Legislation – Michmutters

Tag: Legislation

Categories
US

What carried interest is, and how it benefits high-income taxpayers

What carried interest is, and how it benefits high-income taxpayers

Sen. Kyrsten Sinema, D-Ariz., and Sen. Joe Manchin, DW.V., on Capitol Hill on Sept. 30, 2021.

Jabin Botsford | Washington Post | Getty Images

Senate Democrats passed a historic package of climate, healthcare and tax provisions on Sunday.

But one proposed tweak to the tax code — a modification of so-called carried interest rules — didn’t survive due to objections from Sen. Kyrsten Sinema, D-Ariz., whose support was essential to pass the Inflation Reduction Act in an evenly divided Senate. The bill now heads to the House, which is expected to pass it this week.

Many Democrats and opponents refer to the lower tax rate on carried interest as a loophole that allows wealthy private equity, hedge fund and other investment managers to pay a lower tax rate than some of their employees and other American workers.

“It’s a real rich benefit for the wealthiest of Americans,” said Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center. “Why should a private-equity manager be able to structure his or her compensation for her with low-taxed gains? That seems wrong.”

Here’s what carried interest is, and why many Democrats want to change how it’s taxed.

Carried interest compensates investment executives

Carried interest is a form of compensation paid to investment executives like private equity, hedge fund and venture capital managers.

The managers receive a share of the fund’s profits — typically 20% of the total — which is divided among them proportionally. The profit is called carried interest, and is also known as “carry” or “profits interest.”

Here’s where the tax controversy lies: That money is considered a return on investment. As such, managers pay a top 20% federal tax rate on those profits, rather than regular federal tax rates of up to 37% that apply to compensation paid as a wage or salary.

That preferential 20% tax rate is the same as “long-term capital gains,” which applies to investments like stocks, bonds, mutual funds and real estate held for more than a year.

Bulk of fund managers’ compensation is carried interest

Carried interest accounts for the “vast majority” of compensation paid to managing partners of private equity funds, according to Jonathan Goldstein, who leads the Americas private equity practice at Heidrick & Struggles, an executive search firm.

For example, carried interest accounts for at least 84% of managing partners’ total compensation, on average, according to a Heidrick & Struggles 2021 survey. The share varies, depending on a firm’s assets under management, though skews well over 90% among partners at larger firms.

More from Personal Finance:
How the Inflation Reduction Act preserves expanded health subsidies
These 30 companies will help employees pay off their student loans
Reconciliation bill includes nearly $80 billion for IRS funding

In dollar terms, managing partners’ carried interest ranged from $10 million to $102 million, on average, according to the survey, again depending on overall assets under management.

Additionally, while capital gains for wealthy investors are generally subject to an additional 3.8% Medicare surtax, not all carried interest is subject to this “net investment income tax,” according to tax experts. When it is factored in, managers that are subject to the tax would owe a 23.8% total top tax rate at the federal level, when added to the 20% top rate for capital gains.

Some say it’s a ‘stain’; others, a ‘successful policy’

Wealthy investors, including Warren Buffett and Bill Ackman, have lambasted the tax treatment of carried interest.

“The carried interest loophole is a stain on the tax code,” Ackman, the chief executive of Pershing Square, wrote July 28 on Twitter.

However, other tax experts and proponents of the current tax structure think a lower rate on carried interest is appropriate, benefiting investors and the economy. Raising taxes on fund profits would be a disincentive for managers to take risk and would reduce investment capital, they said.

“Carried interest is appropriately taxed as a capital gain and a successful policy that incentivizes investment in the US economy,” according to Noah Theran, the executive vice president and managing director of the Managed Funds Association, a trade group.

Higher tax rates could also have “spillover effects” by reducing the rate of return for investors like pension funds and other institutions, said Jennifer Acuna, a partner at KPMG and former tax counsel for the Senate Finance Committee.

“The policies have been going back and forth for many years, on what is the right policy to tax carried interest,” Acuna said. “I don’t think it’s a slam dunk.”

Proposal would have curtailed carried interest

A deal brokered by Senate Majority Leader Chuck Schumer, D-NY, and Sen. Joe Manchin, DW. Va., initially proposed curtailing the tax break for carried interest. However, the proposal was removed from the final legislation that passed the Senate.

Most significantly, the proposal would have required fund managers to hold portfolio assets for five years — an increase from three years — in order to receive the preferential 20% tax rate.

Managers with a holding period of less than five years would incur “short-term” capital gains tax rates on carried interest — a 37% top rate, the same that applies to wage and salary income for the highest-income taxpayers.

Another proposed tweak would have effectively lengthened that holding period beyond five years, according to Rosenthal.

That’s because the initial proposal would have started counting the five-year clock only after a private-equity fund made “substantially all” of its investments — a term that isn’t specifically defined but which tax experts would generally consider as 70% to 80 % of a fund’s investment capital being committed, Rosenthal said.

In practice, that would likely have extended the effective holding period to roughly seven to nine years, a policy that “had some bite,” he added.

Democrats estimated that the proposed changes to the carried interest rules would have raised $14 billion over 10 years.

.

Categories
US

Biden signs $280 billion chip funding bill

Biden signs $280 billion chip funding bill

President Biden on Tuesday signed a $280 billion package that aims to boost the domestic chip-making industry and scientific research.

