Stock Buyback Excise Tax | Oil and Gas Industry Windfall Taxes

In response to the Strait of Hormuz crisis, Sens. Chuck Schumer (D-NY), Ron Wyden (D-OR), and Michael Bennet (D-CO) have introduced the Taxing Buybacks from Big Oil Windfalls Act.

Not to be confused with Sen. Sheldon Whitehouse (D-RI)’s Big Oil Windfall Profits Tax, which would introduce a 50 percent excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on the gap between the quarterly average crude oil price and the average crude oil price in 2025, this proposal (also cosponsored by Sen. Whitehouse) would raise the stock buyback excise taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. from 1 percent to 25 percent for large oil and gas companies. While they are different proposals, they rely on some similar, faulty assumptions.

Stock Buybacks

When businesses earn profits, they can either reinvest them in their business or return them to shareholders. Profits can return to shareholders in two major ways: issue dividends (giving all shareholders profits directly), or buy back shares (giving profits to only shareholders who choose to sell back their stock).

Firms may choose stock buybacks instead of dividends as a way to return cash to shareholders for a couple of reasons. For one, stock buybacks are more flexible and do not set up an expectation that the distribution will occur regularly. Stock buybacks also have a tax advantage over dividends for shareholders, as capital gains taxes can be delayed or avoided in ways dividend taxes cannot.

Some analysts see stock buybacks as subtracting from investment. While that may seem true at a firm level, it is a category error at the level of the overall economy. A company returns profits to shareholders once it has exhausted its viable investment opportunities. Returning profits to shareholders frees up those profits to finance potentially viable investments elsewhere in the economy, and signals that the company is not going to waste shareholder cash by holding onto it even though it has no viable investment opportunities.

The Stock Buyback Tax

The InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin Reduction Act of 2022 introduced a 1 percent excise tax on stock buybacks. Taxing stock buybacks might sound like a way to encourage companies to reinvest instead. However, a tax on stock buybacks actually hits investment indirectly. By taxing the return individuals receive from investment, the buyback tax reduces the after-tax return shareholders receive, thus making financing investment less desirable.

While the stock buyback tax may have been intended, in part, to reduce the disparity between shareholder level taxes on dividends versus capital gains, it creates more distortions than it resolves. It increases the bias for debt over equity financing, it further favors pass-through businesses over C-corporations, and it favors privately held corporations over publicly traded ones. Broader reforms to business income taxes would be a better solution. Further, the shareholder level argument is not at all relevant to the case of the industry-specific proposal being introduced.

The New Proposal

The Taxing Buybacks from Big Oil Windfalls Act would raise the existing stock buyback tax from 1 percent to 25 percent for applicable oil and gas corporations: companies must have average annual revenues over $1 billion over the preceding three years and be engaged in oil and gas production, refining, processing, transportation, or distribution.

The tax would apply to stock buybacks that occur between when the law passes and when the retail price of gasoline drops below $2.937 per gallon for five consecutive weeks.

Its Challenges

The oil and gas stock buybacks tax violates several core principles of sound policymaking. For one, it is not neutral: there is no justification for taxing buybacks in one industry at a 25 percent rate while taxing buybacks in all others at only 1 percent. It is also not stable. Introducing a dramatically higher rate for a brief period based on the fluctuations of gas prices is not a recipe for predictability.

One might argue the tax’s temporary nature is an advantage—namely that the tax would mostly impact returns to old investments but not penalize new investments. This is a similar argument to the case for so-called windfall profits taxes.

This defense has two problems.

First, the tax is open-ended. If oil and gas companies anticipate prices remaining elevated, they would also expect the special buyback tax to remain active, and therefore it would reduce the returns to any potential investment in new production capacity.

Second, the reason one invests in a highly volatile industry like oil and gas production is because some periods will have very high prices. Those high prices offset years of low returns or losses—in the case of the oil and gas industry, the post-shale boom price collapse, and the COVID pandemic. If investors anticipate that the government will enact punitive taxes during high-price periods, then the boons of the high-price periods may not be enough to offset the lows of the low-price periods.

The Bigger Picture

The “solution” for high oil and gas company profits already exists: the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.. When profits are dramatically high in a particular industry, then their corporate tax liability rises proportionately. There is no need for bespoke solutions.