Nearly All of the Finance Community’s most Cherished Tax Loopholes survived, as Washington hunted for Revenue to Pay for the Biden Administration’s $1.9 Trillion Social Spending and Climate Package. But the Cost for One of Wall Street’s Favorite pastimes stands to get much more Expensive.
A 1% Excise Tax on Corporate Stock Buybacks, survived All the Wheeling and Dealing. It will raise $124 Billion in Revenue over time, assuming Congress passes President Biden’s Build Back Better Plan after Members return Nov. 15th.
The New Excise Tax, is part of a broader Plan that includes a New Minimum 15% Tax on Corporate Profits, an Expansion of Taxes on Overseas Earnings of U.S. Companies, and Surcharges on Households earning at least $10 Million a year.
Stock Buybacks are Popular with Companies and Institutional Investors because Earnings get Distributed over fewer Shares. Such Repurchases were Illegal until 1982, because the Government considered them a Form of Market Manipulation, but those misgivings are long gone. So far this year, Companies have dipped into the Market and bought back $552 Billion worth of their Shares, according to S&P Global, putting 2018’s Record of $806 Billion in jeopardy. That Record was set after the Trump Administration Slashed Corporate Tax Rates to 21% from 35%.
But Economists and Political Leaders have Long questioned how Productive Share Repurchases are. The Excise-Tax idea was First advanced in September, by Sens. Sherrod Brown (D-OH) and Ron Wyden (D-OR), who wanted a 2% Rate. “Large corporations buy back stock using the capital that could be used to make investments, create new jobs and raise wages,” Brown said.
The White House said last month, that “corporate executives too often use [buybacks] to enrich themselves rather than investing in workers and growing their businesses.”
Corporate America isn’t pleased to be presented with a New Tax Bill. “The definition of ‘repurchase’ is extremely broad, the list of exceptions is fairly narrow, and Treasury would be given broad latitude to determine other ‘economically similar’ transactions that would be subject to the excise tax,” Accounting Giant EY told Clients.
Attorneys at Skadden Arps Slate Meagher & Flom, warned that Excise Taxes could be Triggered in Unexpected Situations, such as when One Company acquires Another. “Payments of cash to the target’s shareholders would likely be viewed as repurchases to the extent those payments are funded out of the target’s existing cash resources or with the proceeds of debt that is incurred or assumed by the target in the transaction,” the Law Firm warned.
Assuming the Tax is approved, it’s possible Companies will dial back Share Repurchases and return Excess Cash to Investors through Dividends. But One reason Buybacks are so Popular, is they can be done quietly, whenever Market Conditions are deemed ripe, and Taxes from Gains on Appreciated Stock are Paid only when Shares are Sold. Dividends are Taxed soon after they’re Paid-Out, and a Company that Raised them only to pull back quickly would quickly irritate Shareholders.
Most Buyback Activity comes from a Few enormous Firms. Apple bought back $86 Billion worth of Shares in fiscal 2021, Four times More than spent on Research and Development, according to its Annual Report.
In 2014 Billionaire Activist Investor, Carl Icahn demanded Apple Buy Back Shares to help make his $5.3 Billion Stake worth more. Apple complied, and Icahn Sold his Position in 2016 for a $2 Billion Gain.
Facebook has bought back $26 Billion worth of Shares this year, and last month authorized an additional $50 Billion.
JPMorgan Chase has bought back $16 Billion worth this year.
Bank of America $18 Billion.
So what’s next? Probably more Buybacks, at least in the near-term, because Companies will Race to Repurchase Shares before the Excise Tax takes effect.
“Any significant or serious buyback tax consideration in Washington could bring accelerated buying near year-end 2021,” S&P Analyst Howard Silverblatt, said in a Report last month.
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