What they’re saying: “Fundamental change is taking place today — politically, economically and technologically,” Biden said before signing the Chips and Science Act. “Change that can either strengthen our sense of control and security, of dignity and pride in our lives and our nation, or change that weakens us.”

  • “This is the moment we face,” he added. “Today is the day for builders. Today America is delivering.”
  • “Today, I am signing the law, the Chips and Science Act, a once-in-a-generation investment in America itself, a law the American people can be proud of.”

Why it matters: The funding is meant to bolster the domestic production of semiconductors — a vital component for almost every electronic device we use today — to help prevent future supply chain crises and increase competition with China.

  • The bill, which passed Congress in late July with bipartisan support, gives $52.7 billion in funding for US semiconductor production and another $200 billion for scientific research, including a technology directorate at the National Science Foundation meant to translate basic research into commercial products.

Go deeper: Chip billions won’t be a quick fix

.

Categories
US

Inflation Reduction Act limits pass-through tax break for 2 more years

Inflation Reduction Act limits pass-through tax break for 2 more years

Senate Majority Leader Chuck Schumer, DN.Y., discusses the Inflation Reduction Act on Aug. 7, 2022 in Washington, DC

Kent Nishimura | Los Angeles Times | Getty Images

Senate Democrats curtailed a tax break for certain pass-through businesses as part of the Inflation Reduction Act passed Sunday.

A pass-through or flow-through business is one that reports its income on the tax returns of its owners. That income is taxed at their individual income tax rates. Examples of pass-throughs include sole proprietorships, some limited liability companies, partnerships and S-corporations.

Democrats’ legislation — a package of health-care, tax and historic climate-related measures — limits the ability of pass-throughs to use big paper losses to write off costs like salaries and interest, according to tax experts.

More from Personal Finance:
How carried interest works and how it benefits high-income taxpayers
Inflation Reduction Act aims to trim insulin costs for Medicare users
Reconciliation bill includes nearly $80 billion for IRS

That limit — called the Limitation on Excess Business Losses — is currently already in place. It was scheduled to end starting in 2027, but the new bill would extend the restriction for an additional two years. That extension wasn’t in Senate Democrats’ initial version of the legislation, but it was added during the subsequent negotiation and amendment process.

The Inflation Reduction Act passed along party lines and now heads to the House.

Wealthy real estate owners likely impacted most

Republicans originally enacted the pass-through limitation in the 2017 tax law known as the Tax Cuts and Jobs Act.

Specifically, the law disallowed pass-through owners from using business losses exceeding $250,000 to offset non-business income. That dollar threshold is for single taxpayers; the law set a $500,000 cap for a married couple filing a joint tax return.

Those caps are higher in 2022 due to an inflation adjustment: $270,000 and $540,000, respectively.

“The business losses can only offset other business income, not salaries and interest and investment gains,” Steve Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, said of the measure.

The provisions hurt “rich guys” who were using business losses to take tax write-offs against bonuses, salaries and investment income, for example, said Rosenthal.

The limitations can theoretically apply to any pass-through business that runs up a big operating loss each year. But real estate businesses — which can use rules around depreciation to consistently rack up big losses on paper — are likely among the most affected categories, according to Jeffrey Levine, a certified financial planner and certified public accountant based in St. Louis.

It’s a really big deal for uber-wealthy people with a ton of real estate.

Jeffrey Levine

chief planning officer at Buckingham Wealth Partners

“It’s a really big deal for uber-wealthy people with a ton of real estate, and then the occasional business that loses a ton of money every year,” said Levine, who is also chief planning officer at Buckingham Wealth Partners.

The limitation for pass-throughs was initially scheduled to expire after 2025, along with the other provisions of the Republican tax law that affected individual taxpayers.

However, Democrats extended the limit for an additional year in the American Rescue Plan, which President Biden signed into law in 2021. The Joint Committee on Taxation estimated that that one-year extension would raise about $31 billion.

The Inflation Reduction Act’s additional extension would presumably raise a roughly similar amount of money each year, Rosenthal said.

However, the business losses don’t necessarily disappear forever. Owners may be able to defer the tax benefits to future years, if Congress doesn’t extend the limitation again.

“The losses almost always get claimed later,” Rosenthal said.

.

Categories
US

With 87,000 new agents, here’s who the IRS may target for audits

With 87,000 new agents, here's who the IRS may target for audits

Jeffrey Coolidge | Photodisc | Getty Images

As the Democrats’ spending plan moves closer to a House vote, one of the more controversial provisions — nearly $80 billion in IRS funding, with $45.6 billion for “enforcement” — has raised questions about who the agency may target for audits.

IRS Commissioner Charles Rettig said these resources are “absolutely not about increasing audit scrutiny on small businesses or middle-income Americans,” in a recent letter to the Senate.

However, with the investment projected to bring in $203.7 billion in revenue from 2022 to 2031, according to the Congressional Budget Office, opponents say IRS enforcement may affect everyday Americans.

More from Personal Finance:
Inflation Reduction Act aims to trim insulin costs for Medicare users
Expanded health care subsidies remain intact in Inflation Reduction Act
Reconciliation bill includes nearly $80 billion for IRS including ‘enforcement’

“Our biggest worry in this is that the burden for these audits will land on Walmart shoppers,” Rep. Kevin Brady, R-Texas, said Tuesday on CNBC’s “Squawk Box.”

