Wall Street is breathing a quiet sigh of relief over the Senate’s version of the Inflation Reduction Act — but experts warn a last-minute provision to tax stock buybacks could come back to haunt investors.
By some measures, the $740 billion energy and health care spending bill has been radically defanged versus an earlier version, which would have cost The Street more than $800 billion, according to estimates. Most notably, the amended version fails to crack down on the so-called “carried-interest loophole,” a giveaway to buyout barons and hedge-fund moguls.
A proposal to shrink the loophole — which treats private equity and hedge fund titans’ income as investment gains and allows them to pay the 20% capital gains tax rate instead of the personal tax rate of 37% — would have raised $14 billion over 10 years. Closing it altogether would have generated at least $180 billion over 10 years, according to one analysis from 2015.
In a lesser-noticed move early Sunday, lawmakers also dropped a provision that would have imposed a minimum tax of 15% on private equity-owned corporations making less than $1 billion in yearly profits — the end result of which is expected to save private-equity owned companies an additional $35 billion over a decade, according to estimates.
Sen. Krysten Sinema (D-Ariz.), who has received at least $2.2 million since 2017 from private equity firms like KKR and The Carlyle Group and their employees, proposed the tax on stock buybacks in exchange for dropping the carried-interest loophole.
Tax experts, however, warn that a new tax on stock buybacks could turn into a “gateway drug” to tax all kinds of financial transactions. The new levy could bring in anywhere from $70 billion to $124 billion, according to preliminary estimates. While the 1% excise is nominal for now, it could very easily be increased down the line once it’s implemented, tax experts told The Post.
“Wall Street was so focused on lobbying against the corporate minimum tax and the global intangible tax (GILTI) they basically conceded the stock buyback tax.” James Lucier, managing director at Washington-based policy research firm Capital Alpha told The Post.
“It is a question of buy now, pay later,” Lucier adds. “The excise tax on stock buybacks could become a problem for M&A, and it sets the precedent for other financial transactions taxes that could be a problem in future years.”
In the short-term that tax — which won’t be implemented until 2023 — could accelerate buybacks.
“We could see billions in buybacks accelerated before year-end,” Thomas Hayes of Great Hill Capital told The Post. “We could wind up the year at much higher levels than most would have thought just a few weeks ago.”
Other revenue sources will come from a 15% corporate minimum tax — a move that is aimed at Big Tech companies like Amazon, along with a slew of other multinational corporations from Exxon to Nike, and bring in around $313 billion, according to one Senate estimate.
A crackdown on the cost of prescription drug prices is expected to dent drugmakers while saving taxpayers an estimated $288 billion on Medicare spending. Additional funding given to the IRS is expected to bring in an estimated $124 billion by going after businesses that are under-reporting taxable income — although this measure is expected to disproportionately target small business owners.
Still, other key provisions in the Democratic wish list — like expanding the 3.8% net investment tax to anyone making more than $400,000, and introducing a modified adjusted gross income or surcharge on those making more than $10 million a year — have also vanished.
“There’s a reason there has been no outcry from Wall Street on this bill,” one Hill aide close to the legislation told The Post.