It is hardly new for Democratic politicians to suggest taxes on the financial sector in order to fund policy reforms. According to a recent report from the New York Times, though, multiple Senate Democrats have outlined a 2% stock buybacks tax as a key element of their proposed budget bill as a way of partially covering the $3.5 trillion in social spending.
What Is the Stock Buybacks Tax Proposal?
Companies typically buy back shares of their own stock in large quantity in the open market as a quick means of increasing share value. An additional incentive for share repurchasing is that it increases the company leadership’s right-to-vote power in corporate matters. The benefits for both company executives and shareholders of this practice are numerous.
Buybacks as a trend have consistently garnered negative attention from Democratic leaders, though. It seems inevitable that a stock buybacks tax would have been passed at some point.
The current proposal, spearheaded by Senators Sherrod Brown (D-OH) and Ron Wyden (D-OR), centers around a 2% tax on the money companies annually spend on buybacks. Partnership tactics employed by large corporations to avoid taxation would also face tighter measures if this bill were to pass.
Why It Matters
This news comes at a time when companies have doubled down on stock buybacks at levels not seen since before the start of the Covid-19 pandemic. Data from Forbes indicates that the first quarter of 2021 saw companies listed on the S&P 500 repurchase roughly $178.1 billion shares of their own stock, an increase of more than 36% from the previous quarter.
If the stock buybacks tax is to pass, it will certainly affect the future of the companies who were quick to start repurchasing their own shares. Many of America’s largest publicly traded companies have exercised excessive share repurchasing. Those who spent the most on buybacks should be watched while we await the verdict of the stock buybacks tax. Those companies are:
- Apple (NASDAQ:AAPL) – Repurchased $18.1 billion in the first quarter of 2021.
- Alphabet (NASDAQ:GOOG, NASDAQ:GOOGL) – Repurchased $11.14 billion.
- Microsoft (NASDAQ:MSFT) – Repurchased $6.9 billion.
- Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B)– Repurchased $6.6 billion.
- JPMorgan Chase (NYSE:JPM) – Repurchased $6.19 billion as of June 2021.
What Comes Next?
It is clear that if the new budget bill passes with the stock buybacks tax as a provision, it will certainly mean less incentive for companies to buy back their own shares. As a result, share value may decrease.
As of now, though, the deal is not done. Bills such as this often go through significant changes before being passed and there are plenty of Senate members who are not likely to look favorably on a policy that they may regard as anti-business.
Even if the stock buybacks tax is to pass, it will not be for months, giving the companies who stand to lose the most time to plan accordingly. For the companies named here, as well as others who have been prone to buybacks, there is no cause for alarm in the immediate future.
On the date of publication, Samuel O’Brient did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.