By Zachary Schroeder
The law’s modest tax provisions won’t weigh too heavily on blue-chip issuers.
The Inflation Reduction Act (IRA) will allocate $739 billion to various clean energy and healthcare initiatives over the next decade. As companies choose much of the tab – via a new alternative minimum tax (AMT) and excise tax on share redemptions – we don’t believe these new provisions will have a significant impact on higher-quality issuers.
The corporate AMT – the larger of the two provisions, expected to raise $222 billion over ten years – requires companies of a minimum size to pay a cash tax rate of at least 15%. But for many issuers, multiple carveouts can end up reducing this rate.
For example, accelerated depreciation allowances and spectrum amortization will help the utilities and telecommunications industries. In addition, net operating losses – from 2020 – will be able to offset revenues. And some credits for clean energy investment, research and development, and foreign revenue will also lower the bill. It is true that companies currently paying a cash tax rate below 15% could pay a little more, but not much.
The buy-back provision imposes a 1% excise tax on net share buybacks beginning in 2023 and is expected to generate $74 billion in revenue over ten years. The companies buying back the most shares are from the TMT, financials and healthcare sectors; they also tend to have healthy free cash flow and large cash balances, which eases the relative burden of redemption tax.
Take Apple (AAPL), which buys back more of its own stock than any company in the broad index. In 2021, the 1% excise tax would have cost the company just $844 million, which is more than manageable given that Apple generated $93 billion in free cash flow and had $191 billion in cash.
The redemption tax could cause companies to postpone share buybacks and potential issuances until 2022, but we expect these impacts to be modest.
Looking at the big picture and considering the healthy (albeit peaking) credit fundamentals of the market, we expect the IRA to have a small negative financial impact on higher quality companies, but not enough to change our short-term view or our positioning within the industry.
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