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1 1 (November 2, 2021)

handle is hein.crs/goveesw0001 and id is 1 raw text is: % Congressians 1 iformin~ th ~e(~isIst 4~t~ I Shl<fl ~14 November 2, 2021 An Excise Tax on Stock Repurchases and Tax Advantages of Buybacks over Dividends The Build Back Better Act (H.R. 5376), as reported by the Committee on the Budget, includes a provision to impose a 1% excise tax on stockrepurchases bypublicly traded corporations. Stockrepurchases are another way to distributeincome to shareholders and, comp aredto dividends, have favorable taxtreatment. What Is a Stock Repurchase? A stockrepurchase or buy-back occurs when a firmbuys its own shares. This repurchase canbe made by a tender offer to shareholders, who can then indicate how many shares they wish to sell and at whatprice, or, more commonly, shares can be purchased on the open market. Stockrepurchases havebeen increasing comparedto dividends. (See CRS Legal SidebarLSB10266, Stock Buybacks: BackgroundandReform Proposals, by Jay B. Sykes.) Historically, dividends were the major form of distributing income and sharerepurchases were rare. Repurchases began to be more common in the mid-1990s, and by the early 2000s, dividends andrepurchases were similar in magnitude. By 2004, annual share repurchases had typically begun to exceed dividends. Repurchases almost doubled in 2018 to more than $1 trillion, following the corporate taxcuts in the TaxCuts and Jobs Act (P.L. 115-94), and remained high in 2019, although they fell in 2020. News articles indicate that almost $900 billion of repurchases have already occurred in 2021. Concerns about s tockrepurchases have led to both nontax (s uch as disallowing s tockrepurchases on the open market) and taxproposals. Taxapproaches have included proposals to allocate share repurchases to shareholders and taxthem as dividends or to impose excise taxes. Senator Brown has introduced legislation (S.2758) to impose a 2% excise tax on stockrepurchases. Why Are Stock Repurchases Tax Favored? A dividend is subject to tax, although at a lower rate than ordinary income (a top rate of 20% compared to a top rate of 37% on ordinary income). Capitalgains are also subject to the s ame taxrate, although the taxapplies only to the sales price minus the basis (the amount originally paid for the stock). Therefore, a shareholder pays a larger amount of tax on a dividend distribution than on a sale of the share. Different types of shareholders have differentpreferences for repurchases compared to dividends. Stockholders who are tax exempt (such as pensionplans andnonprofit organizations) will be indifferent to the taxtreatment. Taxpayers who have a low basis (e.g., becausethey have held the stockfor a long time orbecause the stockhas https ://crs reports appreciated significantly) will have a small preference for a repurchase because most of the s ale price will be taxable. Taxpayers who have a high basis (e.g., if they recently bought the stock) would prefer a share repurchase because little of the sales price would be taxable. In addition to this taxdifferential, the firm's purchase ofcorporation stockcan allow stockholders a choice about how or whether to receive distributions. Explanation of Excise Tax Provision in the Build Back Better Act A provision in H.R. 5376 would impose a 1% excise taxon the repurchase of stockby a publicly traded corporation. The amount subject to taxwould be reduced by any new issues to thepublic or stockis sued to employees. The tax would not apply ifrepurchases were less than $1 million or if contributed to an employeepension plan, an employee stock ownership plan, or other similar plans. The tax would not apply ifrepurchases were treated as a dividend. It would not apply to repurchases by regulated investmentcompanies (RICs) orrealestate investment trusts (REITs). It also would not apply to purchases by a dealer in securities in the ordinary course of business. The excise tax would apply to purchases of corporation stockby a subsidiary of the corporation(i.e., a corporation or partnership that is more than 50% owned by theparent corporation). The taxwould also apply to purchases bya U.S. subsidiary of a foreign-parented firm. It would apply to newly inverted (after September20, 2021) or surrogate firms (i.e., firms that merged to create a foreign parent with the former U.S. shareholders owning more than 60% of shares). In general, excise taxes can be deducted to determine profits subjectto the corporate tax, so thatthe taxis reduced by the corporate taxrate (21%). That is, fora profitable corporation each dollar of excise taxreduces profits taxes by 21 cents. The language specifies that this taxwould not be deductible, so there would be corporateprofits taxoffset. Non-Tax Issues Whereas one factor favoring stockrepurchases over dividends is the taxtreatment, other concerns have been raised regarding stockrepurchases that may be the motivation for discouraging theserepurchases through an excise tax. Firms normally return earnings to shareholders, traditionally through dividends. Repurchases serve the sane purposes. An increase in distributions may occur when the firm does not have desirable investment projects. Both .conqgress.gov S

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