Major companies race to buy back stocks ahead of new corporate tax

Major corporations are scrambling to repurchase their own shares before a new tax on stock buybacks passed as part of Democrats’ major spending bill over the summer goes into effect, an effort that may sap one of the bill’s main sources of revenue.

Stock buybacks occur when a company buys its own shares, taking them out of the marketplace, which increases the value of the earnings-per-share and makes each outstanding share worth more money.  

Buybacks were illegal until 1982 and have long been blasted by critics as a legal form of market manipulation and a way for executives to pay themselves more.

“I hate stock buybacks,” Senate Majority Leader Charles Schumer (D-N.Y.) said in August upon striking a deal with Sen. Joe Manchin (D-W Va.) that would become the Inflation Reduction Act (IRA). The IRA, signed into law by President Biden, enacted the 1-percent buyback tax after an initial proposal to tax the personal income of hedge fund managers was blocked by Sen. Kyrsten Sinema (D-Ariz.).

“I think [buybacks] are one of the most self-serving things that corporate America does,” Schumer said. “Instead of investing in workers and in training and in research and in equipment, they simply – they don’t do a thing to make their company better, and they artificially raise the stock price by just reducing the number of shares. They’re despicable. I’d like to abolish them.” 

Major U.S. corporations, including T-Mobile US Inc., Johnson & Johnson and Comcast announced new buyback initiatives in September ahead of the Dec. 31 effective date of the IRA’s new tax.

T-Mobile’s board authorized a repurchase program for $14 billion of the company’s common stock on Sept. 8 that would extend through 2023.  

“Repurchases are expected to be made from available cash on hand and proceeds of one or more debt issuances,” the company said in a Securities and Exchange Commission (SEC) filing, indicating that it may borrow money in order to buy back the stocks if it can find a favorable rate.

Comcast also announced in mid-September that its board “increased its share repurchase program authorization to a total of $20.0 billion, effective as of September 13, 2022.” Comcast has already repurchased $9.0 billion of its Class A common stock this year, and SEC filings show that it’s been ramping up its buybacks relative to last year.

“For the six months ended June 30, 2022, Comcast paid dividends totaling $2.4 billion and repurchased 133.4 million of its common shares for $6.0 billion, resulting in a total return of capital to shareholders of $8.4 billion, compared to $2.7 billion in 2021,” Comcast’s second quarter earnings report says.

Johnson & Johnson announced its own $5 billion stock buyback initiative in September.

“With continued confidence in our business and pipeline, the Board of Directors and management team believe that company shares are an attractive investment opportunity,” Joaquin Duato, Johnson & Johnson CEO, said in a statement last month. 

Companies have also been hiring investment banks to expedite their buybacks ahead of the new IRA tax in a method known as an “accelerated share repurchase” program. Using investment banks to buy back stocks allows companies “to immediately purchase a large number of common shares,” according to an analysis of the technique by accounting firm Price Waterhouse Coopers.

Two days after President Biden signed the IRA into law, publicly traded department store chain Kohl’s “entered into an accelerated share repurchase agreement (ASR), pursuant to its previously announced share repurchase program, to repurchase approximately $500 million of the Company’s common stock,” an SEC filing shows.

Electronics software company and S&P 500 index member Synopsys also began an accelerated buyback program in August with Bank of America worth $240 million. Under their agreement, the company will take back around 535,000 of its own shares to be settled in November.

“Stock repurchases have been an element of our capital return policy for many years, and we have regularly used ASRs as a way to return capital to our shareholders, including substantial ASRs every year since 2014,” Synopsys said in a statement to The Hill.

A tally by liberal advocacy group Accountable US found five publicly traded companies that had started expedited buyback programs in August, all within about two weeks of the IRA’s new corporate buyback tax.

The repurchase programs totaled $1.5 billion in stock and amounted to about $15 million in avoided taxes, according to the tally.  

“Every dollar that a wealthy corporation dodges in taxes with loopholes like offshore tax havens or accelerated share repurchase programs is a dollar taken away from deficit reduction or priorities that help save consumers money,” Accountable US spokesperson Liz Zelnick said in a statement. “Policy makers should build on the Inflation Reduction Act’s impact to rein in greedy behavior that’s costing average families dearly and ensure those who profiteer are paying their fair share in taxes, which helps reduce inflation.”

Buybacks have faced bipartisan resistance in the past, with both Democrats and Republicans advancing proposals to rein them in.

Sen. Marco Rubio (R-Fla.) put forward a plan to make buybacks less lucrative for corporations in 2019, though it was criticized by some of his Republican colleagues, including Sens. Pat Toomey (R-Pa.) and Rick Scott (R-Fla.).

“Rubio calls for government policies that disincentivize selfish corporate decision-making, such as imposing taxes on share buybacks, while rewarding investment in domestic manufacturing and new research,” a 2019 press release on the senator’s website reads.

Senate Banking Committee and Finance Committee Chairmen Sherrod Brown (Ohio) and Ron Wyden (Ore.), both Democrats, introduced legislation in 2021 for a 2-percent excise tax on buybacks — double what’s in the IRA.

“A few decades ago, a majority of Wall Street capital funded the real economy – wages, machinery, research, new construction. Today, much of that capital is funneled back to wealthy executives in the form of stock buybacks – which used to be illegal market manipulation – and only about 15 percent goes to the real economy,” Brown said in a statement unveiling his bill.

Despite the new excise tax in the IRA, buybacks are likely to remain attractive to corporate managers due to the tax advantages they have over other ways of repaying investors, such as dividends.

“Buybacks often receive preferential tax treatment compared to dividends in certain jurisdictions. In these jurisdictions, buybacks are taxed as capital gains while dividends are taxed as ordinary income, meaning investors could prefer to receive buybacks over dividends,” financial firm FCLTGlobal CEO Sarah Keohane Williamson wrote in a post on the Harvard Law School Forum on Corporate Governance website.

The Hill has reached out to Kohl’s, Comcast and T-Mobile for comment.