Overall, IRS audits plunged by 44% between fiscal years 2015 and 2019, according to a 2021 Treasury Inspector General for Tax Administration report.

While audits dropped by 75% for Americans making $1 million or more, the percentage fell by 33% for low-to-moderate income filers claiming the earned income tax credit, known as EITC, the report found.

Our biggest concern in this is that the burden for these audits will land on Walmart shoppers.

Rep. Kevin Brady, R-Texas

Ken Corbin, chief taxpayer experience officer for the IRS, said returns claiming the EITC have “historically had high rates of improper payments and therefore require greater enforcement,” during a May House Oversight Subcommittee hearing.

Since many lower-income Americans are wage earners, these audits are generally less complex and many may be automated.

How the IRS picks which tax returns to audit

Currently, the IRS uses software to rank each tax return with a numeric score, with higher scores more likely to trigger an audit. The system may flag a return when deductions or credits compared to income fall outside of acceptable ranges.

For example, let’s say you make $150,000 and claim a $50,000 charitable deduction. You’re more likely to get audited because it’s “disproportionate” to what the system expects, explained Lawrence Levy, president and CEO of tax resolution firm Levy and Associates.

Other red flags for an IRS audit may include unreported income, refundable tax credits such as the EITC, home office or auto deductions, and rounded numbers on your return, experts say.

How IRS audits may change with more funding

While the legislation still must be approved by the House and signed into law, it will take time to phase in the funding, hire and train new workers.

The IRS aims to hire roughly 87,000 new agents, according to the Treasury Department.

New auditors may have a six-month training program and receive cases worth a few hundred thousand dollars rather than tens of millions, Levy said.

“You’re not going to give a new General Motors trainee, for example,” he said. “It just isn’t going to happen.”

The chance of an audit may increase for self-employed taxpayers, Levy said, depending on their return. However, the odds may not change for traditional workers with an error-free filing, he said.

“The W-2 employee is much less likely to get audited than a self-employed person by far, in my opinion,” Levy said.

Of course, one of the best way to avoid future headaches is by keeping accurate records with detailed bookkeeping and saving all receipts, he said.

.

Categories
US

Biden signs China competition bill to boost US chipmakers

Biden signs China competition bill to boost US chipmakers

[ The stream is slated to start at 10 a.m. ET. Please refresh if you do not see a player above at that time.]

President Joe Biden on Tuesday signed a bipartisan bill that aims to strengthen US competitiveness with China by investing billions of dollars in domestic semiconductor manufacturing and science research.

“Today is a day for builders. Today America is delivering,” Biden said at the signing ceremony outside the White House. He was joined by a crowd of hundreds, including tech executives, union presidents and political leaders from both parties.

The bill, dubbed the Chips and Science Act, includes more than $52 billion for US companies producing computer chips, as well as billions more in tax credits to encourage investment in semiconductor manufacturing. It also provides tens of billions of dollars to fund scientific research and development, and to spur the innovation and development of other US tech.

The Biden administration also contended that the legislation will “unlock hundreds of billions more” in private spending in the industry. The White House said Tuesday that multiple companies, “spurred” by the chips bill, have announced more than $44 billion in new semiconductor manufacturing investments.

US President Joe Biden (C) signs HR 4346, the CHIPS and Science Act of 2022, on the South Lawn of the White House in Washington, DC, on August 9, 2022.

Mandel Ngan | Afp | Getty Images

Of that sum, $40 billion is coming from Micron’s investment in memory chip manufacturing. The White House said the company’s initiative will yield 8,000 new jobs and increase the US market share of memory chip production to 10% from 2%.

A newly announced partnership between Qualcomm and GlobalFoundries, meanwhile, includes $4.2 billion in chip production as part of an expansion of GlobalFoundries’ upstate New York facility, the White House said.

Advocates say the funding is needed to sharpen America’s technological edge and reinvigorate its lagging chip industry. The US produces only about 10% of the world’s supply of semiconductors, whereas East Asia accounts for 75% of global production — including most of the top-tier chips, according to the White House.

Semiconductors are critical pieces of an array of products including consumer electronics, automobiles, health care equipment and weapons systems. The Covid-19 pandemic sparked a chip shortage and strained supply chains, highlighting America’s dependence on foreign-made chips and revealing a potential national security threat, officials say.

The signing comes as Biden and congressional Democrats cap a flurry of activity before lawmakers leave Washington for the rest of the month and turn their attention to midterm election campaigns.

Senate Democrats on Sunday passed a sweeping bill to fund ambitious climate, energy and health policies by raising taxes on rich corporations and reforming prescription drug pricing. The bill, a major piece of Biden’s agenda that Democrats had worked on for well over a year, squeaked through with no Republican support in the chamber, which is evenly split by party. Vice President Kamala Harris cast the tie-breaking vote.

In late June, Biden also signed a bipartisan bill to strengthen gun regulations, including by enhancing requirements for background checks. The legislation sped through Congress in the wake of a deadly mass shooting at an elementary school in Uvalde, Texas, in which a single gunman killed 19 students and two teachers.

