Lawmaker to Push
Options-Tax Overhaul
By KARA SCANNELL and SARAH LUECK
June 5, 2007; Page A2
WASHINGTON -- A senior Senate Democrat, aiming to rein
in what he calls excessive executive pay and to help increase federal
revenue, wants to overhaul the corporate-tax treatment of some stock
options.
Sen. Carl Levin (D., Mich.) is considering legislation
that would change the tax code to align it with accounting rules that
govern how options are booked on corporate balance sheets. The Permanent
Subcommittee on Investigations, which Sen. Levin oversees, is holding a
hearing today to discuss the difference in what companies report to
shareholders and what is reported to the Internal Revenue Service. Mr.
Levin's staff hasn't yet drafted a bill, but plans to do so.
When a company grants an employee stock options -- the
option to buy a stock at a set price -- it treats the option as a
business expense. When the employee exercises the options, sometimes
years later, they have often increased in value, and the company may
deduct that larger sum from taxable income. The difference in how stock
options are treated is costing the Treasury Department billions of
dollars a year, Mr. Levin said.
The subcommittee asked nine companies to calculate what
they would have expensed for stock options from 2002-06 (even though the
law didn't require options to be expensed until 2005) as well as what
they took as tax deductions. Tax deductions for the companies totaled $1
billion, nearly seven times more than the expense taken on the corporate
books. Mr. Levin tried in 1997 and 2003 to alter the tax code, but with
Democratic control of Congress and a 2005 change in accounting rules, he
could be more successful this time.
![[Carl Levin]](HC-GF487_Levin_20051021132058.gif)
Other lawmakers are looking for ways to raise revenue
to fund various initiatives. Pay-as-you-go budget rules in the Senate
and House require any spending or tax cuts to be offset with spending
cuts or tax increases elsewhere. By one estimate, aligning the
difference in the treatment of stock options could result in $100
billion in revenue during four years, according to one person with
knowledge of the matter.
Another idea under consideration is the tax treatment
of "carried interest," particularly as it pertains to the private-equity
and hedge-fund managers. The managers often receive a large part of
their compensation in the form of an interest in future profits, known
as the carried interest, which under current law is taxed at the 15%
long-term capital-gains rate instead of regular income-tax rates of as
much as 35%. Changes to this structure haven't been proposed, but they
would potentially raise significant amounts.
Meanwhile, amid rising concern about income inequality,
Congress has taken aim at executive-pay packages, with the Senate
passage earlier this year of a limit on the amount employees could place
in certain tax-deferred compensation plans. The provision, which was
included to fund business-tax breaks attached to an increase in the
federal minimum wage, didn't survive negotiations with the House. It
could resurface.
Companies "are benefiting from an outdated and overly
generous stock-option tax rule that produces tax deductions that often
far exceed the companies' reported expenses," Sen. Levin said. Stock
options are the only form of compensation where tax deductions exceed
what is expensed on corporate balance sheets. Changes to the tax code
would affect nonqualified options and not change the special tax
considerations given to incentive-based stock options.
Write to Kara Scannell at
kara.scannell@wsj.com2
and Sarah Lueck at
sarah.lueck@wsj.com3
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