A 1% excise tax on corporate stock buybacks by public companies included in the Inflation Reduction Act of 2022 passed by the Senate Sunday is one of many issues that has drawn the ire of House Republicans on the Ways and Means Committee.
While the GOP has many issues with the bill—a scaled-down version of President Biden’s Build Back Better Act projected to raise $739 billion in revenues and invest $433 billion while reducing the deficit by $300 billion over 10 years—the one in particular the representatives say will specifically hurt retirement savers is the new tax on stock buybacks.
“Democrats are threatening companies that return value to retirees or to 401k plans or to pension plans with a punitive tax. Their unvetted stock buybacks tax is a crippling tax that reduces retirement security for American seniors.”
House Ways and Means Republicans blog post
“Democrats are threatening companies that return value to retirees or to 401k plans or to pension plans with a punitive tax. Their unvetted stock buybacks tax is a crippling tax that reduces retirement security for American seniors,” states an Aug. 5 blog post from Republican members of the House Ways and Means Committee. “A tax on stock buybacks harms all shareholders and employees with an individual retirement account or 401k–including union pensions.”
“In addition to creating a third layer of tax on American companies, this unvetted tax scheme has a $74 billion price tag that will harm seniors and other savers the most,” adds an Aug. 8 “one-pager” post about the bill from House Republicans.
Specifically, the stock buyback tax is a 1% annual excise tax on fair market value of net stock buybacks by all publicly traded corporations with annual stock buybacks in excess of $1 million, with an effective date of Jan. 1, 2023. There is an exemption for stock buybacks that facilitate contribution to an ESOP or retirement plan.
Despite the exemption, House Republicans say the tax will reduce retirement security.
“This tax would harm the 58 percent of Americans who own stock and more than 60 million workers invested in a 401k—a group that has already lost roughly up to $2 trillion dollars in Biden’s economy,” the Aug. 8 post states.
Democrats crafting the Inflation Reduction Act included the stock buyback tax in the hope it will slow their use because they produce capital gains but no immediate tax bills. The provision is a modified version of Senate Finance Committee Chairman Ron Wyden’s (D-OR) Stock Buyback Accountability Act, which was added to the package during negotiations last Thursday. Wyden said the objective was to incentivize big corporations to invest in their workers rather than wealthy executives and shareholders.
“Rather than investing in their workers, mega-corporations used the windfall from Republicans’ 2017 tax cuts to juice their stock prices and reward their wealthiest investors and their executives through massive stock buybacks,” Wyden said in an Aug. 7 statement. “Even as millions of families struggled through the pandemic, corporate stock buybacks once again hit all-time highs. Stock buybacks are currently heavily favored by the tax code, despite their skewed benefits for the very top and potential for insider game-playing. My proposal with Senator [Sherrod] Brown (D-OH) simply ends this preferential treatment and encourages mega-corporations to invest in their workers.”
The stock buyback provision is expected to prompt companies to focus more on dividends instead of share repurchases, starting in 2023.
Stock buybacks are on track for a record year and remain the largest source of demand for U.S. equities, according to a Goldman Sachs Group report from earlier this year, which predicts that S&P share repurchases would increase 12% in 2022 to reach $1 trillion.
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Veteran financial services industry journalist Brian Anderson joined 401(k) Specialist as Managing Editor in January 2019. He has led editorial content for a variety of well-known properties including Insurance Forums, Life Insurance Selling, National Underwriter Life & Health, and Senior Market Advisor. He has always maintained a focus on providing readers with timely, useful information intended to help them build their business.