A corporate tax on stock buybacks expected to take effect in January could dramatically impact big businesses.
A 1% tax on share repurchases by publicly traded companies was passed earlier this year as part of the Inflation Reduction Act, a health care and climate spending package, according to Fox Business.
The move was intended to deter companies from buying back their own stock and propping up their share prices.
Stock buybacks have been under fire for years as several politicians and public officials have expressed their distaste for the practice.
“I hate stock buybacks,” Senate Majority Leader Chuck Schumer (D-NY) said earlier in the year. “I think they are one of the most self-serving things that corporate America does.”
Former SEC chairman Jay Clayton called the practice a tax on shareholders that goes against the idea of the “free flow of capital” that has been a strength of the American economic system.
“Capital going to new things, new ideas, is what has kept America the leading place in the world to raise capital,” he said in August.
Since 1982, companies have been allowed to repurchase their shares from the public. This has been commonplace on Wall Street ever since, according to Fox Business.
The SEC said buybacks hit an all-time high of $1 trillion in 2019.
In the third quarter of 2022, buybacks of S&P 500 companies were $210 billion, down about 10% year-over-year, according to S&P analyst Howard Silverblatt. If the 1% tax had been in place, companies would have owed roughly $1.93 billion in taxes, according to The Wall Street Journal.
Major corporations are not pleased with the new tax, but its low rate may not do much to deter business as usual regarding share buybacks.
Exxon, Lowe’s, and MasterCard have either expanded their buyback programs or launched new ones in recent days, according to The Wall Street Journal.
“We don’t like the tax; nobody likes it,” Michael Mullican, CFO at $4 billion sporting goods retailer Academy Sports & Outdoors, said. “But it’s not significant enough to where it would sway our thinking.”
Apple, the world’s largest company by market cap, has averaged at least $50 billion in share buybacks over the past decade, according to Bloomberg.
Amazon, which has notably abstained from the big buybacks that have been commonplace among its retail competitors, approved a $5 billion share repurchase program in 2016 but did not actually buy back any shares from 2016–2021.
Unlike a dividend, companies that authorize a share buyback are not obligated to repurchase shares. The company announced a new $10 billion buyback program in 2022.
The spending bill also levies a 15% minimum tax on corporations based on publicly reported profits on their financial statements to shareholders, according to Fox Business.
This tax would only apply to companies that reported over $1 billion in income. Democrats said the tax would affect 200 of the largest corporations with profits exceeding $1 billion that pay less than the current 21% corporate tax rate for businesses.
Goldman Sachs is now forecasting a 1.5% decline per share of S&P 500 companies, with the earnings decreases expected to hit health care and IT because of the low effective tax rate.
UBS was projecting the new taxes to have a minimal 1% effect on S&P 500 companies’ earnings per share, adding that some companies would be more affected than others.
