A “skinny” (730-page) version of the massive “Build Back Better” legislation originally proposed last year by President Biden is slated to arrive on his desk shortly. The bill cleared the Senate on a party-line vote Sunday, with Vice President Kamala Harris casting the tie-breaking ballot. The House will vote to send it to the President tomorrow, according to a note to colleagues yesterday from House Speaker Nancy Pelosi (D-CA) concerning “this life-changing legislation.”  

The bill is coined the “Inflation Reduction Act” by its Democrat sponsors although it contains $433 billion in gross new spending (mainly for ACA subsidies) and targeted tax credits (mainly for alternative energy) – provisions my colleagues will soon address in this space. 

Other than the bill sponsors and the White House, few contend it will meaningfully impact the historic inflation the nation continues to experience — certainly not the Congressional Budget Office (CBO) or the Penn Wharton budget model (PWB), who issue highly respected assessments of the macroeconomic impact of major legislation. 

To the contrary, the bill could modestly hike inflation in the near term, according to both PWB and CBO, since it increases federal deficits over the next five years. 

The same CBO score does however foresee the bill achieving deficit reduction over a longer, ten-year budget window, chiefly by increasing tax receipts. The federal tax take is expected to rise due to a huge new investment in IRS enforcement activity, the levying of a new corporate minimum tax, and a one percent stock repurchase excise tax.   

Unchanged is the SALT (state and local income tax deduction) cap. The $10,000 limit on the amount of state and local taxes deductible from federal income was enacted in 2017 and sunsets after 2025, under current law. The cap disproportionately impacts expensive, high-tax Blue States, including New York, where it’s exacerbated the effect of the state’s high marginal tax rates on top earners in Manhattan, hitting hard as well upper middle-class homeowners in expensive areas on Long Island and elsewhere downstate. 

Recent state budget updates document extensive use of the Pass Through Entity Tax (PTET), under which many state taxpayers now treat a significant amount of income as business rather than personal income, and thus no longer are impacted by the SALT cap. But that doesn’t include everyone. Many high-income and/or house-rich New Yorkers still generate their earnings as personal income fully subject to the federal SALT cap. 

The bill the President will sign maintains the SALT status quo despite attempts by some federal lawmakers to use this major legislative vehicle to rescind the cap — and by others to extend its application beyond 2025. 

Last year, Members of Congress from New York and New Jersey – among the most vocal among them then-Democratic gubernatorial candidate Rep. Tom Suozzi – insisted publicly that any version of Build Back Better repeal the SALT cap immediately, or at least scale it back. 

As we pointed out in November, theirs was always a steep uphill effort. First, relief from the SALT cap would disproportionately benefit high income individuals, inviting political attack. Second, it would reduce anticipated federal tax receipts. So, its inclusion in a broader package requires either offsetting tax hikes or less new spending. 

Not surprisingly, then, the package deal announced last week by Senate Majority Leader Schumer and Senator Joe Manchin (D-WV) contained no SALT cap relief. House Democrats in New York and New Jersey recently indicated they won’t try to block it. 

But during Senate floor consideration of the measure last weekend, several Republicans offered floor amendments to extend the SALT cap sunset beyond 2025, to collect additional tax revenue to “pay for” tax cuts elsewhere. One such amendment succeeded — but only briefly. 

An amendment by Senator John Thune (R-SD) to extend the SALT cap through 2026 was adopted with the support of seven Democrats because it used the additional SALT cap receipts as a revenue offset to exempt private equity firms earning less than $1 billion from the new 15 percent corporate minimum tax. Shortly afterward, a new amendment from Senator Mark Warner (D-VA) repealed the SALT cap extension, replacing it with an alternative revenue-raising offset.  

The impact of the major revenue provisions that are in the bill is likely to be felt by New Yorkers across a wide income spectrum.  

On the one hand, fewer than 150 companies will be impacted by the new 15 percent corporate minimum tax on “book income” of corporations with revenue of $1 billion or more, since most big companies already pay tax above that threshold. But the book income tax, which was scaled back to continue to allow accelerated depreciation, is still expected to raise $222 billion in additional revenue according to the latest estimate from the Congressional Joint Committee on Taxation (JCT). That’s because book income will still exceed taxable income for many large companies, such as those that make extensive use of stock options for compensation. 

But at the end of the day, “Corporations don’t pay taxes; people do.” So, whatever the actual tax hit turns out to be, it will flow through to shareholders and customers of big firms. 

Also troubling: Congress is here outsourcing its taxing authority to the Financial Accounting Standards Board (FASB), a private, nonprofit that sets financial accounting standards from which book income is derived. FASB issues accounting rules with an eye toward providing useful data to investors. Those rules will now be subject to intense lobbying since they’ll determine taxes owed. Companies subject to the new tax will be newly incentivized to manipulate book income, potentially reducing the utility and transparency of financial data on which investors broadly rely. 

The bill nearly doubles the IRS budget over the next decade, providing a massive $80 billion increase, including $45 billion for added enforcement that will expand the agency’s 80,000-strong staff. A major new audit risk looms for individuals and small businesses. CBO estimates that the IRS will, over the next decade, parlay the $45 billion into more than $200 billion in additional tax collections. 

Finally, the addition to the bill of a one percent tax on stock share repurchases by publicly traded companies will devalue the holdings of investors, including the state and local pension plans that just absorbed a massive second-quarter decline in value. The new tax will marginally discourage buyback activity in the long term but may well increase it this year, since the tax goes into effect at the start of the 2023 calendar year. JCT estimates it will raise $74 billion in revenue over the next decade.  

In sum, the Inflation Reduction Act will dip into the pockets of New Yorkers and other Americans across the economic spectrum, to raise hundreds of billions in new federal tax revenue. In doing so, projects a Tax Foundation analysis, the new legislation will, “reduce average after-tax incomes for taxpayers across every income quintile over the long run.”