And last week, Biden revealed that a US strike in Afghanistan killed top al-Qaeda leader Ayman Al-Zawahiri, who was considered a mastermind behind the 9/11 terrorist attacks.

Biden is also expected to sign another bill this week that bolsters health benefits for veterans who were exposed to chemicals that billowed from toxic burn pits.

That bill passed with overwhelming bipartisan support after Republicans temporarily blocked it. The move stoked outrage from some veterans’ groups, as well as comedian Jon Stewart, who emerged as a leading advocate.

Biden’s already-middling approval ratings have sunk in recent months, as global inflation and supply chain issues take a toll on Americans’ wallets at the grocery store and the gas station. His unpopularity of him, paired with a tough political map and other political headwinds, has fueled concerns among Democrats that they could suffer a route in the November midterms that results in Republicans taking control of one or both chambers of Congress.

But the latest polls show Democrats’ chances of keeping the Senate have improved, and Biden on Monday predicted that the climate and tax bill’s passage will “immediately help” in the midterms.

.

Categories
US

Biden signs China competition bill to boost US chipmakers

Biden signs China competition bill to boost US chipmakers

[ The stream is slated to start at 10 a.m. ET. Please refresh if you do not see a player above at that time.]

President Joe Biden on Tuesday signed a bipartisan bill that aims to strengthen US competitiveness with China by investing billions of dollars in domestic semiconductor manufacturing and science research.

“Today is a day for builders. Today America is delivering,” Biden said at the signing ceremony outside the White House. He was joined by a crowd of hundreds, including tech executives, union presidents and political leaders from both parties.

The bill, dubbed the Chips and Science Act, includes more than $52 billion for US companies producing computer chips, as well as billions more in tax credits to encourage investment in semiconductor manufacturing. It also provides tens of billions of dollars to fund scientific research and development, and to spur the innovation and development of other US tech.

The Biden administration also contended that the legislation will “unlock hundreds of billions more” in private spending in the industry. The White House said Tuesday that multiple companies, “spurred” by the chips bill, have announced more than $44 billion in new semiconductor manufacturing investments.

US President Joe Biden (C) signs HR 4346, the CHIPS and Science Act of 2022, on the South Lawn of the White House in Washington, DC, on August 9, 2022.

Mandel Ngan | Afp | Getty Images

Of that sum, $40 billion is coming from Micron’s investment in memory chip manufacturing. The White House said the company’s initiative will yield 8,000 new jobs and increase the US market share of memory chip production to 10% from 2%.

A newly announced partnership between Qualcomm and GlobalFoundries, meanwhile, includes $4.2 billion in chip production as part of an expansion of GlobalFoundries’ upstate New York facility, the White House said.

Advocates say the funding is needed to sharpen America’s technological edge and reinvigorate its lagging chip industry. The US produces only about 10% of the world’s supply of semiconductors, whereas East Asia accounts for 75% of global production — including most of the top-tier chips, according to the White House.

Semiconductors are critical pieces of an array of products including consumer electronics, automobiles, health care equipment and weapons systems. The Covid-19 pandemic sparked a chip shortage and strained supply chains, highlighting America’s dependence on foreign-made chips and revealing a potential national security threat, officials say.

The signing comes as Biden and congressional Democrats cap a flurry of activity before lawmakers leave Washington for the rest of the month and turn their attention to midterm election campaigns.

Senate Democrats on Sunday passed a sweeping bill to fund ambitious climate, energy and health policies by raising taxes on rich corporations and reforming prescription drug pricing. The bill, a major piece of Biden’s agenda that Democrats had worked on for well over a year, squeaked through with no Republican support in the chamber, which is evenly split by party. Vice President Kamala Harris cast the tie-breaking vote.

In late June, Biden also signed a bipartisan bill to strengthen gun regulations, including by enhancing requirements for background checks. The legislation sped through Congress in the wake of a deadly mass shooting at an elementary school in Uvalde, Texas, in which a single gunman killed 19 students and two teachers.

And last week, Biden revealed that a US strike in Afghanistan killed top al-Qaeda leader Ayman Al-Zawahiri, who was considered a mastermind behind the 9/11 terrorist attacks.

Biden is also expected to sign another bill this week that bolsters health benefits for veterans who were exposed to chemicals that billowed from toxic burn pits.

That bill passed with overwhelming bipartisan support after Republicans temporarily blocked it. The move stoked outrage from some veterans’ groups, as well as comedian Jon Stewart, who emerged as a leading advocate.

Biden’s already-middling approval ratings have sunk in recent months, as global inflation and supply chain issues take a toll on Americans’ wallets at the grocery store and the gas station. His unpopularity of him, paired with a tough political map and other political headwinds, has fueled concerns among Democrats that they could suffer a route in the November midterms that results in Republicans taking control of one or both chambers of Congress.

But the latest polls show Democrats’ chances of keeping the Senate have improved, and Biden on Monday predicted that the climate and tax bill’s passage will “immediately help” in the midterms.

.

Categories
US

The market’s big winners and losers in climate, health and tax bill

The market's big winners and losers in climate, health and tax bill

US Senate Majority Leader Chuck Schumer (D-NY) walks outside the US Capitol in Washington, US August 2, 2022.

