This is the first of two columns discussing the Inflation Reduction Act.
Next year will mark my 50th year as a tax practitioner. During 40 of those years, I was employed by a Big 4 accounting firm — 30 as a partner. So it is not an exaggeration to say that I have seen of lot in the world of taxes.
Over the past decade, one of the more unpleasant aspects of working as a tax specialist is the politicization of tax law, which has adversely impacted both tax policy and administration of tax laws.
Today, I find that clients who have watched Sean Hannity or Rachel Maddow think they know more about the tax law than the professionals.
Paraphrasing Billy Joel, when I wore a younger man’s clothes, tax law was the result of a deliberative process with bipartisan input. Today, we see the political party in power use the reconciliation process to ram through legislation that appeals to their constituents.
The 2017 Tax Cuts & Jobs Act (“TCJA”) is undoubtedly the worst tax legislation I have seen from both a policy and procedural perspective, but now we have the IRA that follows in its footsteps. Just as considerable misinformation was perpetrated around the TCJA (largely for political purposes), we see the same phenomenon with the IRA.
The IRA increases taxes. In the old days, legislation increasing taxes was called a “revenue act.” But Congress has gotten pretty good at creatively naming bills that increase taxes. Consider the 1982 Tax Equity and Fiscal Responsibility Act or the 1984 Deficit Reduction Act. We certainly have seen neither fiscal responsibility nor deficit reduction since those bills passed. Whether the IRA will actually do much against inflation remains to be seen.
The IRA is 793 pages long and was originally projected to raise $793 billion — that is $1 billion per page. That has to be a new record.
One thing is for sure, just like the TCJA, the IRA will add considerable complexity for many taxpayers. The law contains numerous tax incentive provisions that are narrowly targeted. To qualify for a particular incentive a taxpayer must meet specific qualifications. This will require complex rules to administer and additional tax forms to prepare.
One of the largest tax increases is a minimum tax on the income of large corporations. This has been criticized because one of the metrics of the calculation is not taxable income, but income computed in accordance with generally accepted accounting principles. This will undoubtedly politicize how future accounting principles are promulgated and takes drafting tax law out of the hands of Congress. On the other hand, large multinational corporations have reported strong earnings to their shareholders while showing the IRS that they are not profitable, so perhaps this is the only way to actually tax large corporations.
The IRA also imposes an excise tax on stock buybacks. Understandably, Wall Street does not like this. When the corporate tax rates were reduced by the TCJA, former Treasury Secretary Mnuchin, among others, predicted that a significant portion of the tax savings would be passed onto workers in the form of pay increases. Instead, corporations used the majority of the tax savings to reward shareholders by buying back their stock. The IRA provision claws back some of the corporate tax cuts when used to enrich shareholders disproportionately from congressional expectations.
The Senate passed its version of the bill on Aug. 7. Forty-eight hours later, the non-partisan Joint Committee on Taxation attempted to score the revenue impact of the bill and determine which taxpayers will absorb the tax increase. The JCT report contained many caveats that the analysis was incomplete and subject to change.
Politicians have used the report to perpetuate considerable misinformation about the IRA, such as personal income taxes for middle-class taxpayers are going to increase. The only change to individual taxation is a two-year extension of a TCJA limitation on the ability to offset business losses against investment income or salaries. The rule generally only applies to taxpayers who have over $500,000 in investment income. Those are not middle-class taxpayers.
Part of the confusion comes from the hastily prepared JCT report. If you read the fine print, it compares the 2023-2032 tax burden with the IRS’ preliminary estimate of the 2021 tax burden. There are two problems with this. First, the IRS 2021 estimate is itself preliminary and is likely highly understated. Second, there are a number of COVID relief provisions that expire in 2021 which will increase the tax burden starting in 2022. Taxes are going to rise anyway, but the JCT did a poor job of identifying this phenomenon.
Perhaps the most controversial aspect of the IRA is additional funding for the IRS. That is a lengthy topic worthy of its own column and is the subject of my next column.
Jim de Bree is a semi-retired CPA who resides in Valencia.