A pair of Senate Democrats have introduced legislation to end unlimited tax write-offs on performance-based executive pay, allowing publicly traded corporations to deduct only up to $1 million in pay per employee.
Senators Jack Reed, D-R.I., and Richard Blumenthal, D-Conn., introduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, S.1476, on Friday. They noted that in 1993, Congress limited the deductibility of certain executive pay to $1 million, with an exception for performance-based compensation. As a result, over the last two decades, compensation packages for top executives have often been structured to avoid paying taxes on corporate earnings.
The Economic Policy Institute estimates that between 2007 and 2010, a total of $121.5 billion in executive compensation was deductible from corporate earnings, and roughly 55 percent of this total was for performance-based compensation. According to an Institute for Policy Studies report, 25 of the 100 highest-paid corporate chief executives in the United States took home more in pay than their company paid in 2010 federal income taxes. And The New York Times noted that median CEO pay in 2012 for the top 200 CEOs at public companies with at least $1 billion in revenue was $15.1 million.
The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act would allow a publicly traded corporation to deduct only up to $1 million in pay per employee. The bill would broaden the scope of corporations subject to the restrictions in section 162(m) of the Tax Code from “publically held corporations that issue any class of common equity securities registered under section 12 of the Securities Exchange Act of 1934 (the ’34 Act)” to “any corporation that qualifies as an issuer whose securities are registered under section 12 of the ‘34 Act or that is required to file reports under section 15(d) of the '34 Act.”
The effect would be to capture all corporations that file periodic reports, such as quarterly and annual filings, with the Securities and Exchange Commission for the benefit of investors. The proposed legislation would also broaden the number of employees subject to the restrictions from “the CEO and the 3 highest compensated officers” to “all current and former employees.” It would also eliminate the exception for commission-based remuneration and for performance-based compensation.
“Businesses and their shareholders—not the government—should determine executive pay,” Reed said in a statement. “But the federal government should ensure that American taxpayers aren’t subsidizing multimillion-dollar bonuses. Under current law, this performance-based corporate tax loophole helps push up the debt and forces the middle class to subsidize executive pay at some of the most profitable companies out there. The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act will restore fairness to the tax code and ensure corporations, not taxpayers, are the ones who pay for multimillion-dollar bonuses.”
Over a 10-year window, the Joint Committee on Taxation estimates the legislation would close a loophole that costs U.S. taxpayers over $50 billion.
“Even as income inequality rises and middle-class wages stagnate, American taxpayers are subsidizing tens of billions of dollars in corporate bonuses,” said Blumenthal. “We should be investing in working families, not using taxpayer dollars for tax breaks to corporations that overpay their executives. Corporations should be free to pay their executives whatever they wish, just not at the expense of American taxpayers—many struggling to make ends meet.”
“In many ways our corporate tax system is broken and this is a common-sense solution to help fix it,” said Reed. “I hope we can get bipartisan support for closing this loophole.”
He and Blumenthal pointed out that in 2006, a leading Republican, Senator Chuck Grassley, R-Iowa, who was then chairman of the Senate Finance Committee, said, “162(m) is broken. … It was well-intentioned. But it really hasn’t worked at all. Companies have found it easy to get around the law. It has more holes than Swiss cheese. And it seems to have encouraged the options industry. These sophisticated folks are working with Swiss watch-like devices to game this Swiss cheese-like rule.”