Jonathan Ernst | Reuters

Want to know what the Inflation Reduction Act means for the market’s biggest companies, as well as for your wallet? When it comes to politics, you always have to follow the money – and remember that the devil is in the details.

The Senate on Aug. 7 passed the bill that’s designed to fight climate change, make significant tax changes, trim the federal deficit, cut drug prices for Medicare recipients and extend expanded health insurance subsidies under the Affordable Care Act. As it moves to the House of Representatives, the roster of the winners and losers under the bill is coming into sharper focus even before it goes to President Joe Biden.

For both winners and losers, the impact is more modest than you would think, given the sheer size of numbers being bandied about. That’s because of details like strings attached to some of the new or extended tax breaks, or the schedule for implementing Medicare’s negotiations with big pharmaceutical companies over drug prices.

Changes will be more gradual than many headlines imply.

Beginning with the biggest-dollar provisions of the ten-year package of spending and tax cuts, these are some of the effects American corporations and citizens will see from the law. The two biggest changes are the bill’s deficit reducers – just two provisions of the law that account for 80% of its $300 billion in deficit reduction, according to Moody’s Analytics.

Losers: Big tax-avoiding corporations

Members of the Patriotic Millionaires hold a federal tax filing day protest outside the apartment of Amazon founder Jeff Bezos, to demand he pay his fair share of taxes, in New York City, May 17, 2021.

Brendan McDermid | Reuters

The biggest provision by far of the package is the $313 billion Moody’s Analytics says will be raised over 10 years by imposing a 15% minimum tax on corporate profits for businesses that earn at least $1 billion a year.

The law also cracks down on the practice of letting companies announce one set of profit figures to investors, while using another set of numbers that include tax loopholes to show the government. This happens by applying the 15% rate to the “book rate” profits companies disclose to Wall Street, says the liberal-leaning Roosevelt Institute.

The institute says 55 big companies paid no net federal taxes in 2020, including names like Nike, Salesforce.com, Archer Daniels Midland and Fedex. They would have owed $8.5 billion in 2020 at the standard corporate tax rate of 21%, the institute said.

A report by the Center for American Progress says 19 companies in the Fortune 100 alone paid little or no tax in 2021. Among companies that paid 6% or less, as calculated by liberal-leaning think tank: Amazon, Exxon Mobil, AT&T, Bank of America, and both Ford and General Motors. All of them will likely be paying more.

Losers: Drug companies (but not as much as you think)

Participants hold signs as then-Democratic US presidential candidate US Sen. Bernie Sanders (I-VT) spoke at a news conference to introduce the “Medicare for All Act of 2019” on Capitol Hill in Washington, April 10, 2019

Aaron P. Bernstein | Reuters

The government will save $288 billion by negotiating over drug prices, Moody’s says, and that’s a win for senior citizens – but some experts say the change will be more gradual and phased in than many consumers expect.

That’s because the law will only let Medicare negotiate over a few drugs in the early years of the law’s implementation. Medicare will only be able to haggle over 10 drugs in fiscal 2026, and new drugs will not be subject to negotiation for nine to 13 years after their market introduction, said Tricia Neuman, executive director of the Program on Medicare Policy at the Kaiser Family Foundation .

“Savings are exponentially smaller than under the [2019] House bill, which covered many more drugs,” Neuman said. That bill would have let Medicare negotiate terms with 25 top drugs initially, and expanded faster.

One win for seniors is a $2,000 annual cap on their contribution to prescription spending. Most recipients now spend less, but cancer patients can easily spend $10,000 or more, according to a 2019 study. That gives Medicare recipients certainty about drug expenses, Neuman said.

The impact on companies isn’t completely clear because it’s not known yet exactly which drugs will be the first subjected to price negotiations, Neuman said. In 2020, Medicare spent more than $1 billion on each of nearly 40 drugs. Bristol Myers Squibb’s blood-clotting treatment Eliquis ($9.9 billion), Bristol Myers Squibb’s cancer treatment Revlimid ($5.4 billion), and Johnson and Johnson’s blood-clotting drug Xarelto ($4.7 billion) top the list.

What about the spending part of the bill?

Among so-called spending in the bill is actually targeted tax cuts, which the congressional Joint Committee on Taxation calls tax expenditures. One of the three biggest ones in this package, which together account for three-fourths of the $313 billion in tax breaks, is an extension of existing health-care law.

It would extend the subsidies for health insurance under Obamacare that were increased during the Covid pandemic, keeping the benefit hikes from expiring Dec. 31.

People who buy insurance through Obamacare are among the winners. An estimated $64 billion of the package will be in the form of tax credits for people who buy health insurance on Internet exchange markets like Healthcare.gov, according to Moody’s. These credits subsidize the cost of coverage for people whose employers don’t offer benefits and who make too much to be eligible for Medicaid, and were expanded in Covid relief legislation to make policies more affordable.

The provision extends the credit for three years, adding nothing to the deficit after fiscal 2026, Moody’s says. Without it, an estimated 3.1 million Americans would have lost health care coverage, estimates the Center on Budget and Policy Priorities.

Winners: Car companies (but maybe not Tesla)

GM launched ‘EV Live,’ a free online platform that connects electric vehicle owners or consumers who have questions about zero-emissions cars and trucks with an expert who can answer them.

