Earlier this month, Senators Bernie Sanders of Vermont and Chuck Schumer of New York floated a proposal that would limit stock buybacks by U.S. companies by banning such activity unless a company “invests in workers and communities.” While the senators have yet to spell out exactly what these requirements would be, their New York Times op-ed mentioned such things as “paying all workers at least $15 an hour, providing seven days of paid sick leave, and offering decent pensions and more reliable health benefits.”
Previous articles on GuruFocus have explored the issues with this surface-level legislation here, and have addressed the question of efficacy here. The market has largely chosen to ignore the proposal, suggesting that investors do not view it as politically feasible, and perhaps only see it as Democrats pandering to their own base. However, the broader concept may be attracting some bipartisan advocacy, as Republican Senator Marco Rubio of Florida recently voiced support for his own version of the proposal.
What is Rubio’s plan?
In a recent report, Senator Rubio suggested eliminating the preferential treatment afforded to share buybacks by taxing them as dividend payments, which are currently subject to higher effective rates. The 2017 GOP, reform which lowered the corporate tax rate from 35% to 21%, has been cited as one of the driving factors for the explosion in stock buybacks that has occured over the course of the last year. Although he himself reluctantly voted for the tax reform in 2017, Senator Rubio now seems to agree with his Democratic colleagues that stock buybacks have shifted capital too far in favor of shareholders at the expense of workers and business reinvestment.
Another caveat of the Republican senator’s plan is that it would further incentivize capital investment. The 2017 tax law includes a provision that allows companies to make capital investment tax-deductible, which is effective until 2022. Rubio’s proposal would extend that provision indefinitely.
This is certainly a less heavy-handed approach than the one proposed by Senators Sanders and Schumer. Ostensibly, it seeks to remove what some see as the unfair tax treatment enjoyed by stock buybacks, while encouraging capital investment, which most long-term investors would view as a good thing. It also sidesteps the concerns around regulatory overreach that will come attached with the Democratic plan of banning buybacks outright unless companies meet some nebulous set of criteria.
What does this mean for investors?
More than anything else, this could end up being a savvy political move for Rubio, who is probably eyeing his long-term presidential ambitions. It is clear that there is dissatisfaction on both sides of the political aisle over the rising level of wealth inequality in the U.S., and the Republican senator is trying to make sure his party does not cede that talking point to the Democrats.
Investors and executives should do well to take note of this development -- it could be a sign that some type of reform that would end the buyback bonanza may be in the offing. But, there are also reasons investors might want to get behind Rubio’s plan, as it represents a much less punitive measure than the alternative.
Disclosure: The author owns no stocks mentioned.
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