WASHINGTON (Reuters) – A tax code loophole that gives corporations large deductions on executive stock options would be closed under legislation unveiled on Friday.
As Congress and the White House struggled with budget issues, Democratic Senator Carl Levin offered the measure, calling it a promising revenue-raiser that would discontinue “a taxpayer subsidy for the pay of corporate executives.”
“It’s a tax break we can no longer afford and ought to end,” said Levin, who has introduced similar bills four times previously, going back to 1997, with no success so far.
By ending a disparity between the tax-deduction value of stock options and their financial book value, the measure would raise $25 billion in new government revenue over 10 years.
Levin was joined in sponsoring the bill by Democratic Senator Sherrod Brown. No parallel measure has been offered in the Republican-controlled U.S. House of Representatives, though there have been companion House bills filed in the past.
The Levin-Brown bill joins a long list of proposals to shut down corporate tax breaks. Some have been part of the urgent debt ceiling talks, but none has gained immediate traction.
Over the next year or so, analysts expect only initial sparring on Capitol Hill over comprehensive tax reform, with the main event likely waiting until after the 2012 elections.
When that effort, which has bipartisan support, gets under way in earnest, the so-called “book-tax” options loophole may be among tax breaks eyed for closure in exchange for a cut in the corporate tax rate being sought by business lobbyists.
In a lucrative quirk in the tax code, corporations routinely show one set of figures on executive stock options to tax authorities, and another set to shareholders.
The difference between the two “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,” Levin said.
A stock option gives the holder the right to buy a certain number of shares at a preset price for a specified period, usually 10 years. Top corporate executives receive boatloads of stock options as part of their compensation.
Forbes magazine last year reported that the average pay of CEOs at the 500 largest U.S. corporations was $9 million, with 30 percent of that, on average, coming from stock options.
Options are typically granted to executives with an exercise price equal to the market price of the shares on the grant date. Later, should the market price rise above the exercise price, the holder would profit by buying the shares at the exercise price and selling them at the market price.
Companies are required under 2005 rules to book an expense equal to the fair value of stock options on the grant date. But under the tax code, companies can claim a deduction for options based on gains realized on the exercise date.
The disparity means that, under the right circumstances, tax deductions for stock options can be far larger than the costs recorded for the same options on the financial books.
The Levin-Brown bill would force corporations to equalize the stock option expenses they deduct from taxes with the option expenses they record on the books.
“Requiring corporations to limit their stock option tax deductions to the expenses shown on their books would eliminate billions of dollars in unwarranted corporate tax deductions,” Levin said. “It makes no sense to have two sets of rules.”
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