A new bill from a pair of Democratic senators would eliminate a tax break on corporate stock options.
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The bill was introduced Friday by Sen. Carl Levin, D-Mich., and Sherrod Brown, D-Ohio. It would end the ability for corporations to deduct expenses for stock options from their taxes at greater amounts than the expenses in their financial statements. The measure would reduce the federal budget deficit by $24.6 billion over 10 years, according to the Joint Committee on Taxation.
“Current stock option accounting and tax rules are out of kilter, lead to corporations reporting inconsistent stock option expenses on their tax returns versus their financial books, and often produce huge tax windfalls for corporations that pay their executives with large stock option grants,” Levin said in a statement. “This windfall produces excess corporate tax deductions totaling as much as $60 billion in a single year, which costs the U.S. treasury billions of dollars a year in lost tax revenue. In effect, it’s a taxpayer subsidy for the pay of corporate executives. It’s a tax break we can no longer afford and ought to end.”
The Ending Excessive Corporate Deductions for Stock Options Act, also known as S. 1375, would require that corporate tax deductions for stock options not exceed the expense shown on corporate financial reports filed with the Securities and Exchange Commission. The Joint Committee on Taxation has estimated that ending this tax break would raise $24.6 billion in corporate tax revenues over ten years.
According to IRS data released by Levin, from 2005 to 2009, corporations as a whole took U.S. tax deductions for stock options that were billions of dollars larger than the expenses shown on their financial statements, ranging from $12 billion to $61 billion a year. In 2005, 2007, and 2008, about three-quarters of all the excess deductions were claimed by just 250 corporations.
A variety of organizations have endorsed the bill, including the AFL-CIO, Citizens for Tax Justice, Consumer Federation of America, OMB Watch, and Tax Justice Network- USA.
The prospects for passing the bill in Congress, where most Republicans remain staunchly opposed to tax increases of any kind, are remote. However, the proposal could play a part in the ongoing debate over reducing the budget deficit. This week, Republicans plan to vote on a bill providing a Balanced Budget Amendment that would require a supermajority in Congress to agree to any future tax increases.
The Levin-Brown bill would have corporations deduct stock option compensation on their tax returns in the same year it is recorded on the corporate books, without waiting for the options to be exercised; ensure that research tax credits employ the same method for calculating stock option pay expenses when computing wages eligible for the tax credit.
The bill would leave unchanged the stock option compensation rules for individuals, or for incentive stock options under Section 422 of the Tax Code, which may be used by startup companies and other small businesses. The proposed legislation would also create a transition rule to ensure stock options granted before the enactment date of the law are tax deductible; and make stock option deductions subject to the existing $1 million cap on corporate tax deductions for compensation paid to top executives of publicly held corporations.