A new Senate proposal would sharply increase the stock buyback excise tax for large oil and gas companies in response to the Strait of Hormuz crisis. The Taxing Buybacks from Big Oil Windfalls Act would raise the existing buyback tax from 1% to 25% for certain oil and gas corporations.
The proposal was introduced by Sens. Chuck Schumer, Ron Wyden, and Michael Bennet, and is also cosponsored by Sen. Sheldon Whitehouse. It is separate from Whitehouse’s Big Oil Windfall Profits Tax proposal, which would impose a 50% excise tax on the gap between the quarterly average crude oil price and the average crude oil price in 2025.
How stock buybacks work
When companies earn profits, they can either reinvest those profits in the business or return them to shareholders. The two main ways to return profits are:
- dividends, which distribute profits directly to shareholders;
- stock buybacks, where the company repurchases shares from shareholders who choose to sell.
Companies may prefer buybacks because they are more flexible than dividends and do not create the same expectation of regular payments. Buybacks can also offer tax advantages to shareholders because capital gains taxes may be delayed or avoided in ways dividend taxes cannot.
The article argues that viewing buybacks as automatically reducing investment is a mistake at the economy-wide level. A company may return profits to shareholders after exhausting its own viable investment opportunities. Those returned funds can then be invested elsewhere in the economy.
Existing stock buyback tax
The Inflation Reduction Act of 2022 introduced a 1% excise tax on stock buybacks.
The article argues that taxing stock buybacks does not simply encourage reinvestment. Instead, it can reduce the after-tax return shareholders receive from investment, making investment financing less attractive.
It also argues that the buyback tax creates several distortions:
- it increases the bias toward debt over equity financing;
- it favors pass-through businesses over C-corporations;
- it favors privately held corporations over publicly traded corporations.
The article says broader business income tax reform would be a better way to address differences between dividend and capital gains taxation.
What the new oil and gas proposal would do
The Taxing Buybacks from Big Oil Windfalls Act would raise the stock buyback excise tax from 1% to 25% for applicable oil and gas corporations.
Covered companies would need to meet two conditions:
- average annual revenues above $1 billion over the previous three years;
- involvement in oil and gas production, refining, processing, transportation, or distribution.
The higher tax would apply to stock buybacks occurring after the law passes and would remain in place until the retail gasoline price falls below $2.937 per gallon for five consecutive weeks.
Policy concerns raised
The article argues that the proposal violates neutrality because it would tax buybacks in one industry at 25% while buybacks in other industries remain taxed at 1%.
It also argues that the tax would be unstable because the higher rate would apply for an uncertain period tied to gasoline price fluctuations.
A possible defense of the proposal is that it is temporary and would mainly affect returns to old investments rather than new investments. The article compares this to arguments used for windfall profits taxes, but says that defense has two problems.
First, the tax is open-ended. If oil and gas companies expect prices to stay elevated, they may also expect the special buyback tax to remain active, reducing expected returns on new production investment.
Second, oil and gas is a volatile industry. High-price periods can offset years of low returns or losses, including periods such as the post-shale boom price collapse and the COVID pandemic. If investors expect punitive taxes during high-price periods, the gains during those periods may not be enough to justify the risks of investing through low-price periods.
Existing tax treatment of high profits
The article argues that high oil and gas profits are already addressed through the corporate income tax. When profits rise sharply in an industry, corporate tax liability rises with them.
The main conclusion is that an industry-specific 25% stock buyback tax would create instability and unequal treatment, while the corporate income tax already captures higher revenue when company profits increase.
Source article: taxfoundation.org
