A tax on stock buybacks will likely have a marginal impact on banks' capital management decisions, but it could lead to companies repurchasing shares sooner than expected to get ahead of the new expense.
The Inflation Reduction Act, signed into law on Aug. 16, calls for a 1% excise tax on most stock buybacks valued at more than $1 million by publicly traded domestic companies. It's scheduled to take effect on stock repurchases after Dec. 31, and some executives will want to buy back shares before the tax goes into place.
"We will see a boom in stock buybacks before the end of the year," James Lucier, managing director at Capital Alpha Partners LLC, wrote in an email.
Still, Lucier said the 1% tax is nominal, and it will not make a big difference for capital management decisions. However, it has the potential to make other options a bit more attractive.
"Perhaps M&A [will get] some more attention," Lucier said.
Matthew Veneri, head of investment banking at Janney Montgomery Scott LLC, said he does not think the tax will change strategic objectives much.
"That 1% is just going to be an additional minor cost that they're going to put into the formula when they're looking at analyzing a buyback versus an alternative," Veneri said in an interview. "I don't think it'll deter them too much from continuing if they've been active in that capacity."
Others agreed that the tax might only slightly tip the scales in favor of an acquisition.
Details of potential deals themselves would affect banks' decisions about whether to engage in M&A or buy back stock, though the tax could push banks in the direction of M&A.
"I think a lot of it has to do with the economics of the deal," Robert Lickwar, a tax partner at UHY LLP, said in an interview. "So you're going to find situations where repurchases may very well be the only viable option, so I wouldn't rule repurchases out altogether. … I think you'll see more of a move towards M&A."
M&A decisions are primarily driven by strategic and financial considerations, Venkat Badinehal, head of the financial institutions group within global investment banking at RBC Capital Markets LLC, said in an interview.
"Assuming those criteria are met, this change might marginally make a strategic transaction more favorable versus a buyback," Badinehal said.
Other criteria — such as broader economic factors or how much repurchasing of shares a company has done recently — might have a greater impact on buyback decisions than the tax.
"More banks might take into consideration a potential deterioration of the economy and credit environment to determine how aggressive to be on buybacks," Badinehal added in an email.
Certain stock acquisitions by specified affiliates are expected to be treated as repurchases under the new law. The tax could even apply to M&A deals, such as if there is a cash consideration, a special purpose acquisition company or a spinoff, UHY's Lickwar said.
Lickwar said he expects the IRS to issue a notification before the end of the year on "safe harbors" regarding situations in which there are questions, such as whether whole transactions would be subject to the tax when there is a cash consideration for part. A safe harbor is a provision that protects against liability. This buyback tax provision is likely to be a top priority for the IRS for issuing guidance.
Edward Mills, managing director and Washington policy analyst at Raymond James & Associates Inc., doubts the tax in its current form would have a big impact on strategic thinking. But he noted that it is possible the tax could eventually get more expensive.
"The only concern I do have would be in the bucket of, once there is a tax, the possibility of it increasing over time is always a threat," Mills said in an interview.