On August 16th, President Joe Biden signed into law a climate, tax and healthcare bill after being pushed through the Senate (51-50) and the House (220-207).
Sponsored by Sen. Joe Manchin (WV-D) and Senate Majority Leader Chuck Schumer (NY-D), the bill, dubbed the Inflation Reduction Act of 2022, aims to reduce the federal budget deficit, reduce GHG emissions, invest in new energy infrastructure and lower healthcare costs.
Sen. Kyrsten Sinema’s (AZ-D) support was vital to the bill’s passage and signaled that changes to certain tax provisions aimed at the private equity market would need to be made for her approval.
As a part of funding efforts, the bill had originally included a provision that would close the “carried interest loophole” which allows investment advisers to treat a portion of their returns as capital gains instead of income. This provision was ultimately removed in order to gain Sinema’s support and secure the bill’s passage in the Senate.
In place of closing the “carried interest loophole,” the bill will add a 15% corporate alternative minimum tax on companies with more than $1 billion in book income and a one percent excise tax on stock buybacks.
Additionally, two sets of provisions, as a part of Manchin and Schumer’s compromise, will face scrutiny from those pushing for stronger climate action as the bill would (1) require the government to open new locations for oil and gas leasing in Alaska and the Gulf of Mexico; and (2) forbid the government from selling wind/solar leases on federal land when it has not also opened territory to oil and gas developers.
Despite these compromises, the New York Times reported that these steps are anticipated to cut GHG emissions to about 40% below 2005 levels by 2030.
The bill’s contents include clean energy developer tax credits; electric vehicle incentives; energy efficient household subsidies; investments in communities disproportionately affected by climate change; heavy industry decarbonization tax credits; fees for methane leakage from oil and gas wells; funding for cutting agricultural and livestock emissions; and support for forest and coastal habitat conservation and restoration.
Additional Bill Details:
Energy Tax Credits
The new bill creates decade-long technology-neutral tax credits for any low- or zero-carbon form of power generation. Developers can take a new investment credit which generally covers 30% of a project, or they can take a new production credit which pays for every kilowatt-hour of zero-carbon electricity generated.
Other tax credits are available for companies that capture and bury carbon dioxide, keep existing nuclear plants running, and for states and utilities that reduce carbon dioxide emissions.
EV Incentives
Consumer tax credits are available for up to $7,500 for new electric vehicles and $4,000 for used electric vehicles, with respective income stipulations, which will encourage the manufacture of electric vehicles in North America.
Household Subsidies
10 years of subsidies are available for households to buy energy efficient appliances and rooftop solar panels. This is separate from the $10 billion in funds for low-income Americans.
Decarbonizing Heavy Industry
The bill sets aside billions in funds for clean energy manufacturing, production tax credits for zero-carbon power development, and investment tax credits for electric vehicle and renewable energy technology manufacturing.
This is a de facto extension of the one-off demonstration project funding from last year’s infrastructure bill to provide longer-term tax credits for scaling purposes.
Emissions Fees
Fees for excess methane leaking from oil and gas wells, pipelines and other infrastructure at a rate of $900/metric ton that exceed limits will be imposed in 2024, increasing to $1,500/metric ton in 2026.
Low-income Investments
Over $60 billion will support communities disproportionately affected by climate change through grants and mitigation funding. An additional $27 billion would be put toward a “green bank” aimed at clean energy deployment with a focus on disadvantaged communities.
Agriculture and Forestry Emissions
$20 billion will be set aside to support forest and coastal habitat conservation and restoration, as well as to cut livestock and agricultural emissions.
Healthcare
Medicare recipients will be able to take advantage of a new cap for out-of-pocket costs and establishing a $35/month cap for a month’s supply of insulin. Medicare will also be able to negotiate prices for high-cost drugs.
Energy
Two sets of provisions in the bill will (1) require the government to open new locations for oil and gas leasing in Alaska and the Gulf of Mexico; and (2) forbid the government from selling wind/solar leases on federal land when it has not also opened territory to oil and gas developers.
Tax
The 15% corporate alternative minimum income tax was amended to exclude private equity funds whose portfolio companies’ combined book income exceeds $1 billion and added a depreciation carveout. A one percent excise tax provision on stock buybacks was also added to make up for the funding lost by narrowing the corporate alternative minimum income tax and removing the carried interest loophole provisions.
