Democrats pass $739 billion tax hike, including stock buybacks

Senate Democrats passed a bill that includes one of the biggest tax hikes in decades, including a new levy for corporations that repurchase their own stock.

The Inflation Reduction Act of 2022, passed along party lines with Democrats using the budget reconciliation process, would raise an estimated $739 billion over the next decade, with the revenues going toward initiatives to combat climate change and curb pharmaceutical prices, as well as efforts to reduce the nation's $30 trillion debt.

It includes $433 billion in new spending, while around $300 billion of the new revenue raised would go toward paying down the nation's deficit.

New levies on wealthy businesses are one of the main revenue raisers, including a 1% excise tax that is poised to take effect in 2023. Democrats, who estimated that the new tax will raise $74 billion over the next decade, are hoping to slow down companies' tendency to buy back their own stock from investors.

Since 1982 companies have been allowed to buy their own shares, and the practice has become commonplace on Wall Street. According to the SEC, there was a record $1 trillion drop in stock buybacks in the year 2019. In the first three months of 2022, the buybacks hit a record $281 billion, according to Howard Silverblatt, S&P analyst. They were down 17.4% in the second quarter.

Senate Majority Leader Chuck Schumer, D-N. Y., said I hate stock buybacks. I think they are one of the most self-serving things that corporate America does. The bill also imposes a 15% minimum tax on corporations based on profits they publicly report on their financial statements to shareholders. The minimum book tax would only apply to companies with more than $1 billion in income. The levy will affect about 200 of the country's largest corporations with profits over $1 billion and pay less than the current 21% rate for businesses, according to Democrats.

Experts expect the two taxes to drag on 2023 earnings, with Goldman Sachs forecasting a 1.5% decline in S&P 500 companies. The tax rate is expected to hurt industries like IT and health care because of the low earnings.

UBS strategists, led by Solita Marcelli, predicted that the new taxes would have a minimal 1% drag on S&P 500 earnings per share, although some companies will be more affected than others. The bill is going to the House for a vote that could happen as soon as Friday. President Biden will sign it into law.