What the Inflation Reduction Act Means for Your Portfolio
Ken Blazick, Chief Investment Officer
This week President Biden signed the Inflation Reduction Act of 2022 into law, finalizing the highly contested piece of legislation. The job of the money management team is not to debate the political aspects of any legislation, but rather to objectively analyze new legislation for the possible implications on business, economies, markets, and what it means for our clients' portfolios. Below is an overview of what is included in the act.
Inflation Reduction Act Policy Changes
- Extension of Affordable Care Act subsidies
- Extends the healthcare subsidies provided by the Affordable Care Act through 2025. Subsidies were set to expire at the end of 2022.
- Climate & Energy Provisions
- Provides tax rebates and credits on clean energy solutions with the goal of reducing energy costs for everyday Americans and reducing America’s carbon emissions.
- Corporate Tax minimum
- Imposes a 15% minimum tax on corporations earning over $1 billion in yearly financial statement income.
- Share Repurchase Tax
- Creates a new 1% tax on net stock repurchases that corporations make.
- Excess Noncorporate Loss Limitation Extension
- Extends the limit on pass-through loss deductions through 2028. The maximum deductible loss remains at $540,000 for joint filers; however, this amount is indexed to inflation so that future amounts may increase or decrease.
- Medicare Prescription Drug Price Reforms
- Allows Medicare to negotiate prices for certain prescription drugs, limits price growth of certain prescription drugs, and reworks Medicare Part D’s benefit formula.
- IRS Funding
- Provides the IRS with an additional $80 billion over the next decade to hire additional auditors, modernize computer systems and improve taxpayer services.
On the surface, this legislation is designed to fight climate change, lower healthcare costs, and increase IRS enforcement. To offset the spending, the bill includes increases in corporate taxation with the idea that reducing the Federal Government’s budget deficit will help lower inflation. In a nutshell, the government estimates that over the next ten years, the measures included in this act will increase government spending by $437 billion and increase government revenue by $737 billion, thus creating a $300 billion budget deficit reduction.
However, the devil is usually in the details, and this bill is no exception. We expect the Inflation Reduction Act will have a minimal impact on the overall business environment. In the details for the spending provisions, most of the “spending” comes in the form of tax incentives rather than actual monetary outlays. The headline calls for roughly $437 billion of spending, but only a little more than $150 billion of that is expected to be physical government spending. The rest of the $437 billion is anticipated tax credits the government will give out over the next ten years. The offsetting increases from corporate taxation are much the same. The Inflation Reduction Act calls for a minimum tax of 15% on corporate profits over $1 billion but does not change the tax code for calculating those profits. For example, in 2020 (the most recent data we have access to) FedEx received a $230 million tax rebate after it zeroed out its federal income tax on $1.2 billion of pretax income. The (legal) deductions FedEx used to zero out the $1.2 billion of pretax income remain unchanged.
It is our conclusion after parsing through the 700+ pages of the bill text and researching the possible implications, the impact of the Inflation Reduction Act will be minimal in all respects. The Wharton School of Business states, “The impact on inflation is statistically indistinguishable from zero.”1 Overall, while there is some potential for impacts on the climate and average Americans to benefit from the individual measures included in the Act, we do not anticipate it to significantly impact investments in either a positive or negative direction. We believe our portfolios remain well positioned in the current market environment.
1https://budgetmodel.wharton.upenn.edu/issues/2022/7/29/inflation-reduction-act-preliminary-estimates