Democratic leaders struck a deal with Sen. Kirsten Sinema, who ditched the moderate vote by moving her climate and health bill one step closer to the fruit. However, the agreement could spur key changes in corporate taxation, particularly on share buybacks.
Sinema, the Democratic senator from Arizona, said she was ready to “move forward” with the so-called legislation Inflation Reduction Actafter being approved by the Senate Parliamentarian.
But Sinema’s compromise could come with important revisions to the bill tax provisions — the main source of funding for climate, health and deficit reduction initiatives.
Democrats may agree to cut elements of the proposed 15 percent minimum tax for big companies, according to reports. They may also remove a provision that would close the carried interest loophole, which allows private equity partners to pay the lower rate of capital gains tax on income rather than ordinary income tax rates.
To compensate, Democrats may add a 1 percent excise tax on share buybacks for publicly traded companies, The Wall Street Journal reported, citing a person familiar with the matter. The buyback tax “means just that: a 1% slice of salami taken off the top of share buybacks,” wrote Capital Alpha Partners analyst James Lussier.
In the middle of what looks like a record year for U.S. buybacks, the measure could raise more money than the provisions the bill removes. This can be particularly important for companies that have bet heavily on buying back their own shares, such as
Over the past four quarters, Apple has spent more than $86 billion on share buybacks, making it the No. 1 spender on buybacks, according to Dow Jones market data. Meta came in second, spending about $48 billion, while Microsoft spent $28 billion.
Bank of America
) are fourth and fifth, respectively, both having spent over $20 billion.
“We don’t believe this is a good thing for investors, but given the increased revenue opportunities on the table to help pay for the Inflation Reduction Act (IRA), it’s probably the least bad thing,” Lussier added .
This isn’t the first time Democrats have considered adding a tax share buyback. The provision was central to the Build Back Better Act, the party’s trillion-dollar social spending initiative that failed in November after party leadership failed to reach a compromise with moderate Sen. Joe Manchin of West Virginia. At the time, the administration estimated that a 1 percent repurchase tax could generate about $125 billion in revenue over 10 years. By comparison, the carried interest loophole would raise $14 billion in taxes.
A buyback tax can also incentivize companies to switch to paying dividends. Studies assess that a 1 percent tax rate on share buybacks could trigger about a 1.5 percent increase in dividend payouts, writes Tax Policy Center senior fellow Thornton Matheson.
Share buyback plans have gained momentum over the past few decades, outpacing dividend growth. Because of the way taxes are currently structured, shareholders must pay a greater amount of tax on dividend distributions than on stock sales, according to the Congressional Research Service, making it a popular way for companies to return value to stockholders. shares.
“Because share buybacks help avoid taxation at the investor level, a buyback tax is a reasonable way to reduce their tax advantage,” Matheson wrote last year. “This adds significant earnings and could trigger an increase in dividend payouts.”
Critics of share buyback plans argue that companies use share buybacks as a way to avoid investor-level taxes on corporate profits and that companies should instead use profits to reinvest and increase productivity. In 2019, Senator Elizabeth Warren said that buybacks create a “sugar high” for corporations by raising prices in the short term without investing in long-term performance.
Supporters, on the other hand, pointed to evidence suggesting that companies consider buybacks only when they have exhausted other investment options.
“Buybacks do not displace productive investment or come at the expense of workers — so they should not be targeted for tax increases based on these misconceptions,” wrote Tax Foundation senior economist Erica York.
Democrats still have to wait for final approval from a Senate lawmaker before moving forward with the bill. Voting is expected to begin this weekend. The measure could still undergo several revisions as it moves through Congress.
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