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Companies facing first tax on stock buybacks in Biden bill – The North State Journal

The New York Stock Exchange is seen in New York. (AP Photo/Seth Wenig)

WASHINGTON, DC — Democrats have pulled off a quiet first in their just-passed legislation on climate change and health care: the creation of a tax on stock buybacks, a cherished tool of American corporations that had long seemed untouchable.

Under the bill President Joe Biden signed into law on Tuesday, companies will face a new 1% excise tax on purchases of their own stock, effectively paying a penalty for a maneuver they have long used. to return money to investors and strengthen their stock price. The tax takes effect in 2023.

Takeovers have skyrocketed in recent years – expected to hit $1 trillion in 2022 – as companies bloated with cash on sky-high profits.

Investors, especially pension and retirement funds, love buyouts. But fierce criticism from big business and Wall Street like the senses. Elizabeth Warren and Bernie Sanders hate them, calling it “paper manipulation” to enrich senior executives and big shareholders.

Centrist Democrats, like Senate Majority Leader Chuck Schumer, have long been critical of buyouts.

Democrats say that instead of returning cash to shareholders, big companies should use the money to boost employee salaries or invest in the business. They hope the excise tax – which is expected to bring the government $74 billion in additional revenue over 10 years – will lead to a major change in business behavior.

But some experts doubt the tax is working as intended. They note that companies have other methods of rewarding shareholders, suggesting that legislation aimed at ending one share ownership practice could facilitate another, with new and unpredictable effects on the economy. .

How it all unfolds could be significant for the future landscape of America’s big business, their employees and shareholders, and for the political resistance to one of Biden’s signature legislative initiatives and his Democratic majorities in Congress.

Companies poured more of their money into buying their own stocks even as they grappled with rising inflation, higher interest rates and the potential for slowing economic growth . They faced higher expenses for raw materials, shipping, and labor. Businesses have largely been able to pass these costs on to their customers, but rising prices for food, clothing and everything else could threaten consumer spending, driving sales growth for many businesses. Americans continue to spend, albeit more tepidly, according to the latest government reports.

Buyouts can increase companies’ earnings per share because there are fewer shares universally owned by shareholders. Buyouts can also signal executives’ confidence in a company’s financial prospects.

Since the new excise tax will be calculated on the smallest net amount of a company’s redemptions – the total redemptions minus the shares issued during the year – some companies may consider it a modest success that is worth worth taking and keep buying stocks.

The tax will not apply to shares paid into retirement accounts, pensions and employee stock ownership plans.

After asking its analysts about the tax, RBC Capital Markets suggested companies might complain about it, but “it’s unlikely to have an impact on planning.”

One thing is almost certain: with the new tax due to take effect on January 1, companies have a deadline to redeem their shares tax-free. This means that a wave of redemptions could occur in the coming months.