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Stock-Buyback Tax Revival in Senate Bill Leaves Wall Street Unfazed

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(Bloomberg) -- A tax on stock buybacks is on the cusp of becoming law, potentially hampering a beloved tactic by companies and investors to boost share prices.

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The new levy was unexpectedly added back into Senate Democrats’ tax and climate package late Thursday after last-minute negotiations to get on board holdout Senator Kyrsten Sinema. A vote on the bill is expected this weekend.

Market players downplayed the effect on overall equity values, as they see US equities driven mostly by larger macroeconomic issues, such as the Federal Reserve raising interest rates.

The proposed measure levies a 1% excise tax on the value of corporate stock buybacks, which Democrats are hoping will slow their use because they produce capital gains but no immediate tax bills. The tax would also potentially shift some companies to opt instead for dividends, which are taxed when issued.

Buybacks “are one of the most self-serving things that corporate America does,” Senate Majority Leader Chuck Schumer said Friday.

Buybacks remain the largest source of demand for U.S. equities, according to a Goldman Sachs Group Inc. report from earlier this year, which also predicted that S&P share repurchases would increase 12% in 2022 to reach $1 trillion.

Here’s how some on Wall Street are reacting to the tax proposal:

Tina Teng, a markets analyst at CMC Markets Plc:

“It is not good news either way for both corporates and investors.

“Considering a large portion of the market rally is supported by companies’ share buyback programs this year, the bill will definitely have a negative impact on the stock markets if it passes.

“To avoid the tax, companies may choose to increase dividends payout to shareholders but it will also cause a price drop and burden investors with more tax.”

Keith Lerner, co-chief investment officer at Truist Advisory Services:

“It’s not a positive, but I don’t know that it’s so significant to change the narrative of the bigger drivers in this economy, which is the business cycle and what the Fed is going to do. This is not a game-changer for the overall market. It’s a factor. It’s a negative, but it’s not the biggest driver of stocks now.”

Jill Carey Hall, US equity strategist for Bank of America Securities:

“We are certainly watching policy. For share buybacks overall, we’ve been expecting that they’re going to be lower than they were trending for many of the past several years.

“We’re not expecting a net benefit from buybacks to EPS growth similar to what we’ve seen in post-crisis years.”

Sam Stovall, chief investment strategist at CFRA

“Investors buy stocks because they want a cut of the action. The action is corporate profits, earnings, and a way that investors will benefit from those earnings is an increase in share price or an increase in dividend payout. Share buybacks can also help with share prices. So I think what this does is sort of remove the incentive offered through share buybacks. The cut of the action would then come simply in price increases or dividend payout increases.”

“Companies have to engage in buybacks in order to fulfill stock option grants to executives, and so there would be a minor increase in cost in order to do that, but I don’t necessarily think it would adversely affect share prices.”

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