September 28, 2022

The Carrot and Stick of America’s Inflation Reduction Legislation

At the beginning of his new administration, President Biden’s legislative agenda focused in large part on his proposed Build Back Better Act. What was considered a landmark bill, however, was diluted in the Senate, a major source of intra-Democrat strife.

That being said, those tense negotiations did eventually enable the Biden administration to score a legislative victory with the passage into law on 16 August of the US Inflation Reduction Act (IRA).

Journalists and political pundits have spilled a great deal of ink over the IRA, focusing in large part on its green credentials and likely impact on the US energy sector, with almost US$370bn earmarked for climate and clean energy programs. The legislation includes considerable tax incentives through ‘direct pay’ credits for renewable energy, particularly the solar and wind subsectors, as well provisions for federal tax credits to support the sale of electric vehicles.

These developments represent a welcome rethinking of previous approaches to supporting the growth of renewables—unmistakably, the ‘carrot’ of monetary incentives is much more palatable than the ‘stick’ of carbon taxes. However, amid these headline-grabbing advances, other measures and their potential impact on dealmaking risk getting lost in the whirl.

One such provision would see the application of a minimum 15% tax on large companies, specifically those with financial accounting profits exceeding US$1bn. Business lobbies railed against this, to little avail, though one group can breathe a little easier—private equity (PE) firms. With the backing of Senate Republicans and seven Democrats, an amendment was tabled at the 11th hour carving out PE players from the 15% tax. A measure that would have done away with the preferential treatment of carried interest was also removed.

For the most part, those amendments leave only one other new tax measure of note, namely a 1% excise tax on stock buybacks by public-traded US companies, which Democrats say will fill the gap left by the scrapped carried interest measure.

But will the measures stick?

The Act was a talking point in Datasite’s recent webinar, ‘M&A momentum ahead of midterms’. In our live poll of the participants, the reaction to the IRA was skeptical. Very few (just 5%) believed it would achieve its stated goal of reducing inflation, while 20% thought it would actively fuel it. Yet despite the cynicism, many (29%) agreed that it would spur investment in green energy and ESG credentials – which clearly has significant implications for M&A going forward.

The true impact of the Act will depend heavily on the current M&A landscape – the topic at the heart of Datasite’s webinar discussion. Will confidence from last year keep driving deal momentum? What will be the impact of the midterm elections? To dive deeper into this discussion, view the webinar recording.

Datasite Deal Drivers: Americas HY 2022

Deal Drivers: Global Dealmaking Trends

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