Courtesy: GM

The other big headlines on the “spending” side of the bill are the extension of the $7,500 consumer income tax credit for the purchase of new electric vehicles, and the addition of a new, $4,000 credit for buying a used EV. But the details of the bill make assessing short-term winners and losers complicated.

First, the bill caps the price of eligible new cars at $55,000, excluding the most popular version of Tesla’s Model 3 (as well as all Model S and X vehicles). Trucks and vans can get the credit if they cost less than $80,000. Even that’s a modest win for Tesla, which has not offered its buyers any tax credits since it used up the 200,000 credits it was allotted under existing law. Most or all vehicles from startups like Lucid Motors and Rivian are also excluded under the new bill, at least until they introduce planned cheaper models.

“The Model 3 is right on the border,” said Chris Lafakis, energy economist at Moody’s Analytics.

More crucially, the bill includes requirements for domestic manufacturing of EVs and their battery components to qualify for the extended credit. As written, the law requires that 40% of battery components be sourced from factories in the US or its free-trade agreement partners; that batteries are US made by 2029; and that Chinese components and minerals be phased out beginning in 2024.

Right now, it is not clear if any US battery plant can meet the law’s requirements. To keep the credits flowing once the law takes effect next year, the Biden administration will have to waive some provisions of the soon-to-be-approved law.

One unexpected effect of the law will be to highlight a comment Tesla CEO Elon Musk made on the EV maker’s most recent conference call, and has made before, that coming demand for EVs will make the next half-decade a great time to be an entrepreneur mining or refining the lithium that powers electric vehicle batteries. The law’s buy-American provisions will only add to those pressures.

“It is basically like minting money right now. There’s, like, software margins in lithium processing right now,” Musk said on the recent earnings call. “So I would really like to encourage, once again, entrepreneurs to enter the lithium refining business. You can’t lose.”

Winners: Utilities and homeowners

A wind farm shares space with corn fields in Latimer, Iowa, US

Jonathan Ernst | Reuters

About a third of the tax breaks in the bill — up to $113 billion — are to extend tax credits to encourage production of renewable electricity plants, which have four times as much share of the US market as they did a decade or so ago.

That’s a boon to utilities, which either build plants themselves or buy power from independent operators, Lafakis said. Utilities will also benefit from selling more power as electricity fuels more cars, trucks and appliances, thanks to tax breaks in the law.

More reliance on renewables should also benefit rate payers, since new wind-electricity plants are now much cheaper than new plants that burn coal or natural gas, according to the investment bank Lazard. In some cases, a new wind plant with existing tax subsidies can be cheaper than even continuing to run a coal plant that’s already in use, Lazard said.

Ratepayers who own their own homes may also claim tax credits for shifting more of their home appliances to using electricity, which can be powered by renewables, rather than natural gas. Since most makers of electric hot water heaters and stoves also make gas models, it’s not clear whether the law will cause any major shifts in market share.

“The clear winners are clean energy, solar and other renewables,” said Robert Haworth, senior investment strategy director at US Bank Wealth Management. “And it works hard to make sure there’s not too much disincentive for fossil fuels.”

Winners: Hedge funds (for now)

Losers: Public company shareholders

US Senator Kyrsten Sinema (D-AZ) waits for an elevator to go to the Senate floor at the US Capitol in Washington, US August 2, 2022.

Jonathan Ernst | Reuters

The last minute deal with Arizona Sen. Kyrsten Sinema to gain her vote for her made Democrats drop a plan to impose ordinary income taxes on bonuses that hedge fund and venture capital managers make, closing a loophole that lets these financiers pay lower capital-gains rates on money they never put at risk.

Instead, the plan imposes a 1% tax on stock buybacks – a corporate finance tactic companies use to increase earnings per share by reducing the number of shares outstanding with excess cash.

Proponents of the buyback tax, like Vermont Senator Bernie Sanders, argue that companies can put their cash to work investing more in plants and higher salaries. Opponents say it will hurt returns of retirement plans and pension funds.

Companies in the Standard & Poor’s 500 stock index spent $850 billion on buybacks last year.

.

Categories
US

Sinema made Schumer cut carried interest piece of reconciliation bill

Sinema made Schumer cut carried interest loophole from reconciliation bill

US Senate Majority Leader Chuck Schumer (D-NY) holds his weekly news conference after the Democratic caucus party luncheon at the US Capitol in Washington, August 2, 2022.

Jonathan Ernst | Reuters

Senate Majority Leader Chuck Schumer said Friday that Democrats had “no choice” but to drop a key tax provision from their major spending bill in order to gain Sen. Kyrsten Sinema’s support.

Sinema, a centrist Democrat from Arizona, had held her support of the Inflation Reduction Act, the sweeping bill that includes much of the Biden administration’s tax, climate and health care agenda. Senate Democrats need her support from her to pass the bill through the Senate on a party-line vote using the budget reconciliation process, which requires a simple majority vote. The chamber is split 50-50 between Democrats and Republicans.

Sinema announced Thursday night that she would indeed back the legislation, following an agreement “to remove the carried interest tax provision.”

She was referring to the bill’s inclusion of language that would narrow the so-called carried interest loophole, a feature of the tax code that both Democrats and Republicans — including former President Donald Trump — have tried to close.

