U.S. Sens. Jack Reed (D-RI) and Richard Blumenthal (D-CT) want to stop unlimited corporate tax write-offs on CEO performance-based pay, which leaves taxpayers holding a $5 billion tab each year.
The two senators introduced a bill Friday that would limit the tax deductibility of executive pay to $1 million and eliminate the exception for commission-based and performance-based compensation.
The bill, the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act, S.1476, would expand the restrictions to all current and former employees of all corporations that file periodic reports with the U.S. Securities and Exchange Commission (SEC).
The Joint Committee on Taxation estimates the legislation will rein in $50 billion in tax revenue over a 10-year period, the senators said.
“Even as income inequality rises and middle-class wages stagnate, American taxpayers are subsidizing tens of billions of dollars in corporate bonuses,” Blumenthal said in a statement. “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.”
The “major loophole” in the current corporate tax law first began in 1993 when Congress capped the deductibility of certain executive pay to $1 million. The law allowed an exception, however, for performance-based pay, including stock options, non-equity incentive plans and stock appreciation rights, as part of Section 162(m) of the Internal Revenue Code. As it stands, unlimited amounts can be deducted off corporations’ income taxes for performance-based executive pay expenses.
As a result of the law, more executive compensation packages have been structured to meet the performance-based exception as a way to avoid paying taxes on corporate earnings.
Under the senators' proposed measure, publicly traded corporations would be allowed to deduct only up to $1 million in combined performance-based and salary pay per employee.
As a 2012 study by the Economic Policy Institute pointed out, a total of $121.5 billion in executive pay was deductible from corporate earnings between 2007 and 2010, with about 55 percent of that sum for performance-based compensation.
In 2006, Sen. Chuck Grassley (R-IA), who was then the chair of the Senate Committee on Finance, said 162(m) is “broken.”
“It was well-intentioned. But it really hasn’t worked at all,” Grassley said at the time. “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.”
It’s also important to note that in 2012, the median pay for the top 200 CEOs at public companies with at least $1 billion in revenue was $15.1 million, a 16 percent jump from 2011, the New York Times reported.
As Progress Illinois has noted, the average CEO made 354 times what the typical worker made in 2012.
The Institute for Policy Studies and the Campaign for America’s Future issued a report in May that took a deeper look at the executive pay loophole's cost to taxpayers.
The report found that between 2009 and 2011, 90 publicly held corporate member firms in the CEO lobby group Fix the Debt saw $953 million in tax write offs as a result of using the performance-based tax exemptions for their executive pay.
“If Fix the Debt’s CEOs really wanted to fix the debt, they wouldn’t be lobbying for lower tax rates – even as they take advantage of tax loopholes that allow their companies to pay them incredibly lavishly,” Roger Hickey, co-director of the Campaign for America’s Future, said in a statement following the report's release. “Clearly they want austerity for hard working Americans, but no sacrifices at all for CEOs.”
During the same time period, the health care company UnitedHealth Group saw a $68 million taxpayer subsidy for its CEO Stephen Hemsley’s performance-based pay, according to the report. Discovery Communications, the media and entertainment company, also raked in $37 million from the loophole for its CEO David Zaslav's compensation between 2009 and 2011.
“In many ways our corporate tax system is broken and this is a common-sense solution to help fix it,” Reed said via statement. “I hope we can get bipartisan support for closing this loophole.”