The 1% Stock-Buyback Tax Hasn’t Slowed Repurchases. A Proposed 4% Tax Might.

U.S. companies in recent months have spent hundreds of billions of dollars on share repurchases, which are often seen by businesses as a good use of capital that reduces the number of a company’s shares and can lift stock prices. And despite the 1% levy, stock buybacks by companies in the S&P 500 are projected to top $1 trillion in 2023 for the first time in a calendar year, according to S&P Dow Jones Indices.

But just over a month into its life—the 1% tax went into effect Jan. 1—President Biden proposed in his State of the Union address lifting the rate to 4% to encourage long-term investments by companies instead of rewarding shareholders and executives. Later in February, a group of Senate Democrats followed up with a bill similarly seeking to increase the tax on certain buybacks from 1% to 4%. 

Leidos Holdings, an information-technology and engineering services firm, for instance, may shift some of its buyback spending to dividends if the tax increases, said Chief Executive

Roger Krone,

who will be stepping down from that post by May. The Reston, Va.-based company’s board in February of last year authorized the repurchase of up to 20 million shares. 

During the fiscal year ended Dec. 30, Leidos returned $741 million to shareholders, including $199 million as part of its regular dividend program and $542 million in share repurchases. Even with the 1% tax, stock buybacks are the preferred way to return cash to shareholders, Mr. Krone said at a conference in February.

“If the president gets us 4%,” he added, “maybe everyone in the industry will do more dividends or special dividends.” 

Buybacks have additionally come into recent focus in relation to the $53 billion Chips Act. Last week, the U.S. government began detailing how it plans to award chip-manufacturing subsidies under the Chips Act, which aims to promote domestic manufacturing of semiconductors, adding this week that recipients of the funds are prohibited from engaging in buybacks. 

Warren Buffett,

chief executive officer of

Berkshire Hathaway Inc.,

used his 2022 annual letter to shareholders to mordantly defend buybacks. Stock repurchases by Berkshire and the publicly traded companies it owns benefited investors, he wrote in the Feb. 25 letter. “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue,” he wrote. 

The 1% tax—which was a last-minute addition to the climate, health and tax law passed last year—is levied on net buybacks, meaning total shares repurchased minus new shares issued during the year. The tax has been projected to raise $74 billion over a decade by the Joint Committee on Taxation, and would have raised roughly $8.4 billion from S&P 500 companies had it been in effect in 2021. 

In the fourth quarter, S&P 500 companies spent about $189 billion on stock buybacks, up 2% from the third quarter and down 18.2% from a year earlier, according to preliminary data from S&P Dow Jones Indices, a unit of ratings firm S&P Global Inc. Companies in the index would have paid a combined roughly $2 billion in taxes for the quarter and lost about 0.48% in operating income had the levy been in effect in the fourth quarter, according to

Howard Silverblatt,

a senior index analyst at S&P Dow Jones Indices. 

“It’s annoying, it’s payments, especially when you’re counting every penny, but the bottom line is it’s not going to stop you,” Mr. Silverblatt said of share repurchases in light of the 1% tax.

The proposed 4% tax, were it to pass, would bring S&P 500 companies’ tax bill to nearly $6.9 billion if it were levied on net buybacks, according to Mr. Silverblatt. A more muted increase, such as to around 2%, could gain the required backing in Congress, he added. At 2%, companies would have paid around $3.4 billion in taxes in the fourth quarter, he said. That figure goes up to roughly $5.2 billion at a rate of 3%. 

Companies would likely start to reassess buyback activity if the tax increased to between 2.5% and 2.75%, Mr. Silverblatt said. Some of that would then be pushed into dividends, though not dollar for dollar, he added. 

Companies tend to prefer buybacks over dividends. For one, share repurchases typically don’t commit them to continuing to buy shares, and offer flexibility on timing. A dividend, however, comes with the expectation that it will continue. Dividends are also taxable for many shareholders, while buybacks—until this year—generally weren’t a taxable event. 

Internet retailer Overstock will consider dividends if the tax increases, said Chief Executive

Jonathan Johnson.

The Midvale, Utah-based company announced a $100 million buyback program in August 2021 that runs through Dec. 31, 2023. In the final quarter of last year, Overstock bought back $20 million in shares, leaving around $19.9 million remaining under the current authorization.

Mr. Johnson said a 1% excise tax is a “toll,” but not a meaningful one. “But if the tax gets high enough, if the toll is expensive, it may wind up coming back in dividends,” he said. The company hasn’t yet determined how high the tax would have to climb to affect buyback activity, Mr. Johnson noted. 

For energy infrastructure company Kinder Morgan, a higher tax would mean lower stock prices are needed at the time of share repurchases, said Chief Financial Officer

David Michels.

In January, Kinder Morgan’s board increased the company’s share repurchase program to $3 billion, up from the prior limit of $2 billion. The Houston-based company, which has repurchased around $943 million of shares since the program was authorized in July 2017, looks at share repurchases as a discretionary use of excess capital, Mr. Michels said. “We only really consider share repurchases when we have an attractive repurchase price,” the CFO said. 

At 1%, the excise tax is a consideration, but not a very large part of any decision on buybacks, according to Mr. Michels. “If excise taxes on buybacks increase, our approach will generally not change, though we would require even lower market prices to execute stock repurchases.”

