How North Bay employers could be impacted by Inflation Reduction Act
When President Joe Biden on Aug. 16 signed the $739 billion Inflation Reduction Act of 2022, the administration touted it as the beginning of work to bring down 40-year-high record inflation and address climate change and the high costs of energy and health care.
Over the next decade, the legislation will include $433 billion in new spending and over $300 billion committed to reducing the deficit, according to the Congressional Budget Office. The bill would slightly increase inflation for the next two years, and then lead to lower prices, according to the Wharton School, a business research school of the University of Pennsylvania in Philadelphia.
The legislation allots $64 billion to a three-year extension of enhanced Affordable Care Act premium tax credits, according to the CBO. The Internal Revenue Service stands ready to gain $80 billion to make improvements.
The “pay-fors” to cover these investments include $313 billion from a 15% minimum corporate tax, $288 billion from prescription drug-pricing reforms, $124 billion from bolstering IRS tax enforcement, and $74 billion from a 1% excise on corporate stock buybacks, according to the CBO.
So what does this all mean for North Bay employers? The Business Journal checked in with a number of businesses to find out.
Some of the North Bay’s publicly traded companies could be affected by the new law’s provision to levy a 1% excise tax on purchases of their own shares starting next year. One of the exclusions was buybacks totaling under $1 million annually.
Corte Madera-based luxury home goods retailer RH in June upped its common-stock repurchase plan by $2 billion, on top of the $450 million it had remaining from its previous buyback authorization. If fully used, that could result in an excise tax of $24.5 million.
But by the end of June, RH said it was revising its outlook for the second half of its fiscal year and noted that it hadn’t repurchased any more shares.
“The deteriorating macro-economic environment has resulted in lower than expected demand since our prior forecast...,” CEO Gary Friedman wrote in the shareholder letter.
Nationwide, buybacks this year are forecast to reach $1 trillion as businesses have “swelled with cash from sky-high profits,” according to the New York Times.
But at Novato-based Bank of Marin, a key reason for the stock buybacks is for the benefit of shareholders, namely the company’s employee stock ownership plan, or ESOP, according to Chief Financial Officer Tani Girton.
“We’ve had dependable and predictable growth,” Girton said. “Every one of our employees is a shareholder. This is with them in mind.”
When the company does its capital planning, it aims for a sustainable dividend over time, and the institution has been increasing them over time to be in line with comparable Standard & Poor’s capital yields.
The bank’s board in the middle of last year approved the repurchase of up to $25 million through mid-2023, then increased that authorization to $57 million. By June 30 of this year, the bank had bought back nearly 619,000 shares for $22.3 million, with the last round of repurchases including $877,000 in the first quarter.
In 2018, the bank repurchased $71 million in stock, and that was accelerated in 2019 but suspended in early 2020 amid the economic shock of the pandemic.
“We wanted to consolidate liquidity and capital to be ready for what comes,” Girton said.
The repurchases were restarted at the end of 2020.
But one challenge with planning for repurchases in the pandemic has come because of the flood of deposits from various government relief programs to the bank’s customers, Girton said. That tipped the percentage of total assets for capital down on the balance sheet.
The excise tax could affect further stock buybacks for the bank, because the capital planning is done based on a spectrum of company stock prices, all after tax costs are considered, Girton said. Higher after-tax stock prices could result in fewer shares purchased.
The Inflation Reduction Act of 2022 also will impose a 15% corporate alternative minimum tax on businesses with income of at least $1 billion a year for any consecutive three-year tax period, according to the Wharton School and Stoel Rives. The earnings metric in question is adjusted financial statement income, or net income, with adjustments specified in the law.
No North Bay public companies have crossed the billion-dollar annual earnings threshold yet, but some are nearing it.
For example, Santa Rosa-based Keysight Technologies reported net income of $894 million in fiscal 2021, up from $627 million and $621 million the previous two years. RH reported earnings of $688.5 million in fiscal 2021, a big jump from $271.8 million and $220.4 million in fiscal 2020 and 2019, respectively.