Budget Reconciliation Agreement on Inflation Reduction Act
August 1, 2022
Last Wednesday evening, Senator Joe Manchin (D-WV) announced he reached an agreement with Senate Majority Leader Chuck Schumer (D-NY) on a slimmed down tax, health care, climate and energy spending bill. A one page summary says the bill would “enact historic deficit reduction to fight inflation” and lower healthcare and energy costs. The new Democrat-only budget reconciliation bill, called the Inflation Reduction Act, includes $433 billion in spending – $369 billion towards climate and energy – coupled with $739 billion in new revenue, with $306 billion in deficit reduction.
As per Politico, “Overnight [Manchin] has become the author of the most significant carbon-reducing legislation in history and the savior of Biden’s legislative agenda. Adding that “after once being described by Bernie Sanders (I-VT) as “sabotaging” President Biden’s agenda and single-handed roadblock to their policy ambitions. Axios describes Manchin transformed, “from fickle obstructionist to master tactician overnight.” Yet, Politico notes: “Politically, pivoting from saboteur to savior is awful for Manchin back in West Virginia, where Biden’s approval rating is nineteen percent.”
Energy Efficient Buildings
For commercial real estate, the bill makes key changes to Section 179D, which incentivizes energy efficient retrofits for commercial buildings. The 179D deduction would be increased from the current $1.80 per square foot to a sliding scale of $2.50 to $5.00 per square foot, depending on compliance with heightened wage and labor standards, according to the U.S. Green Building Council.
Other tax incentives for energy efficiency, renewable energy, storage, electric vehicles, and other clean energy technologies, and additional funding for green affordable housing included in the bill could reduce carbon emissions by around 40% by 2030. A summary of the bill’s energy security and climate provisions provides additional detail.
Tax Increases
To pay for the spending and deficit reduction, the bill would raise:
Carried Interest
Carried interest, taxed at a capital gains rate of 20%, is the percentage of an investment’s gains that a private equity partner or hedge fund manager takes as compensation, which would otherwise be taxed at the ordinary income tax rate of 37% for top earners.
- The bill seeks to by extend the capital gains holding period requirement for carried interest from three to five years.
- Beneficiaries of carried interest say the change, “could potentially hurt small businesses and big investors, such as endowments, foundations and pension funds.”
- However, real estate is exempted from the five-year hold and would instead maintain a three-year hold period, in what has been described as, “Not the end of the world, but not painless for some.”
CREFC has been coordinating with the Real Estate Roundtable and other real estate trade associations on the impacts of the proposed legislation on the industry. See stories by the New York Times and Wall Street Journal for more detail.
Permitting Reform
Notably, the agreement calls for comprehensive permitting reform legislation to be passed this fall, to unlock domestic energy and transmission projects, lower costs for consumers, and help meet long-term emissions goals.
Passage Not a Certainty – Senator Sinema Is the ‘X’ Factor
Whether the legislation will be signed into law before a September 30 procedural deadline is dependent on three variables:
- How Senator Kyrsten Sinema reacts. The centrist Democrat, who was influential in earlier budget negotiations, reportedly learned of the agreement via Twitter and was not consulted or briefed on the secret talks between Manchin and Schumer.
- How a handful of Democrats from high-tax states like New York, New Jersey, and California will react. A number of these lawmakers have insisted that any reconciliation vote must lift the limit on deductions for state and local taxes (SALT). Democrats control the House by just a slim three-vote margin.
- How many Senators will be unable to vote in August, due to COVID (Sen. Durbin) or injury (Sen. Leahy). Speaker Nancy Pelosi announced the House will return to vote on the legislation in August.
Further reading
- How Manchin struck a miracle of a deal with Schumer, Pelosi and Biden – The Hill
- Surprise Deal Would Be Most Ambitious Climate Action Undertaken by U.S. – New York Times
- ‘Inflation Reduction Act’ Has Little Inflation Help, UPenn Study Says – Bloomberg