New Tax on Stock Buybacks Would Have Raised Over $8 Billion in 2021, Study Says
The 1% tax on stock buybacks signed into law last month would have raised about $8.4 billion from the biggest publicly traded U.S. companies if it had been in effect last year, absorbing the equivalent of nearly a half-percentage-point of net income overall, a new analysis finds.
The financial impact would have been similar to raising the combined effective tax rate for the companies to 17.95% from 17.56%, according to financial data firm S&P Dow Jones Indices, which analyzed the buybacks for companies in the S&P 500 index.
The buyback tax, which goes into effect Jan. 1, is expected to raise $74 billion in federal revenue over a decade, the nonpartisan congressional Joint Committee on Taxation has projected. Congressional estimates consider the possibility that companies may change behavior in response to a tax.
Share repurchases by S&P 500 companies reached a new record in the first quarter, at $281 billion, surpassing the previous peaks of $223 billion in late 2018 and $270 billion in the fourth quarter of last year.
Preliminary data show S&P 500 buybacks in the second quarter declined about 19% from the first quarter as worries grew that the economy could slow significantly, but remained above second-quarter 2021 levels, said Howard Silverblatt, senior index analyst with S&P Dow Jones Indices. While financial firms cut second-quarter buybacks by just over half compared with 2021, energy companies ramped up repurchases significantly.
“The additional tax will not have a material impact on buybacks,” Mr. Silverblatt predicted. “The concern is that, like any other tax, it has the tendency to go higher, given that both sides of the aisle seem to want the tax.”
The new excise tax—a last-minute addition to Democratic legislation intended to help pay for spending on climate, healthcare and other initiatives—is levied on net buybacks, or repurchases offset by new share issuance. Companies often buy back stock to avoid dilution from newly issued shares, in some cases leaving net issuance at or near zero.
The impact of the new tax is likely to vary across companies and industries. Based on their 2021 buybacks, the cost to real-estate companies would have been less than 0.1% of income, while the tax bill for tech and communications-services companies would have reached about 0.7% of income for the year.
Apple Inc.
would have paid nearly $900 million in taxes on its net buybacks of $87.7 billion if the tax had been in effect last year, while
Alphabet Inc.
and
Meta Platforms Inc.
would have paid about $500 million apiece, the analysis found.
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How will the buyback tax affect big business? Join the conversation below.
Apple reported net income of $94.7 billion in its most recently completed fiscal year, ended Sept. 25. Google parent Alphabet reported net income of $76 billion in 2021, and Meta, formerly Facebook Inc., reported net income of $39.4 billion.
Four other companies would have seen a tax bill of between $250 million and $275 million on last year’s buybacks, including
Microsoft Corp.
,
Berkshire Hathaway Inc.
and
Bank of America Corp.
, the data suggest.
Analysts and company finance chiefs say the tax isn’t likely to prompt major changes in buyback strategies.
“I don’t say I’m not concerned about it, because it’s another tax, but I think it’s manageable,” said
Tom Sweet,
chief financial officer of
Dell Technologies Inc.
But some companies said it could affect their activity in the market.
“We’re watching carefully the impact of the share-repurchase tax because that might change our plans,” said
Aaron Alt,
CFO of food-services giant
Sysco Corp.
“It’s causing us to reflect further on our share-repurchase plans, but we have not made a decision yet.”
—Nina Trentmann contributed to this article.
Write to Theo Francis at [email protected] and Mark Maurer at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
The 1% tax on stock buybacks signed into law last month would have raised about $8.4 billion from the biggest publicly traded U.S. companies if it had been in effect last year, absorbing the equivalent of nearly a half-percentage-point of net income overall, a new analysis finds.
The financial impact would have been similar to raising the combined effective tax rate for the companies to 17.95% from 17.56%, according to financial data firm S&P Dow Jones Indices, which analyzed the buybacks for companies in the S&P 500 index.
The buyback tax, which goes into effect Jan. 1, is expected to raise $74 billion in federal revenue over a decade, the nonpartisan congressional Joint Committee on Taxation has projected. Congressional estimates consider the possibility that companies may change behavior in response to a tax.
Share repurchases by S&P 500 companies reached a new record in the first quarter, at $281 billion, surpassing the previous peaks of $223 billion in late 2018 and $270 billion in the fourth quarter of last year.
Preliminary data show S&P 500 buybacks in the second quarter declined about 19% from the first quarter as worries grew that the economy could slow significantly, but remained above second-quarter 2021 levels, said Howard Silverblatt, senior index analyst with S&P Dow Jones Indices. While financial firms cut second-quarter buybacks by just over half compared with 2021, energy companies ramped up repurchases significantly.
“The additional tax will not have a material impact on buybacks,” Mr. Silverblatt predicted. “The concern is that, like any other tax, it has the tendency to go higher, given that both sides of the aisle seem to want the tax.”
The new excise tax—a last-minute addition to Democratic legislation intended to help pay for spending on climate, healthcare and other initiatives—is levied on net buybacks, or repurchases offset by new share issuance. Companies often buy back stock to avoid dilution from newly issued shares, in some cases leaving net issuance at or near zero.
The impact of the new tax is likely to vary across companies and industries. Based on their 2021 buybacks, the cost to real-estate companies would have been less than 0.1% of income, while the tax bill for tech and communications-services companies would have reached about 0.7% of income for the year.
Apple Inc.
would have paid nearly $900 million in taxes on its net buybacks of $87.7 billion if the tax had been in effect last year, while
Alphabet Inc.
and
Meta Platforms Inc.
would have paid about $500 million apiece, the analysis found.
SHARE YOUR THOUGHTS
How will the buyback tax affect big business? Join the conversation below.
Apple reported net income of $94.7 billion in its most recently completed fiscal year, ended Sept. 25. Google parent Alphabet reported net income of $76 billion in 2021, and Meta, formerly Facebook Inc., reported net income of $39.4 billion.
Four other companies would have seen a tax bill of between $250 million and $275 million on last year’s buybacks, including
Microsoft Corp.
,
Berkshire Hathaway Inc.
and
Bank of America Corp.
, the data suggest.
Analysts and company finance chiefs say the tax isn’t likely to prompt major changes in buyback strategies.
“I don’t say I’m not concerned about it, because it’s another tax, but I think it’s manageable,” said
Tom Sweet,
chief financial officer of
Dell Technologies Inc.
But some companies said it could affect their activity in the market.
“We’re watching carefully the impact of the share-repurchase tax because that might change our plans,” said
Aaron Alt,
CFO of food-services giant
Sysco Corp.
“It’s causing us to reflect further on our share-repurchase plans, but we have not made a decision yet.”
—Nina Trentmann contributed to this article.
Write to Theo Francis at [email protected] and Mark Maurer at [email protected]
Copyright ©2022 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8
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