Why is 'Buyback' the Term of the Day?

S&P Global

The Inflation Reduction Act, a slimmed down version of last year’s Build Back Better Act that was passed by the House of Representatives yesterday, includes a provision to impose a 1% excise tax on the value of corporate stock buybacks starting Jan. 1, 2023. 

This provision, which was included in Build Back Better, had been absent from earlier drafts of the bill, but was added at the last minute to make up for concessions made to holdout Democrats on issues like the carried interest loophole and corporate alternative minimum tax. 

The tax, which is projected to raise $74 billion in revenue, comes at a time of intense buyback activity. According to S&P Global, S&P 500 companies spent a record $985 billion on buybacks in the 12-month period ending March 2022. That total is more than 11% higher than the previous record of $882 billion spent in 2021. Companies may do buybacks for various reasons, including company consolidation, equity value increase, and to look more financially attractive.

Analysts estimate the new tax will have a relatively minor effect on corporate earnings and buyback activity. Though some see it giving dividends, which have lagged far behind buybacks in recent years, a minor lift. The Tax Policy Center, for example, says the tax could lead dividend payouts to rise 1.5%.

-Colin