Carried interest refers to compensation that hedge fund managers and private equity executives receive from their firms’ investment gains. After three years, that money is taxed at a long-term capital gains rate of 20%, instead of a short-term capital gains rate, which tops out at 37%.

The Inflation Reduction Act aimed to narrow that loophole by extending the short-term tax rate to five years. The bill’s provision was projected to raise $14 billion over a 10-year period.

“I pushed for it to be in this bill,” Schumer, DN.Y., said of the proposal to narrow the loophole.

But “Senator Sinema said she would not vote for the bill, not even move to proceed unless we took it out,” he said. “So we had no choice.”

Sinema stressed Thursday night that after the reconciliation bill passes, “I look forward to working with [Sen. Mark Warner, D-Va.] to enact carried interest tax reforms, protecting investments in America’s economy and encouraging continued growth while closing the most egregious loopholes that some abuse to avoid paying taxes.”

A spokeswoman for Sinema defended the senator’s record when asked by CNBC on Friday about Schumer’s remarks and her stance on carried interest.

Sinema “has been clear and consistent for over a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness,” the spokeswoman said. “At a time of record inflation, rising interest rates and slowing economic growth, disincentivizing investments in Arizona businesses would hurt Arizona’s economy and ability to create jobs.”

Schumer said that another tax piece from the Inflation Reduction Act was taken out in order to secure the deal with Sinema. This one came from a proposal to impose a 15% corporate alternative minimum tax aimed at rich corporations that are accused of skirting their tax obligations. It was projected to raise $313 billion — more than 40% of the bill’s revenue.

While that part of the bill was altered, “$258 billion of that remains, so the vast majority remains,” Schumer said.

And while the carried interest provision was nixed, Schumer said Democrats added in an excise tax on stock buybacks that will bring in $74 billion. He said that multiple legislators are “excited” about that update.

“I hate stock buybacks. I think they’re one of the most self-serving things corporate America does,” Schumer said. “I’d like to abolish them.”

.

Categories
US

Sinema made Schumer cut carried interest loophole from reconciliation bill

Sinema made Schumer cut carried interest loophole from reconciliation bill

US Senate Majority Leader Chuck Schumer (D-NY) holds his weekly news conference after the Democratic caucus party luncheon at the US Capitol in Washington, August 2, 2022.

Jonathan Ernst | Reuters

Senate Majority Leader Chuck Schumer said Friday that Democrats had “no choice” but to drop a key tax provision from their major spending bill in order to gain Sen. Kyrsten Sinema’s support.

Sinema, a centrist Democrat from Arizona, had held her support of the Inflation Reduction Act, the sweeping bill that includes much of the Biden administration’s tax, climate and health care agenda. Senate Democrats need her support from her to pass the bill through the Senate on a party-line vote using the budget reconciliation process — which requires a simple majority vote in the Senate split 50-50 by party.

Sinema announced Thursday night that she would indeed back the legislation, following an agreement “to remove the carried interest tax provision.”

She was referring to the bill’s inclusion of language that would narrow the so-called carried interest loophole, a feature of the tax code that both Republicans and Democrats — including former President Donald Trump — have tried to close.

Carried interest refers to compensation that hedge fund managers and private equity executives receive from their firms’ investment gains. After three years, that money is taxed at a long-term capital gains rate of 20%, instead of a short-term capital gains rate, which tops out at 37%.

The Inflation Reduction Act aimed to narrow that loophole by extending the short-term tax rate to five years. The bill’s provision was projected to raise $14 billion over a 10-year period.

“I pushed for it to be in this bill,” Schumer, DN.Y., said of the proposal to narrow the loophole.

But “Senator Sinema said she would not vote for the bill, not even move to proceed unless we took it out,” he said. “So we had no choice.”

Sinema stressed Thursday night that after the reconciliation bill passes, “I look forward to working with [Sen. Mark Warner, D-Va.] to enact carried interest tax reforms, protecting investments in America’s economy and encouraging continued growth while closing the most egregious loopholes that some abuse to avoid paying taxes.”

A spokeswoman for Sinema defended the senator’s record when asked by CNBC on Friday about Schumer’s remarks and her stance on carried interest.

Sinema “has been clear and consistent for over a year that she will only support tax reforms and revenue options that support Arizona’s economic growth and competitiveness,” the spokeswoman said. “At a time of record inflation, rising interest rates, and slowing economic growth, disincentivizing investments in Arizona businesses would hurt Arizona’s economy and ability to create jobs.”

Schumer said that another tax piece from the Inflation Reduction Act was taken out in order to secure the deal with Sinema. This one came from a proposal to impose a 15% corporate alternative minimum tax aimed at rich corporations that are accused of skirting their tax obligations. It was projected to raise $313 billion — more than 40% of the bill’s revenue.

While that part of the bill was altered, “$258 billion of that remains, so the vast majority remains,” Schumer said.

And while the carried interest provision was nixed, Schumer said Democrats added in an excise tax on stock buybacks that will bring in $74 billion. He said that multiple legislators he spoke with are “excited” about that update.

“I hate stock buybacks. I think they’re one of the most self serving things corporate America does,” Schumer said. “I’d like to abolish them.”

.

