The Senate recently passed the Inflation Reduction Act, which is expected to pass the House and be signed into action. While the final bill may not be fully shaped, the provisions in the Senate bill include (see detailed breakdown below)1:
- A minimum corporate tax rate
- A tax on share repurchases
- Medicare provisions
- Energy tax credits
While the bill is still evolving, and actual project-related impacts may be years in the making, the general adjustments and spending in this bill could have long-term ramifications on US consumers and businesses.
First, the Senate bill calls for a 15% minimum corporate tax rate and a 1% tax on share repurchases. According to Citi analyst, Scott Chronert, the minimum tax rate, and share repurchase tax could decrease S&P 500 FY23 EPS by ~0.42% and ~0.35% respectively.2 This is a very minor impact on the overall S&P 500 earnings trajectory and this estimate will be subject to future change. Further, we believe a 1% tax on buybacks probably does not sway the capital return decision aggressively, but we may see a slight preference for companies to increase dividends over repurchasing shares.
In addition, the bill calls for an extension of the Affordable Care Act and several Medicare provisions. The biggest changes would be that Medicare would be able to negotiate drug prices and Medicare patient out-of-pocket expenses would be capped at $2,000 per year.1
Lastly, the bill calls for $369 billion for energy security and climate change, which is one of the most significant government spending actions directed toward climate change initiatives. The money will be used to extend renewable energy tax credits and build out energy generation (specifically wind and solar) with the goal to decrease carbon emissions by ~40% by 2030.1
Overall, Senate Democrats believe the bill will result in a $300 billion deficit reduction over the next 10 years.1 All Senate Republicans voted against the bill, saying it would eliminate jobs and inflate prices further.5
According to Bill Adams, Chief Economist for Comerica Bank, this bill will have little effect on curbing short-term inflation.3 The Congressional Budget Office estimates that inflation, as a result of this bill, is likely to change the inflation rate by less than one-tenth of one percent in the next two years.4
We will continue to monitor actions that result from this legislation and determine if the bill, in final form, has any substantive impact on our portfolio positions. However, we are likely to be very patient in this regard as this type of legislation tends to be very long-tailed in time from passing congress to implementation, and those benefit and those harmed can vary based on several different outcomes.
- Senate Democrats Inflation Reduction Act – 8/8/2022
- Citi, “Inflation Reduction Act: Index Earnings Impact Appears Minimal”, 8/8/2022
- CNBC: Inflation Reduction Act Won’t Curb Inflation ‘Over the Short Run’ Says Economist – 8/8/2022
- Washington Post: Why the ‘Inflation Reduction Act’ is No Such Thing – 8/8/2022
- Yahoo Finance: What the ‘Historic’ Inflation Reduction Act Means for Your Bank Account – 8/9/2022