Stock Options Among Tax Breaks Democrats Target In Budget Talks
08 November 2013
Posted by: Author: Heidi Przybyla
Author: Heidi Przybyla (Bloomberg)
Executive stock options, corporate
jets and the tax break enjoyed by hedge-fund managers are among
the targets for Democratic lawmakers seeking to negotiate a
budget deal by next month.
The Democrats’ list of options, obtained by Bloomberg News,
sets the stage for a renewed clash with Republicans, who reject
proposals to raise revenue as part of an agreement. Democrats
say taxes must be on the table as lawmakers seek an annual
budget that would replace some of the $1 trillion in automatic
spending cuts now in effect.
While congressional aides say the two sides are finding
some areas of compromise on spending cuts, such as farm
subsidies, the standoff over revenue could be the main obstacle
to reaching a deal by lawmakers’ self-imposed Dec. 13 deadline.
"It shouldn’t be difficult for Republicans to agree to put
just a few of the most egregious, wasteful loopholes and
special-interest carve-outs on the table,” Patty Murray,
chairwoman of the Senate Budget Committee and the lead
Democratic negotiator, said on Nov. 5.
Democrats have long urged Republicans to agree to scrap at
least some of the tax preferences on their list, while
Republicans argue that doing so would undermine efforts for a
broader tax-code revision.
One proposal to limit the ability of some business owners
to avoid payroll taxes by claiming income as business profits
would save $12 billion over the next 10 years, according to the
Democrats’ estimates. Newt Gingrich and John Edwards benefited
from the break, according to tax returns the two filed during
their 2012 and 2004 campaigns for the White House.
In addition to closing what Democrats call the "John
loophole,” the options include carried-interest treatment that allows
hedge-fund managers and private-equity advisers to pay a 20 percent tax rate on their income
instead of the nation’s top income rate of 39.6 percent. Ending
that break would save more than $17 billion over a decade,
according to the Democrats.
Limiting corporate deductions for "excessive” executive
stock options could save even more -- as much as $50 billion
over the same period, the Democrats’ list says.
Curbing a break that lets U.S. companies deduct their
expenses when they send their plants overseas would raise $200
million and discourage offshoring of American jobs, the
Democrats contend. Ending preferences for corporate jets and
subsidies for yachts and vacation homes, combined, would bring
in another $19 billion.
Representative Paul Ryan, the lead Republican negotiator
and chairman of the House Budget Committee, has opposed
including any tax measures as part of a budget agreement. The
29-member panel, which met last week, will reconvene on Nov. 13.
A spokesman for Ryan didn’t respond to a request for
Lawmakers on both sides of the aisle have played down
prospects for a broader agreement to slow the growth of the U.S.
national debt, which is now at $17 trillion.
They are instead looking at a package of no more than $70
billion to $100 billion to replace the automatic spending cuts,
which are unpopular among lawmakers from both parties, for a
year or two. Given the more limited nature of such a deal,
revenue has no place in it, argue Republicans, who also say
Democrats are recycling "loopholes” they’ve unsuccessfully
sought to use as bargaining chips in past budget negotiations.
"All these proposals the Democrats are putting out there
are things there might be some support for if it were in the
context of tax reform,” said Senator John Thune of South
Dakota. "It’s going to be very hard for Republicans to vote for
tax code-related revenue” as part of a budget conference, said
Thune, the Senate’s No. 3 Republican. "Every time you close a
loophole you’re raising taxes on somebody.”
Democrats say there must be at least some revenue as part
of even a smaller-scale deal to replace the automatic budget
cuts, known as sequestration.
"What I want to know from Republicans is which ones they
are willing to put on the table to help solve this?” Murray, of
Washington, said in an interview.
Another Democrat on the negotiating panel, Sheldon Whitehouse of Rhode Island, said Republicans need to justify
their stance against raising revenue.
"Why do they want to cut some of the programs that help
regular American families while preserving the ability of hedge-fund billionaires to pay carried-interest tax rates and pay less
of a rate than a Rhode Island brick mason pays?” he said.
Carried interest is the profits-based compensation that
private-equity managers, real estate investors and members of
oil and gas partnerships often receive. They get a portion of
their clients’ earnings as investment income if the underlying
earnings are treated that way.
Republican 2012 presidential nominee Mitt Romney’s tax
return, which he released during his campaign, showed he used it
to help limit his effective tax rate to 13.9 percent. In 2010,
$7.4 million of Romney’s $21.6 million in income was in the form
of carried interest, taxed at the capital gains rate, his
Democrats also are looking at ending tax deductions U.S.
companies take for expenses when they relocate their operations
"When somebody gets a write-off from moving their plant
overseas, that’s the kind of spending in the tax code we ought
to stop,” said Senator Debbie Stabenow, a Michigan Democrat on
the committee. Last Increase
Republicans say they already voted for a tax increase,
citing a law passed in January that let the top income tax rate
rise to 39.6 percent. They also say the revenue collected from
ending tax preferences is needed to help pay for lowering income
tax rates for everyone as part of a broader tax overhaul.
"They’re pushing every little approach they can” to raise
taxes, said Orrin Hatch, a Utah Republican and the top
Republican on the tax-writing Senate Finance Committee.
"They would like to snooker Republicans into just doing
one part of tax reform,” Hatch said. "We can’t do that because
you’re going to need all parts to come up with something that
With an estimated $1 trillion in such revenue at stake,
Murray and other Democrats say it isn’t a credible position. "I
don’t buy it,” she said.
There is some truth to both arguments, said Roberton Williams, a fellow at the Tax Policy Center in Washington.
"It’s a matter of degree rather than black and white,” said
Williams, a former Congressional Budget Office staff expert. ‘Easiest Ones’
"If you get rid of some of the loopholes there will be
less available to buy down tax rates. But will there still be a
lot left? Yes,” he said. "But you’re taking away some of the
easiest ones they can agree on.”
Additional preferences identified by Democrats include one
that allows many multinational corporations to shield foreign
subsidiaries from tax by checking a particular box on their
Internal Revenue Service forms. Scrapping the provision would
save $80 billion over 10 years.
Another targets companies that set up P.O. Box mailing
addresses in overseas locations like the Cayman Islands, often
referred to as tax havens. There are 18,000 companies that say
their headquarters are in a single five-story building in the
Cayman Islands, according to the Democrats’ fact sheet. It would
save $7 billion over a decade.
During the 2012 presidential campaign Gingrich, a
Republican and former House speaker, released a tax return that
showed income of about $3 million from Gingrich Productions,
which is what is known as an S corporation, according to Tax
Notes. He paid himself a salary of about $450,000, with the
remainder treated as S corporation net income to him that wasn’t
subject to payroll taxes. That cost the government $73,950 in
employment taxes, Tax Notes said.
Edwards, who ran for the Democratic vice presidential
nomination in 2004, disclosed that his S corporation paid him an
annual salary of about $360,000, with more than $5 million per
year that escaped payroll taxes.
"Some wealthy business owners knowingly mischaracterize
their income as business profits instead of salary to avoid
Medicare and Social Security payroll taxes,” the Democrats’
list of options says.
Gingrich didn’t respond to messages left on his phone
asking for comment. Edwards also couldn’t be reached through his
former campaign scheduler, Matthew Nelson.
This article first appeared in bloomberg.com.