Categories
US

Does the Inflation Reduction Act violate Biden’s $400,000 tax pledge?

Does the Inflation Reduction Act violate Biden's $400,000 tax pledge?

JimWatson | Afp | Getty Images

Senate Democrats’ package of climate change, health-care, drug pricing and tax measures unveiled last week has proponents and opponents debating whether the legislation violates a pledge President Joe Biden has made since his presidential campaign, to do not raise taxes on households with incomes below $400,000 a year.

The answer isn’t quite as simple as it seems.

“The fun part about this is, you can get a different answer depending on who you ask,” said John Buhl, an analyst at the Tax Policy Center.

More from Personal Finance:
Embryos can count as dependents on Georgia state tax returns
Would you be included in student loan forgiveness?
Remote work is helping fight inflation

The White House has used $400,000 as a rough dividing line for the wealthy relative to middle and lower earners. That income threshold equates to about the top 1% to 2% of American taxpayers.

The new bill, the Inflation Reduction Act, doesn’t directly raise taxes on households below that line, according to tax experts. In other words, the legislation wouldn’t trigger an increase on taxpayers’ annual tax returns if their income is below $400,000, experts said.

But some aspects of the legislation may have adverse downstream effects — a sort of indirect taxation, experts said. This “indirect” element is where opponents seem to have directed their ire.

What’s in the Inflation Reduction Act

The legislation — brokered by Senate Majority Leader Chuck Schumer, DN.Y., and Sen. Joe Manchin, DW.Va., who’d been a key centrist holdout — would invest about $485 billion toward climate and health-care measures through 2031, according to a Congressional Budget Office analysis issued Wednesday.

Broadly, that spending would be in the form of tax breaks and rebates for households that buy electric vehicles and make their homes more energy-efficient, and a three-year extension of the current Affordable Care Act subsidies for health insurance.

The bill would also raise an estimated $790 billion via tax measures, reforms for prescription drug prices and a fee on methane emissions, according to the Congressional Budget Office. Taxes account for the bulk — $450 billion — of the revenue.

Critics say corporate changes could affect workers

Specifically, the legislation would provide more resources for IRS enforcement of tax cheats and would tweak the “carried interest” rules for taxpayers who earn more than $400,000. The change to carried-interest rules — which allow certain private equity and other investors to pay a preferential tax rate on profits — is likely dead, though, after Democratic leaders agreed to scrap it to win support from Sen. Kyrsten Sinema, D-AZ.

Those elements aren’t controversial relative to the tax pledge — they don’t raise the annual tax bills middle and low earners owe, experts said.

The Inflation Reduction Act would also implement a 15% corporate minimum tax, paid on the income large companies report to shareholders. This is where “indirect” taxes might come into play, experts said. For example, a corporation with a higher tax bill might pass on those additional costs to employees, perhaps in the form of a lower raise, or reduced corporate profits may hurt 401(k) and other investors who own a piece of the company in a mutual fund.

The Democrats’ approach to tax reform means increasing taxes on low- and middle-income Americans.

Sen. mike krapo

Republican of Idaho

The current corporate tax rate is 21% but some companies are able to reduce their effective tax rate and therefore pay back their bill.

As a result of the policy, those with incomes below $200,000 would pay almost $17 billion in combined additional tax in 2023, according to a Joint Committee on Taxation analysis published July 29. That combined tax burden falls to about $2 billion by 2031, according to the JCT, an independent scorekeeper for Congress.

“The Democrats’ approach to tax reform means increasing taxes on low- and middle-income Americans,” Sen. Mike Crapo, R-Idaho, ranking member of the Finance Committee, said of the analysis.

Others say financial benefits outweigh indirect costs

However, the JCT analysis does not provide a complete picture, according to experts. That’s because it doesn’t account for the benefits of consumer tax rebates, health premium subsidies and lower prescription drug costs, according to the Committee for a Responsible Federal Budget.

Observers who consider indirect costs should weigh these financial benefits, too, experts argue.

“The selective presentation by some of the distributional effects of this bill neglects benefits to middle-class families from reducing deficits, from bringing down prescription drug prices and from more affordable energy,” a group of five former Treasury secretaries from both Democratic and Republican administrations wrote Wednesday.

The $64 billion of total Affordable Care Act subsidies alone would “be more than enough to counter net tax increases below $400,000 in the JCT study,” according to the Committee for a Responsible Federal Budget, which also estimates Americans would save $300 billion on costs and premiums for prescription drugs.

The combined policies would offer a net tax cut for Americans by 2027, the group said.

Further, setting a minimum corporate tax rate shouldn’t be viewed as an “extra” tax, but a “reclaiming of revenue lost to tax avoidance and provisions benefitting the most affluent,” argued the former Treasury secretaries. They are Timothy Geithner, Jacob Lew, Henry Paulson Jr., Robert Rubin and Lawrence Summers.

There are additional wrinkles to consider, though, according to Buhl of the Tax Policy Center.

For example, to what extent do companies pass on their tax bills to workers versus shareholders? Economists differ on this point, Buhl said. And what about companies with a lot of excess cash on hand? Might that cash buffer lead a company not to levy an indirect tax on its workers?

“You could end up going down these rabbit holes forever,” Buhl said. “It’s just one of the fun parts of tax pledges,” he added.

.