Companies facing first tax on stock buybacks in Biden bill

WASHINGTON (AP) — Democrats have pulled off a quiet first in their just-passed legislation addressing climate change and health care: the creation of a tax on stock buybacks, a cherished tool of Corporate America that had long seemed untouchable.

Under the bill President Joe Biden is scheduled to sign into law Tuesday, companies will face a new 1% excise tax on purchases of their own shares, effectively paying a penalty for a maneuver that they have long used to return cash to investors and bolster their stock price. The tax takes effect in 2023.

Buybacks have ballooned in recent years — they’re forecast to reach $1 trillion in 2022 — as companies have swelled with cash from sky-high profits.

Investors, including pension and retirement funds, like the buybacks. But fiery critics of big corporations and Wall Street like Sens. Elizabeth Warren and Bernie Sanders loathe them, calling the practice “paper manipulation” to enrich senior executives and big shareholders.

Centrist Democrats, too, such as Senate Majority Leader Chuck Schumer, have long criticized buybacks.

Democrats say that instead of returning cash to shareholders, big companies should use the money to increase employees’ wages or invest in the business. They are hoping the excise tax — it's projected to bring the government an additional $74 billion in revenue over 10 years — will cause a major shift in corporate behavior.

But some experts are skeptical that the tax will work as intended. They note that businesses have other methods for rewarding shareholders, raising the prospect that legislation aimed at halting one corporate stock practice could instead facilitate another, with new and unpredictable effects on the economy.

How it all plays out could be significant for the future landscape of big U.S....