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The new Wall Street tax key to Democrats’ Inflation Reduction Act

Corporate stock buybacks were illegal until 1982, but now Democrats want to tax the transactions to pay for President Biden’s climate and health-care agenda

Apple is one of the biggest repurchasers of its stock. (Mark Lennihan/AP)

Democrats are poised to pass the first new corporate taxes in a generation as part of President Biden’s sweeping climate, health-care and tax bill, including a levy on a corporate financial maneuver that was once considered illegal market manipulation.

In addition to a proposed 15 percent minimum tax on large corporate profits, lawmakers are set to pass an entirely new 1 percent excise tax on corporate stock buybacks.

The stock buyback tax is projected to raise $74 billion over the next decade, according to congressional estimates, and is key to funding some of the big spending on initiatives including credits to buy electric cars. The tax could bring in massive sums from some of the nation’s largest stock repurchasers, including tech giants Apple, Google parent Alphabet and Meta, Facebook’s parent company.

Democrats’ proposal opens up an entirely new arena for corporate taxes, collecting against a company’s financial calculations, after years of relative stability in the U.S. corporate tax structure. Historically, companies have been taxed on their profits and workers on their wages.

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“Very seldom does a totally brand new revenue source pop up,” said Mark Mazur, the Biden administration’s former assistant treasury secretary for tax policy. “That’s kind of a big deal. It’s going to raise a ton of revenue and it has the potential to change behavior.”

The 1 percent tax on a firm’s repurchased shares was a last-minute addition to the Inflation Reduction Act, which passed the Senate on Sunday and is slated for a House vote on Friday, where passage appears likely.

Taxing corporate buybacks is a relatively new revenue-raising idea, at least in Democratic tax circles, according to tax policy experts. In 2020 when he was running for president, Biden criticized corporate buybacks. His 2023 budget proposal also calls for new restrictions on buybacks.

In September, Democratic Sens. Ron Wyden (Ore.) and Sherrod Brown (Ohio) introduced legislation for a 2 percent tax, and built the proposal into a “menu” of revenue options to include as an offset in Biden’s social spending agenda, Wyden told The Washington Post.

When Sen. Kyrsten Sinema (Ariz.), a moderate Democrat, raised concerns about other tax provisions in the Inflation Reduction Act, the party rallied around Wyden and Brown’s buyback tax as a replacement.

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“When we were looking for additional revenue in the homestretch [of negotiations], we were ready,” Wyden said.

The provision in this version of Biden’s tax-and-spend agenda marks a success for Democrats who have been looking for a political victory to tout on the campaign trail ahead of the midterms.

“We have watched the trend of increased stock buybacks accelerate, and this is part of this very skewed economic system,” Wyden said. “I want an economic system that gives everybody in America the chance to get ahead.”

Stock buybacks, where corporations purchase shares of their own securities, have reached historic heights during the coronavirus pandemic. As companies reported record profits and amassed piles of cash, executives used repurchases to drive up the value of their business’s stock.

In the past 12 months, the top 100 U.S. firms purchased $816 billion worth of their own shares, according to Bloomberg data.

Experts say the tax is modest and probably won’t deter companies from repurchasing shares. Requests for comment from Apple, Alphabet and Meta about the tax proposal were not answered.

Liberals have long assailed the practice as a tax-free way for businesses to concentrate power and reward executives rather than spend their money to boost wages, make products cheaper or invest in new technologies.

But policymakers also say it puts substance behind Democrats’ years of talk about reining in corporate power and forcing big businesses to shoulder more of the country’s tax burden.

Corporations most often return money to investors in two ways: dividends or buybacks. The buyback maneuver allows investors who want to sell their stocks while boosting the security’s value for remaining shareholders.

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It is also, for now, mostly tax free. Corporations do not pay taxes on the purchase, and investors generally only pay a capital-gains tax when they sell their shares. Buybacks also allow corporations more leverage in the market by holding on to equity and creating artificial demand for their shares.

For those reasons, buybacks were illegal until 1982. The Securities and Exchange Commission lifted that prohibition after reasoning that companies needed to repurchase shares for legitimate reasons, said Will McBride, vice president of federal tax policy at the conservative Tax Foundation think tank.

Some companies instead used the new authority to keep a close watch on their share price and find novel ways to cut into their tax bills.

A new tax on those transactions, while an effective revenue generator, McBride said, risks burdening businesses or forcing them into less efficient methods of returning money to investors.

“The bigger picture is that it’s adding another piece of friction into the history of the corporate model to democratize investments, or from the company perspective, draw from a larger pool of investors to monetize assets,” he said.

And in recent years, technology giants have used buybacks to control the market or prepare for acquisitions.

It can also be a sign of consolidation in the marketplace. Corporations that are buying back shares have nothing better to do with their cash, said Tom Essaye, president of Sevens Report Research.

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Technology giants, in particular, have grown too large and inflexible to develop new lines of business or new products, Essaye said. It’s easier for them to instead purchase other companies, but after years of tech industry consolidation, fewer acquisition targets remain.

“The business model of these companies has been to make a ton of profits and keep the cash for a long time, not distribute it to the shareholders,” Mazur said. “It’s hard to change a culture like that.”

That’s why these corporations offload some of their excess cash and reward investors, Essaye said.

Liberals hope that a new tax will change corporations’ behavior and incentivize businesses to either spend more money on internal investments — many of which can be written off tax bills — or distribute profits as dividends on a more consistent schedule.

“We’ve known for years that stock buybacks are a problem — that they distort the market, they lead to less long-term economic growth, and they divert investment from workers,” Brown said in a statement. “This excise tax is an important step to rein in corporations rewarding their shareholders over workers, and one that will make sure taxpayers benefit if they do. No matter how corporations respond to this, workers are better off.”

correction

A previous version of this story included a chart that reported Malibu Boats had $30.3 billion of stock buybacks in the past 12 months. Malibu Boats had $30 million in buybacks. The chart has been corrected.

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