingent upon the number of leases used for solar, wind, and other alternative energy sources.
The long-term impact of legislation generally cannot be accurately predicted when the law is passed. This Act is no different. For example, the degree to which the federal deficit is reduced—and the resulting reduction of inflationary pressure—can only be forecast, not guaranteed. Consensus analysis indicates at least some measure of deficit reduction will occur over the next ten years. The non-partisan Congressional Budget Office estimates a deficit reduction of about $238 billion—down from the previous estimate of over $300 billion due to changes made during reconciliation—over the next ten years, primarily funded by increased tax collection enforcement, Medicare savings on drugs, and corporate taxes. For context, this forecast reduction is about $24 billion annually against an annual deficit, for example, totaling about $875 billion for fiscal 2022.
Financial advisors and planners have much to monitor as the impact of the Act reverberates through the economy.
- Retirement plans may need a review to consider the $2,000 annual cap on Medicare drug costs and, although unrelated to the Act, the dramatic increases to Social Security benefits driven by nearly unprecedented inflation levels.
- Tax plans should incorporate potential new individual tax credits, such as the energy offset credit.
- Investment plans may need to be assessed to determine how allocations should change, if at all, as a result of the new corporate minimum tax and buy-back excise tax. For example, planners and advisors should be alert for strategic changes such as fewer stock buybacks and increased dividend payouts.
- Corporate executives’ nonqualified deferred compensation strategies should be evaluated, especially those working in corporations subject to earnings pressure under the Act and those industries impacted by the Act.
The Act presents clear opportunities to proactively serve clients; clued-in advisors and planners need competence across the financial spectrum, in this case, the potential retirement, tax, investing, and corporate executive implications of the Act. Click here to dig deeper into the training resources our firm provides to recognize and respond appropriately to these kinds of opportunities and more.
If you’d like to speak with someone to figure out how we can help you email Rick Swygman at email@example.com.
The information presented herein is provided purely for educational purposes and to raise awareness of these issues; it is not meant to provide and should not be used to provide investment, tax, or financial planning advice of any kind. An experienced and credentialed expert should be consulted before making decisions relating to the topics covered herein. There are variations, alternatives, and exceptions to this material that could not be covered within the scope of this blog.