It’s a compromise for sure, but Democrats are running out of time given they are expected to suffer heavy losses in midterms in November. Biden in the first proposals for this bill called for hundreds of billions of tax increases on wealthy Americans, ranging from nearly doubling the capital gains tax rate to much stricter inheritance taxes.
The stock buyback provision was on the table during months of talks between Schumer and Manchin but was dropped in favor of the 15% minimum tax on large companies.
Manchin has repeatedly said that the bill does not have any new tax increases and only aims to stop tax avoidance. The new stock buyback tax goes counter to that approach. His office did not comment Thursday night.
Stock markets took the news in stride, with futures on the S&P 500 Index rising 0.2% before the official open of US exchanges.
Still, the buyback tax is unlikely to be welcomed by investors, said Tina Teng, an analyst at CMC Markets Plc. She said that to avoid the tax, companies could increase dividends to shareholders.
The deal struck to get Sinema on board would pare back the original 15% corporate minimum tax proposal by creating an exemption for depreciation tax deductions. The hole created by this new exemption as well as by nixing the carried interest provision would largely be made up for with the 1% excise tax on stock buybacks, according to people familiar with the talks.
The stock buyback tax, however, is expected to generate less than the $124 billion estimated when the House passed it last year.
One of Manchin’s other demands was that the legislation cut the deficit.
Other revenue would come from stricter enforcement of tax compliance by the Internal Revenue Service, repealing a Trump administration restriction on prescription drug rebates, generating $122 billion, and by allowing Medicare to negotiate the cost of high-priced drugs, which generates $102 billion.
Sinema said in a statement that she will continue talks with Senator Mark Warner, a Virginia Democrat, about separate legislation to narrow carried interest, a tax break for investment fund managers.
The fate of that effort remains murky, given a possible Republican takeover of one or both chambers of Congress in November’s midterm elections, which could eliminate the ability of Democrats to pass such a bill after January.
The legislation as drafted before the talks with Sinema would spend $370 billion on climate change measures and energy programs while extending Obamacare premium subsides for three years. Sinema mentioned a boost to clean energy through her efforts but details on that were not immediately available.
-With assistance from Abhishek Vishnoi.
This article was provided by Bloomberg News.