The Legislature is putting together a package of incentives for the semiconductor industry. (Ron Cooper/Oregon Capital Chronicle)
Imagine you have a wealthy cousin who comes asking for money. He brags about how much he spends on lavish parties, yet he begs for cash to fix up his house. “You gotta be kidding me,” you’d probably say.
That’s also what the Oregon Legislature’s response should be to the big corporations that are coming in asking for research and development dollars.
Right now, Oregon lawmakers are discussing whether to bring back a research and development tax credit that expired a few years back. Lawmakers let the credit lapse, seeing insufficient evidence that it incentivized companies to do something they otherwise wouldn’t do.
But today, the R&D tax credit is back on the table. It’s a potential item in an incentives package the Legislature is putting together to attract money from the CHIPS Act, the federal legislation designed to bolster domestic semiconductor manufacturing. The Oregon business lobby has been pushing to bring back the R&D tax credit for any kind of company, not just semiconductor companies, and also to make it far more generous than its prior incarnation.
The reasons to doubt the efficacy of the R&D tax credit haven’t gone away. But even if lawmakers choose to ignore the lack of evidence that an R&D tax credit fosters investment that otherwise wouldn’t occur, they should at least deny it to corporations that engage in stock buybacks.
In stock buybacks, corporations use their cash to purchase their own shares as a way to prop up the value of the stock. This use of corporate resources is a boon to shareholders, including company executives who derive much of their compensation in the form of stock — the same people who decide whether to pursue stock buybacks.
Money spent on stock buybacks is money the company could have spent on research and development, new factories or better wages for workers.
In recent years, big corporations have been throwing lavish stock buyback parties. In the 12-month period ending March 2022, the corporations that make up the S&P 500 together spent nearly a trillion dollars buying their own shares, setting a new record.
Among the companies partying hard are some that have been lobbying the Oregon Legislature to reinstate the R&D tax credit. Since 2005, Intel has spent more than $100 billion buying its own shares, at times spending more on stock buybacks than on research and development. According to some analysts, Intel’s stock buyback binge cost the company its leadership in semiconductor manufacturing.
Similarly, Hewlett-Packard “has spent the past two years hurling money at shareholders in the form of share buybacks,” according to news reports. The company even went into debt to finance more than $10 billion of stock purchases, even as sales weakend.
Earlier this year, a new federal tax of 1% on stock buybacks went into effect. But so far, corporations seem undeterred in their stock buying habits, prompting the Biden administration to propose raising the tax to 4%. The White House has also made it clear it will look unfavorably at semiconductor companies engaging in stock buybacks when it comes to reviewing their applications for CHIPS Act dollars
These steps by the federal government make sense, given the damage that flows from stock buybacks. With so much corporate resources going to prop up stock prices, it’s not surprising to find research showing that stock buybacks suppress corporate innovation. And given that corporate stock is concentrated in the hands of wealthy, white shareholders, stock buybacks worsen economic inequality and racial inequality.
Oregon, too, should refuse to indulge companies playing the stock buyback game. Stock buybacks are a clear signal that corporations have plenty of money to invest in research and development if they so choose, so any money that Oregon hands to them is pure waste. And whatever amount of money Oregon gives these companies – the current bill has a maximum credit of $9 million – is peanuts compared to the billions they fritter away buying their own shares.
The Oregon Legislature let the R&D tax credit expire a few years back because there was no evidence that it incentivized investment. Lawmakers today should heed that lesson.
But even if they don’t, they should at least leave out corporations spending money on stock buybacks, making it clear that Oregon won’t use public resources to subsidize shareholder giveaways.
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