The introduction of a 1% tax on stock buybacks is causing companies to anticipate increased tax burdens, resulting in a combined impact of over $3.5 billion on the largest U.S. public companies during the first half of the year.
Recent weeks have seen businesses revealing their expected tax bills for share repurchases in the first half of the year, offering insight into the tax’s impact on their financials. Booking Holdings, for instance, estimates a tax liability of $47 million for the first half of the year, as disclosed in a regulatory filing. Similarly, PayPal expects a $24 million tax bill related to buybacks for that period, while MetLife projects a $13 million tax hit.
Effective since January 1, the tax is predicted to cost S&P 500 companies approximately $1.6 billion in the second quarter, according to preliminary data from S&P Dow Jones Indices, a division of S&P Global. This amount, slightly down from the approximately $1.98 billion in the first three months of the year, represents about 0.34% of the companies’ collective operating income for the second quarter.
Despite the heightened tax responsibilities, companies are largely unfazed by the tax’s impact. Preliminary data from S&P indicates that from April to June, S&P 500 companies are projected to spend around $169 billion on stock buybacks, down about 20% from both the first quarter of this year and the previous year. While macroeconomic uncertainties have led some companies to reduce buybacks, the tax hasn’t significantly deterred repurchase activities among S&P 500 companies.
Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices, noted that the tax, amounting to $1.6 billion, is relatively minor compared to earnings of approximately $458 billion in this quarter.
At Liberty Energy, the tax has been incorporated into share prices during buybacks, causing a reduction in available capital for repurchases, according to Michael Stock, the company’s finance chief. However, this change doesn’t significantly affect the decision-making process unless a company is on the brink of determining whether to proceed with a repurchase.
The Internal Revenue Service (IRS) has temporarily suspended reporting and payment requirements tied to the buyback tax while it works on defining the tax’s scope. Although companies will ultimately owe the 1% tax for affected buybacks this year, payment obligations have been postponed. The IRS guidance is expected to specify when companies will need to begin reporting and making these payments.
The 1% tax, introduced as a last-minute addition to the Inflation Reduction Act passed last year, targets net buybacks, taking into account total repurchased shares minus new shares issued within the year. It aims to create equity between buybacks and other forms of capital return to shareholders, like dividends, while also funding expanded federal programs. The tax has been estimated to generate $74 billion over a decade by the Joint Committee on Taxation and would have raised around $8.4 billion from S&P 500 companies in 2021.
While the tax rate is currently 1%, discussions surrounding a potential increase could reshape company strategies. President Biden proposed quadrupling the rate to promote long-term investments rather than favoring shareholders and executives. Some Senate Democrats also suggested a similar hike to 4%, though its passage faces challenges in the divided Congress.
Although an eventual increase in the tax is expected, Silverblatt anticipates a more moderate rise, possibly to around 2%. Such an increase could gain congressional support, potentially causing companies to reconsider their repurchase activities if the rate reaches around 2.5%.