Dems take aim at stock option deduction

With deficit reduction all the rage now, a key Democratic senator is hoping for fresh momentum for his push to overhaul corporate tax deductions on stock options.

Sen. Carl Levin of Michigan announced on Friday that he was introducing, for a fifth time, legislation to fix what he says is a mismatch between accounting and tax rules on stock options. 

The bill, also backed by Sen. Sherrod Brown (D-Ohio), would bring in close to $25 billion over a decade in extra revenues, according to the Joint Committee on Taxation, and comes as policymakers are searching for ways to close yawning budget gaps.

“If we’re going to ask working families to make sacrifices to reduce our deficit, then we should be willing to ask corporations to forgo excessive tax breaks for stock options,” Brown said in a statement. 

Stock options, a popular way for corporations to compensate their executives, basically allow those officials to buy stocks at current prices, often for years into the future. 

Groups like the Business Roundtable have endorsed options as a logical way to pay executives, saying it links compensation to performance. (The idea being: The stock will rise or fall at least in part based on the performance of a company’s leadership.)

{mosads}Corporations generally expense stock options when they are granted. But, for tax purposes, the companies can deduct the options when they are exercised – at which point, the stock price will have often grown, leading to a larger deduction.

According to IRS data released by Levin, that policy boosted deductions from $12 billion to $61 billion between 2005 and 2009. In three of those years, around 250 companies took the vast majority of those deductions.

In a Friday statement, Levin, the chairman of the Senate’s Permanent Subcommittee on Investigations, called the current arrangement “a taxpayer subsidy for the pay of corporate executives.”

“It’s a tax break we can no longer afford and ought to end,” he added. 

Under Levin and Brown’s proposal, the amount a company deducted due to stock options could not be more than the amount in their accounting books. 

{mosads}The bill would also, among other things, let a corporation take a stock option deduction the same year the option was exercised, and bring stock options under a $1 million cap on deductions tied to executive compensation.

The measure also comes as lawmakers and administration officials continue to haggle over a deficit deal to raise the $14.3 trillion debt ceiling by the Aug. 2 deadline. 

A major sticking point in those negotiations has been taxes, with President Obama and other Democrats stressing that they believe high earners should contribute more revenues to paying down the national debt. 

For their part, Republicans have steadfastly stood against tax increases, though some GOP officials have said they were open to ditching certain tax credits and deductions. 

Earlier this week, Levin also unveiled his latest effort to curb corporate use of offshore tax loopholes. 

At the time, the Michigan Democrat said he hoped the drive to reduce deficits would give his tax haven legislation the final push it needed. The senator’s office has said he hopes the current climate will give the stock option measure a boost as well. 

Liberal groups like Citizens for Tax Justice and the AFL-CIO have also gotten behind the legislation. Rebecca Wilkins of CTJ added in a statement that the group would prefer scrapping the stock option deduction altogether.