Rubio Bill Limiting Buybacks Draws Republican Resistance

February 15, 2019

A week after Senate Democrats announced a bill targeting stock buybacks, Senator Marco Rubio (R-FL) announced via Twitter his intentions to introduce a bill that would tax buybacks the same as dividends to “give permanent preference to investments that will drive the creation of jobs [and] increases in wages.”

Sen. Rubio’s rationale:  The “justification for corporate buybacks is that the company has no better investment available.  This may be true for any company from time to time.  But what does it say when it is true for many companies year after year... [As currently written the tax code] discourages the best aspect of the free market by giving buybacks a deferral advantage over dividends or investments.”  This makes him the first Republican to criticize buybacks as excessive.

Bill falls flat with other Republicans:  Less than a week after Sens. Bernie Sanders (I-VT) and Chuck Schumer (D-NY) unveiled a buybacks bill which would make buybacks contingent on workforce investments, including a $15 minimum wage and paid time off with health benefits, fellow Republicans were quick to distance themselves from Rubio.

  • Sen. Pat Toomey (R-PA) called Rubio’s plan “fundamental[ly] flawed” for “inflating prices of shares at the expense of future productivity and job creation."

  • Sen. Rick Scott (R-FL) observed: “If companies can't figure out how to get a better return on the cash they have on their balance sheet, give it back to the shareholders."

Buybacks provide tax advantages, but only if ownership surrendered:  Currently, buybacks provide an avenue for companies to return capital to shareholders in exchange for surrendering their share ownership.  In contrast to dividends, which are a return on investment to shareholders and thus are taxed as income, buybacks are a combination of return of capital (which currently is not taxable) and income (which is taxed at capital gains rates) if the buyback price exceeds the stockholder’s initial investment.  Although details have not yet been released, the bill could tax the income at regular tax rates.  

Issue not going away:  With the 2020 elections getting closer every day, the hyper focus on buybacks will continue.  The question will be whether this is simply political rhetoric or if a specific policy proposal can pick up momentum.