Write to Jennifer Williams-Alvarez at [email protected]

U.S. companies in recent months have spent hundreds of billions of dollars on share repurchases, which are often seen by businesses as a good use of capital that reduces the number of a company’s shares and can lift stock prices. And despite the 1% levy, stock buybacks by companies in the S&P 500 are projected to top $1 trillion in 2023 for the first time in a calendar year, according to S&P Dow Jones Indices.

But just over a month into its life—the 1% tax went into effect Jan. 1—President Biden proposed in his State of the Union address lifting the rate to 4% to encourage long-term investments by companies instead of rewarding shareholders and executives. Later in February, a group of Senate Democrats followed up with a bill similarly seeking to increase the tax on certain buybacks from 1% to 4%. 

Leidos Holdings, an information-technology and engineering services firm, for instance, may shift some of its buyback spending to dividends if the tax increases, said Chief Executive

Roger Krone,

who will be stepping down from that post by May. The Reston, Va.-based company’s board in February of last year authorized the repurchase of up to 20 million shares. 

During the fiscal year ended Dec. 30, Leidos returned $741 million to shareholders, including $199 million as part of its regular dividend program and $542 million in share repurchases. Even with the 1% tax, stock buybacks are the preferred way to return cash to shareholders, Mr. Krone said at a conference in February.

“If the president gets us 4%,” he added, “maybe everyone in the industry will do more dividends or special dividends.” 

Buybacks have additionally come into recent focus in relation to the $53 billion Chips Act. Last week, the U.S. government began detailing how it plans to award chip-manufacturing subsidies under the Chips Act, which aims to promote domestic manufacturing of semiconductors, adding this week that recipients of the funds are prohibited from engaging in buybacks. 

Warren Buffett,

chief executive officer of

Berkshire Hathaway Inc.,

used his 2022 annual letter to shareholders to mordantly defend buybacks. Stock repurchases by Berkshire and the publicly traded companies it owns benefited investors, he wrote in the Feb. 25 letter. “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue,” he wrote. 

The 1% tax—which was a last-minute addition to the climate, health and tax law passed last year—is levied on net buybacks, meaning total shares repurchased minus new shares issued during the year. The tax has been projected to raise $74 billion over a decade by the Joint Committee on Taxation, and would have raised roughly $8.4 billion from S&P 500 companies had it been in effect in 2021. 

In the fourth quarter, S&P 500 companies spent about $189 billion on stock buybacks, up 2% from the third quarter and down 18.2% from a year earlier, according to preliminary data from S&P Dow Jones Indices, a unit of ratings firm S&P Global Inc. Companies in the index would have paid a combined roughly $2 billion in taxes for the quarter and lost about 0.48% in operating income had the levy been in effect in the fourth quarter, according to

Howard Silverblatt,

a senior index analyst at S&P Dow Jones Indices. 

“It’s annoying, it’s payments, especially when you’re counting every penny, but the bottom line is it’s not going to stop you,” Mr. Silverblatt said of share repurchases in light of the 1% tax.

The proposed 4% tax, were it to pass, would bring S&P 500 companies’ tax bill to nearly $6.9 billion if it were levied on net buybacks, according to Mr. Silverblatt. A more muted increase, such as to around 2%, could gain the required backing in Congress, he added. At 2%, companies would have paid around $3.4 billion in taxes in the fourth quarter, he said. That figure goes up to roughly $5.2 billion at a rate of 3%. 

Companies would likely start to reassess buyback activity if the tax increased to between 2.5% and 2.75%, Mr. Silverblatt said. Some of that would then be pushed into dividends, though not dollar for dollar, he added. 

Companies tend to prefer buybacks over dividends. For one, share repurchases typically don’t commit them to continuing to buy shares, and offer flexibility on timing. A dividend, however, comes with the expectation that it will continue. Dividends are also taxable for many shareholders, while buybacks—until this year—generally weren’t a taxable event. 

Internet retailer Overstock will consider dividends if the tax increases, said Chief Executive

Jonathan Johnson.

The Midvale, Utah-based company announced a $100 million buyback program in August 2021 that runs through Dec. 31, 2023. In the final quarter of last year, Overstock bought back $20 million in shares, leaving around $19.9 million remaining under the current authorization.

Mr. Johnson said a 1% excise tax is a “toll,” but not a meaningful one. “But if the tax gets high enough, if the toll is expensive, it may wind up coming back in dividends,” he said. The company hasn’t yet determined how high the tax would have to climb to affect buyback activity, Mr. Johnson noted. 

For energy infrastructure company Kinder Morgan, a higher tax would mean lower stock prices are needed at the time of share repurchases, said Chief Financial Officer

David Michels.

In January, Kinder Morgan’s board increased the company’s share repurchase program to $3 billion, up from the prior limit of $2 billion. The Houston-based company, which has repurchased around $943 million of shares since the program was authorized in July 2017, looks at share repurchases as a discretionary use of excess capital, Mr. Michels said. “We only really consider share repurchases when we have an attractive repurchase price,” the CFO said. 

At 1%, the excise tax is a consideration, but not a very large part of any decision on buybacks, according to Mr. Michels. “If excise taxes on buybacks increase, our approach will generally not change, though we would require even lower market prices to execute stock repurchases.”

Write to Jennifer Williams-Alvarez at [email protected]