The world of politics and political maneuvering never ceases to amaze us. When most considered the Build Back Better Act and its potential tax increases as being left behind – here comes its sequel. Spoiler alert: a quick summary on the good news is that most of the proposed tax increases are not in this bill. The bad news – it doesn't mean they are gone, it just means that they aren't in this particular bill.
Has it passed? What are the odds of more changes?
First, the deal isn't done yet. This new bill, the Inflation Reduction Act of 2022, has been approved by the Senate and now moves to the House for a vote. While there is always a possibility of additional changes occurring, the probability of that is pretty low. There appears to be strong alignment on the Democratic side of the aisle to take this bill across the finish line, which means the House vote later this week will most likely be uneventful and procedural.
What's included in the Inflation Reduction Act (as of now)
Without getting into the nitty-gritty details unrelated to taxes, investors should be aware of three key tax increases/tax law changes investors should be aware of. One that got significant press at first is now of no consequence to most investors, one is of some consequence, and one is of more consequence.
The one that is no longer of consequence is the proposed changes to the "carried interest loophole." This change lived for less than two weeks in the new bill before it was scuttled in negotiations and dropped from the bill altogether.
Instead, a 1% excise tax on stock buybacks has been added to the bill. This one is of some consequence as it impacts some investors. Simply put, a 1% tax rate on stock buybacks reduces the benefits investors receive from the buybacks. It also could be a disincentive for companies to do buybacks. On the other hand, companies may divert this type of shareholder payout activity to increased dividend payments. (Both buybacks and dividends are ways that corporations distribute excess income back to shareholders). The impact of this one may take some to study and analyze.