New buy-back tax for companies due to come into force in 2023: What you should know

A new corporate tax on stock buybacks set to take effect in January could cost US companies billions of dollars.

1% tax on repurchase of shares, which will only apply to publicly traded companies, was passed by Democrats earlier this year as part of a comprehensive health and climate package. The tax is estimated to raise about $74 billion over the next decade.

Democrats have said the 1% tax is designed to curb the tendency of companies to buy back their own stock from investors with the tax.

“I hate stock buybacks,” Senate Majority Leader Chuck Schumer, D-N.Y., said earlier this year. “I think they’re one of the most self-serving things that corporate America does.”

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Chuck Schumer press conference

Senate Majority Leader Chuck Schumer, of NY, speaks to the media after a Democratic policy luncheon, Tuesday, Oct. 19, 2021, on Capitol Hill in Washington. ((AP Photo/Jacquelyn Martin) / AP Newsroom)

Companies have been allowed to buy their own shares since 1982, and the practice has since become common on Wall Street. In 2019, share buybacks reached a record $1 trillion, according to the SEC. In the third quarter, buybacks among S&P-listed companies totaled about $210 billion, down about 10% from the same period a year ago, according to S&P analyst Howard Silverblatt.

In the second quarter, companies spent about $210 billion, compared to about $281 billion in the first.

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If the 1% tax had been in place during the third quarter, companies would have owed about $1.93 billion to Uncle Sam, according to The Wall Street Journal.

Yet CFOs remain largely unaffected by the penalty.

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Gasoline prices are displayed on an Exxon Mobil gas station sign on June 9, 2022 in Houston, Texas. (Brandon Bell/Getty Images/Getty Images)

Companies including Exxon, Lowe’s and MasterCard have expanded programs or announced new ones in recent days to buy back their stock, the Journal reported.

“We don’t like the tax; nobody likes it,” Michael Mullican, chief financial officer of sporting goods store Academy Sports & Outdoors told the Journal. “But it’s not important enough to where it would affect our thinking.”

The Democrats’ spending bill — called the Inflation Reduction Act — also imposes a 15% minimum tax on companies based on profits they publicly report on their accounts to shareholders. The minimum book tax would only apply to companies that reported more than $1 billion in revenue. Democrats said the tax would affect about 200 of the nation’s largest companies with profits above $1 billion and that pay less than the current 21% corporate rate.

US Capitol building

People walk outside the US Capitol building in Washington, on June 9, 2022. (AP Photo/Patrick Semansky, File/AP Newsroom)

Experts expect the two taxes to drag on 2023 revenues, with Goldman Sachs estimates a decline of 1.5% per share in the S&P 500 companies. The decline in earnings is expected to hit industries such as healthcare and IT due to the low effective tax rate.

UBS strategists led by Solita Marcelli, meanwhile, estimate that the new taxes will have a “very minimal drag of 1% on S&P 500 earnings per share, although some companies will be more affected than others.”

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