On the eve of its announcement, the Senate Finance Committee voted on Senator Bernie Sanders’ bill that would eliminate corporate tax deductions for stock buybacks. If the measure becomes law, it could deter big corporations from returning windfall profits to shareholders in the form of share buybacks, a trend that has long buoyed stock prices.
A top concern among investors is the sense that investors could be captivated with the hype of buybacks only to see the stock begin to drop, making shareholders even less inclined to approve them. The tax bill, if enacted, could give investors and the companies they invest in more pause.
Under current law, companies can write off the full cost of shares they repurchase in the year they are purchased. That gives companies an incentive to buy as much stock as possible in a single year because it lowers their tax burden — and because investors can count on big gains from share purchases at that point.
“The entire concept of buybacks is exactly what it’s designed to do: maximize the number of shares bought in a single year,” said Ken Langone, the co-founder of Home Depot and a longtime defender of corporate excess. “And this is a bill that will discourage people from making these irrational decisions.”