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Restricting Stock Buybacks

Bernie Sanders and Chuck Schumer.
Sen. Bernie Sanders, I-Vt. (left) and Sen. Chuck Schumer, D-N.Y. Photo courtesy the Senate Democrats on Flickr.

Corporate stock buybacks are booming, and at least a couple of senators think someone ought to put a stop to it.

Sens. Chuck Schumer of New York and Bernie Sanders of Vermont wrote an opinion column for The New York Times explaining the logic behind legislation they plan to introduce that would impose limits on companies’ ability to buy back their own stock. The senators characterized stock buybacks as “an enormous problem for workers and for the long-term strength of the economy,” and noted that corporations collectively repurchased more than $1 trillion in stock over the course of 2018.

Schumer and Sanders’ proposed legislation would address this issue by implementing a checklist of criteria a company must meet before it could legally buy back its own stock. These include meeting wage minimums and providing a certain level of benefits, such as at least seven days of paid sick leave for workers. The specific details of the bill are still under development.

Depending on your politics, you may think that some of the suggested restrictions are, in isolation, good ideas. By and large, many Democrats are apt to be comfortable with forcing corporations to pay workers at least $15 per hour, for instance. But if it were to become law, this bill would represent a major change to American capitalism in a way that a simple tax hike or new minimum wage law would not. It is a terrible idea, regardless of politics.

Setting aside the significant questions of how these rules would be enforced and who would monitor companies’ required investments in workers and long-term growth, the plan set forth by Schumer and Sanders would heavily favor companies in industries that already offer relatively high compensation, like technology and finance. More critically, it would take the ability to make decisions about a company’s long-term financial health out of the hands of its leaders.

MarketWatch investigated which companies would be able to meet the standards laid out in the Times op-ed and found that, even allowing for the ambiguity surrounding requirements such as “decent pensions and more reliable health benefits,” few of the companies that repurchased shares in 2018 would be eligible to do so under this legislation. The two MarketWatch named were both large banks. Depending on implementation, this proposal could effectively result in a ban on stock buybacks for most corporations. Holman W. Jenkins, Jr. suggested in an opinion column for The Wall Street Journal that this plan might even encourage companies to quit the public market altogether, hastening a trend in the past couple of decades toward going private.

In fairness to Schumer and Sanders, the proposal is a reaction, if not a sensible one, to a real shift. Corporate stock buybacks have been on the rise for years, and after the 2017 Tax Cuts and Jobs Act, they noticeably spiked. As I have written before, the evidence suggests that many corporate leaders have treated the 2017 tax cut as a temporary windfall, rather than a new long-term baseline. While American businesses have also expanded hiring and capital investment in 2018, a survey from the National Association of Business Economics found that 84 percent of responding business said their plans for investment had not changed as a result of tax reform.

If you need evidence that recognition of the problem extends beyond Democratic lawmakers, consider Sen. Marco Rubio of Florida. Rubio, a Republican, has also publicly expressed concern over the level of buybacks following the passage of the TCJA. (He, like his fellow senators, wrote an op-ed outlining his plan, though his appeared in The Atlantic rather than the Times.) Instead of restricting buybacks through regulation, Rubio has proposed taxing buybacks more aggressively, while at the same time extending an existing provision to all companies to immediately deduct the cost of new investments. Full expensing would become permanent – it is currently slated to expire in 2022 – and buybacks would be treated like dividends for tax purposes, giving them no particular tax advantages. Rubio’s proposal is not as extreme as that of his colleagues, in that it does not dictate outright how a corporation should spend its cash. But Rubio’s plan does reflect an evidently bipartisan concern that the hoped-for business expansion following tax reform has not materialized to the extent Congress had hoped.

It is far from clear that Schumer and Sanders’ plan could pass at all. I think it is unlikely that the bill goes anywhere, at least in its current form. The senators may well know this – the plan, on its face, seems designed to help Democrats with upcoming campaigns more than to serve as a viable piece of legislation. The news cycle has largely moved on from this story. Let’s hope that the senators are equally willing to let it drop.

Vice President and Chief Investment Officer Paul Jacobs, of our Atlanta office, contributed several chapters to our firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55, including Chapter 12, “Retirement Plans;” Chapter 15, “Investment Approaches and Philosophy;” and Chapter 19, “A Second Act: Starting a New Venture.”

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