For most Americans, the end of November means the year is winding down, with just a few more weeks until the holidays. For Congress, however, the lame duck session is the last opportunity to fix some major taxes set to weigh down the economy in 2023.
Possibly the most urgent tax that needs to be addressed is the “book minimum” tax instituted as part of the Inflation Reduction Act (IRA). The book minimum tax is the product of politicians’ cognitive dissonance between (1) the fact that they dislike when businesses use deductions to reduce their tax liabilities and (2) the fact that those same politicians generally support the deductions being used.
Rather than address actual deductions they feel are too generous, progressives instead settled upon Sen. Elizabeth Warren’s (D-MA) proposal for a “book minimum” tax, a parallel tax on book income when taxable income turns up numbers they dislike. Not only does this tax limit Congress’s ability to use the tax code to incentivize more economically productive activity from businesses, it is proving to be an administrative nightmare.
That’s because, with a little over a month to go until 2023, no one actually knows how the tax will work — not even, apparently, the Treasury Department. Administrative guidelines necessary for businesses to figure out how to compute the tax have yet to be released, leaving those businesses in an impossible position. At this point, even if the Treasury released guidelines tomorrow, there would scarcely be enough time for businesses to be ready to comply by the time it goes into effect on January 1.
Another troubling product of the IRA is also set to go into effect in a little over a month. The IRA included a stock buybacks excise tax, targeting another target of misplaced progressive angst. While stock buybacks are often blamed for all manner of misfortune, they are in reality fairly innocuous.
While progressives often claim that stock buybacks reward shareholders at the expense of the economy writ large, there is no evidence for this. Indeed, corporations tend to engage in stock buybacks only after productive investment opportunities have been exhausted.
Rather than something nefarious, buybacks should be viewed as corporations returning excess cash to an investment “bank,” an activity that moves those investment dollars around the economy to somewhere where they can be more immediately used. The corporation buying back stock receives more room to sell shares should it need to raise investment capital later on down the line, while other businesses in need of investment capital now benefit from the cash returned to the investment pool.
A final tax change set to go into effect is the beginning of the wind-down of 100 percent bonus depreciation, which allows businesses to fully and immediately expense capital investments in the year they are made rather than over varying periods of time using complicated depreciation schedules. Because businesses benefit from the simplicity and up-front benefit of full expensing, it encourages investment more than depreciation systems.
Beginning in 2023, businesses will only be able to expense 80 percent of their capital investments, depreciating the other 20 percent. The share that businesses can expense will decrease by 20 percent annually over the next five years, becoming fully phased out by 2026. Unfortunately, even at 80 percent expensing, businesses will still have to reckon with the oft-overwhelming depreciation system for the final 20 percent.
So while Americans’ thoughts are turning to the Christmas presents they have to buy, Congress needs to spend the last month of 2022 fixing the issues it has created. Otherwise, get ready for new taxes with the new year.
