What does Washington have to say about ESOPs? This blog post will discuss the current proposed legislation, some indicators of future ESOP policy, and provide links to some additional ESOP information:
Current Proposed Legislation
There are currently two active pieces of proposed legislation, which are both positive for ESOPs:
The ESOP Promotion and Improvement Act of 2007
The United States Employee Ownership Bank Act
Indicators of Future ESOP Policy
- The Congressional Budget Office (CBO) Recommends Repealing 404(k) (February 2007)
As discussed in the following posts, the CBO recommended repealing Internal Revenue Section 404(k):
CBO Update - Key Congressional Players
Update on Proposal to Repeal 404(k) - Letter to the CBO
The Congressional Budget Office Recommends Repealing 404(k)
- Presidential Panel on Federal Tax Reform (Clarified February 2007)
As discussed in this post: Clarification of Save At Work Proposal, the initial Presidential Panel on Federal Tax Reform proposed replacing the current retirement plan structure with Employee Retirement Savings Accounts (ERSAs), and did not specifically address ESOPs. While the 2008 proposed budget clarified that this did not include ESOPs, it left many questions unanswered.
- Treasury Conference on Business Taxation and Global Competitiveness (July 2007)
The U.S. Department of the Treasury prepared a background paper to suggest some ways to reduce corporate taxes to make the United States more competitive in the global economy. The background paper was released on July 23, 2007 in preparation for a July 26 conference. According to the press release:
“The paper details:
* the extent to which special provisions narrow the business tax base;
* the importance of the non-corporate sector generally subject to the individual tax rather than the corporate tax;
* the various ways the tax system distorts economic decisions;
* and how the level of U.S. tax compares with our major trading partners (G7, OECD, and emerging market countries).
The paper also discusses the U.S. system for taxing international income and examines how that affects business decisions.”
The report provides that if the “special provisions” were eliminated, the corporate tax rate could be reduced from 35% to 27% without affecting overall tax revenue. One of the “special provisions” mentioned is “Special ESOP Rules”. The “Special ESOP Rules” make up $23 billion of the $1,241 trillion (1.85%) of “special provisions”.
The ESOP Association provides regular updates on the status of ESOP rules and regulations. The August 2007 ESOP Report summarized the Treasury Department’s suggestion as follows:
“…it seems that the Treasury Department suggestion to repeal ESOPs to increase U.S. competitiveness is undeniably ridiculous on its face as 30 years of research demonstrates that ESOP companies are more competitive than non-ESOP companies.”
- Bush May Try to Cut Corporate Tax Rates (August 2007)
“"Our tax structure makes us less competitive, and if we want to be a competitive nation, we've got to analyze a lot of things, including taxes, dependence on oil or good education policy," Bush said. "And so we will work through possible suggestions for Congress."
Now he is focusing strictly on the corporate side of the code. A "determinant factor" in deciding whether to go forward, he said, will be whether advisers can craft a revenue-neutral plan, neither raising nor decreasing overall taxes.”
The above-mentioned ESOP Report provided some commentary:
"“This is very troubling to see,” said J. Michael Keeling, President of The ESOP Association. “While this Background Paper is not a proposal, it has obviously been picked up by the Administration as a part of a possible corporate tax package. In fact, it borders on the mind boggling to repeal incentives for ESOP creation in the name of increasing American competitiveness in the world. I calculate eliminating the ESOP tax incentive would permit a seven on-hundredths reduction in the corporate tax rate, or about $650 per $1 million in tax liability.”"
Additional ESOP Information
Here are two of many blog postings on this site documenting the research and benefits of ESOPs to companies, employees, and society:
Employee Ownership and Corporate Performance
The Benefits of ESOPs and Employee Ownership to Companies
Also, here are some links to recent ESOPs In the News:
ESOP Association Blog/In The News: Employee Ownership, Satisfaction, Competence, and Experimentation Culture/Countrywide Financial Stock Drop Lawsuit
In the News: Successful Employee Owned Grocer/Using an ESOP to Avoid Cutting Staff
Here are some links to the leading employee ownership information sites:
The National Center for Employee Ownership (NCEO)
The ESOP Association
