The Anti-Inflation Act — the much-touted tax and energy bill the Senate passed Sunday — includes few if any of the long-feared taxes on individuals that Democrats originally called for a year and a half ago.
The Democrats themselves removed the taxes from the bill, which now goes to the House of Representatives. If passed there, the law flies to the White House to be passed.
Aliya Robinson, who follows the legislature T Rowe Price (TROW), expects the House of Representatives to vote on the anti-inflation bill by the end of this week.
At the time of their vote, Senate Democrats have squandered several large individual tax increases they had originally sought. They did this to get the 50-vote consensus they needed to pass the anti-inflation bill, along with Vice President Kamala Harris’ landmark vote.
The tax hike compromises were crucial in garnering support from centrists like West Virginia Sen. Joe Manchin and Arizona Sen. Kyrsten Sinema.
Measures to increase taxes
The rejected tax increases included doubling the capital gains rate, an increase in inheritance taxes and a new millionaire tax.
One tax that has survived the compromise gauntlet is a 1% levy on share buybacks. Many companies increase earnings per share by reducing the number of shares they have outstanding. “The long-term impact on individual investors is difficult to predict,” said Robinson of T. Rowe Price. “But in the short term, companies are expected to do more buybacks before the tax comes into play.”
Tax credits in the anti-inflation law
The Senate’s final version of the Inflation Reduction Act also lacked an extension of the childcare tax credit. The proposal would have increased the credit from the current $2,000 to as much as $3,600 per child. And it would have extended the term of the loan to 2027.
Lawmakers have also rejected a proposal for a tuition-free college.
One tax credit whose extension made it into the Senate Inflation Reduction Act was the popular $7,500 per vehicle excise tax credit for new electric vehicle purchases.
Buyers of used electric vehicles will receive a new credit of $4,000.
Still, the bill caps the price for eligible new cars at $55,000. That would exclude many Teslas (TSLA) Model 3. It also excludes all Model S and X vehicles.
Trucks and vans must cost less than $80,000 to be eligible.
Another requirement for the creditworthiness of buyers: their electric vehicles and battery components must be largely manufactured in the USA or its free trade partners.
Credit eligibility for Chinese components and minerals will be phased out starting in 2024.
health care cost cap
The Inflation Mitigation Act has other provisions that should make consumers’ bank accounts smile. The final bill caps the out-of-pocket expenses for prescription drugs for seniors at $2,000 per year.
“There is a fairly complicated mechanism behind this, which draws funding from multiple sources,” said James Gelfand, President of the ERISA Industry Committee. “But from the patient’s perspective, once the $2,000 mark is reached, the drug is simply covered with no cost sharing.”
The bill also allows Medicare to negotiate the prices of 10 drugs in four years.
The Democrats have had only partial success in trying to limit the monthly cost of insulin to $35. The drug treats diabetes.
The Senate passed the Medicare patient cap. But the seven Republican supporters and all 50 Democrats lacked three of the 60 senators needed to extend the cap to the private insurance market.
Funds for the IRS
If the Inflation Reduction Act is enacted, even the IRS will get more money. The Senate voted to give the IRS $80 billion to improve auditing and enforcement.
The Inflation Alleviation Act does not expand the $10,000 cap on state and local tax deductions, or SALT. That will hurt homeowners in states with high property taxes on the Northeast and West Coasts.
Inflation calculation ignores carried interest
Another populist tax that did not survive the grueling intra-party negotiations was a proposed rate hike on carried interests.
Carried interest is a type of compensation paid to investment managers in private equity funds, hedge funds, and venture capital funds.
Carried interest is a portion of the fund’s profit. It is also known as “Carry”. Fund managers pay a maximum of 20% federal tax on these gains. Taxes similar to long-term capital gains apply. In contrast, regular federal tax rates on ordinary income go up to 37%.
As a result, these fund managers are taxed at a carried interest rate that is often lower than that of lower-paid clerks and manual workers. Born interest controversy as a result.
But since Sinema was adamantly opposed to a higher tax, lawmakers didn’t vote in favor of it.
The Inflation Mitigation Act differs from the two versions of the Senate-proposed pension rule upgrades known as Secure 2.0. This pack of upgrades to the House and Senate versions of the retirement rules will most likely be combined into a single pack. That combined proposal then faces a likely year-end vote, Robinson says.
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