New Excise Tax on Corporate Stock Buybacks

President Biden is set to sign a bill into law which includes a new 1% excise tax on stock buybacks.

The Inflation Reduction Act (H.R.5376) passed both the Senate and the House on party-line votes,  with Vice President Kamala Harris breaking the tie in the upper chamber.

According to a White House statement, the Inflation Reduction Act will “lower costs for families, combat the climate crisis, reduce the deficit, and finally ask the largest corporations to pay their fair share.” Among the provisions included in the Inflation Reduction Act is a 1 percent excise tax on corporate stock buybacks as a means of raising revenue.  Proponents claim the economy would benefit by firms reinvesting surplus cash in their businesses, rather than returning it to shareholders. The tax on stock buybacks is projected to raise $74 billion over a 10-year period, according to the Joint Committee on Taxation. In addition, the bill imposes a 15 percent alternative minimum tax on large corporations (more than $1 billion in reported income), which is projected to raise $222 billion over 10 years.

In addition to encouraging companies to reinvest in their businesses, the excise tax provision seeks to create a disincentive for companies to buy back stock as a means to increase share price and potentially increase CEO pay. While the tax will apply to most types of share repurchases made by US publicly-traded companies and US companies that trade on non-US exchanges, most analysts expect the tax will have little impact on a company's decision to repurchase shares.

Outlook: President Biden will sign the Inflation Reduction Act into law on August 16. The stock buyback tax will go into effect on January 1, 2023, and will impact any repurchases announced after the bill is signed into law.  The President’s 2023 budget proposal also calls for new restrictions on buybacks. Given the President’s previous criticism of buybacks, we could see additional attempts by the current administration on this issue.