The surprise agreement between Senator Joe Manchin and other Democrats on a newpaves the way for some tax changes that have long been on President Biden’s agenda. Whether the proposal could affect you may depend on your income, your job and where you live.
Called the Inflation Reduction Act, the package — a dramatically scaled-down version of the last year’s failed Build Back Better Act — aims to invest in clean energy, while allowing Medicare to negotiate drug prices and capping out-of-pocket drug costs for Medicare recipients at $2,000. The bill would also lower premiums for millions of people on Affordable Care Act plans.
To pay for this, the bill would make changes to the IRS and the tax code to raise $739 billion, with about $300 million left over to help reduce the deficit. That’s a lot of new tax revenue, which prompts the question of who could end up paying more in taxes if the measure becomes law.
The answer: Mostly businesses and high-earning individuals.
“The on-again-off-again negotiations over the proposed #BuildBackBetter tax increases on corporations and high-income earners appears to be… on again,” the Tax Foundation noted in a tweet.
At the same time, one major Build Back Better tax benefit aimed at low- and middle-class families has been left out of the new spending package: The Child Tax Credit. That tax credit, which provided as much as $300 per child in cash payments to most U.S. families for the last six months of 2021, would have been extended under Build Back Better, but it hasn’t been revived in the Inflation Reduction Act.
Here’s what you should know about taxes and the Inflation Reduction Act.
How would the proposal raise tax revenue?
The Inflation Reduction Act seeks to raise $749 billion through four main avenues:
- A 15% corporate minimum tax
- Prescription drug pricing reform
- IRS tax enforcement
- Closing the carried interest loophole
That would pay for an estimated $433 billion in climate and energy investments, with roughly $300 billion remaining that will go toward deficit reduction, according to the plan’s backers.
Would it increase taxes on individuals?
Most taxpayers wouldn’t see a tax increase, with the text of the bill stating that it doesn’t intend to boost taxes for anyone earning less than $400,000.
However, some higher-income Americans could end up paying more to the IRS under the bill’s plan to beef up the agency to go after people who are skirting the nation’s tax laws.
“Nearly all working- & middle-class people have simple tax returns and very high compliance rates: most of their income is from wages/salaries & all gets reported on W-2s,” noted Chuck Marr, vice president of federal tax policy at the left-leaning Center on Budget and Policy Priorities, in a tweet.
“On the other hand, many high-income people have complex taxes because they have opaque income sources that are difficult to trace & lots of lawyers to arrange their affairs,” he added.
Some wealthy asset managers and private-equity investors may also be on the hook for higher taxes under the bill’s proposal to close the so-called “carried-interest loophole.” This allows some money managers to treat much of their earnings as capital gains, which is taxed at a much lower rate than earned income.
What about corporate taxes?
The bill would impose a 15% minimum tax on corporations, which some lawmakers say is necessary given that many companies are able to use loopholes and tax strategies to reduce their tax rate to almost zero despite a statutory corporate tax rate of 21%.
One study published earlier this year found that 19 of the biggest American corporationsin 2021, even as U.S. companies enjoyed their since 1950.
“Dozens of the largest companies – which report large profits to their shareholders (aka their “book” profits) – pay no corporate income taxes,” Marr wrote. A corporate minimum tax is “commonsense policy that’s easy to understand.”
Some Republicans and tax experts are raising concerns about a new corporate tax, given an economy that’s experiencing headwinds like high inflation and a housing slowdown. In their view, raising taxes on businesses while the U.S. facescould only harm economic growth.
Are there any new tax credits?
Yes, the proposal includes tax credits geared to help Americans buy electric vehicles, and it also extends Obamacare subsidies for three years to help lower premiums for people buying health care through the federal health program.
First, the bill adds a new tax credit of $4,000 for the purchase of used electric vehicles — a benefit that could convince some consumers to buy a less-expensive used EV.
Second, it extends the tax credit of $7,500 for new electric vehicles. That credit had only been available to automakers who had sold fewer than 200,000 EVs, but that cap would be lifted under the bill. That would permit capped-out automakers including Tesla, GM and Toyota to sell EVs with that tax credit once again, according to Bloomberg.
Tax losers: Families with kids, homeowners in high-tax states
Because the bill represents a scaled-back version of Mr. Biden’s Build Back Better Act, which was scuttled last year amid opposition from Sen. Manchin, it’s also worth noting what didn’t make it into the Inflation Reduction Act: The Child Tax Credit and the SALT deduction cap.
The Child Tax Credit sent as much as $300 in monthly cash payments for each child in low- to middle-income families in the second half of 2021. While the plan helped lower child poverty, it came under fire from some critics for its cost, as well as the potential impact on inflation.
The new bill also doesn’t include any relief for homeowners in states with high property and income taxes. The 2017 Tax Cuts & Jobs Act, passed under former President Donald Trump, imposed a $10,000 cap on state and local tax deductions (known as the SALT deduction). Some lawmakers, especially those from high-tax states, had sought to eliminate the cap or raise the limit above $10,000. But that doesn’t appear to be in the cards.
“Our tax code should not favor red state or blue state elites with loopholes like SALT and should focus more on closing unfair loopholes like carried interest,” Manchin said in a statement about his support for the bill.