WASHINGTON, DC – In an effort to restore fairness to the tax code and encourage long-term investments over short-sighted maneuvers to goose executive pay, U.S. Senator Jack Reed (D-RI) joined U.S. Senators Sherrod Brown (D-OH) and Ron Wyden (D-OR) in introducing the Stock Buyback Accountability Act of 2023.  This legislation incentivizes corporations to use profits to invest in employees and productive capabilities by quadrupling the new 1 percent excise tax on corporate stock buybacks.

Stock buybacks are a controversial financial maneuver by large corporations that remove shares from the market and enable a company to increase its share price and earnings per share and offset dilution when executives exercise stock options.  Until 1982, buybacks were uncommon and generally considered a form of market manipulation.  But when the Securities and Exchange Commission (SEC) adopted rule 10b-18 that year, it gave large companies a “safe harbor” to buy back stocks.

The Stock Buyback Accountability Act of 2023 is being introduced after President Biden called for it in his State of the Union address on the heels of a record year for stock buybacks, which topped $1.2 trillion, and recent reports that stock buybacks continue to be a popular option for highly-profitable corporations.

In January of 2023 alone, the value of announced stock buybacks more than tripled to $132 billion compared with the same period in 2022 - a record for the start of a year, according to data compiled by Birinyi Associates.

“Big corporations should never pay less in taxes than middle-class families. With the Inflation Reduction Act, we took the first steps to make sure corporations and Wall Street pay more of their fair share, but there is more work to do,” said Senator Brown. “While corporations are raising prices to pad their profits and reward executives, Congress needs to do our part to hold them accountable.”

“It is not lost on the American people that corporate profits have climbed right along with the prices that families have been paying for groceries, rent, gas and other basics over the last few years. To see big multinational corporations announcing record stock buybacks benefitting their executives and wealthy shareholders at a time when so many families are feeling squeezed by inflation is simply offensive,” Wyden said.

“Enacting this legislation would help workers and boost economic investment, while also reducing tax avoidance,” said Senator Reed.  “This is a commonsense proposal to ensure executives don’t benefit at the expense of workers and taxpayers.”

Senator Reed supported Senators Brown’s and Wyden’s successful effort to include a version of their Stock Buyback Accountability Act of 2021 in the Inflation Reduction Act, which for the first time, imposed a one percent excise tax on corporate stock buybacks.  This excise tax was in response to a 2017 tax law that delivered a massive tax windfall to wealthy corporations, leading to a record number of stock buybacks that enriched shareholders and CEOs instead of creating new jobs, easing prices, or raising workers’ wages.  To curb this trend, the bill requires corporations to pay a tax on the total amount they spend on stock buybacks.

The new legislation includes an improvement to rules for when a company buys back stock but then issues new stock and generally reduces the amount of its buyback tax – this is referred to as the “netting rule.” One significant source of new stock issuance is stock compensation for employees, and this netting rule creates a small incentive to share stock with the employees of a company. But some companies may abuse the netting rule by increasing stock-based compensation packages to their wealthy executives, rather than sharing stock with their workers. To minimize this impact, this provision would exclude the stock compensation to the top executives and highest paid employees from the netting rule. A similar rule in the tax code already makes a portion of this compensation non-deductible.

In addition to Brown, Wyden, and Reed, the measure is also cosponsored by U.S. Senators Brian Schatz (D-HI), Chris Van Hollen (D-MD), Ben Ray Luján (D-NM), and Tammy Baldwin (D-WI).