Corporate America continues to game the system at the expense of taxpayers and the economy. Too many corporations are exploiting a tax loophole to shower their top executives with excessive pay — and avoid billions of dollars in tax payments in the process. This is an egregious practice that robs American industry and the U.S. Treasury of valuable resources the economy needs in this slow recovery. Congress should close the loophole.
As the New York Times recently reported, the tax law has created a windfall for dozens of major corporations and hundreds of executives who took advantage of the huge price swings of the stock market in recent years. In late 2008, as the markets began to collapse, some of America's biggest companies doled out unusually large stock options to their top executives. The move allowed top company managers to hoard stock on the cheap and to sell those shares at much higher prices once stocks soared again in value. And the companies are allowed to claim a tax deduction in future years for the value of options that were far less lucrative when they were actually handed out.
SiriusXM Radio CEO Mel Karmazin was granted options in 2009 to buy company stock at 43 cents a share. At the recent price of $1.80 a share, as the newspaper reported, Karmazin's options have increased in worth to $165 million from $35 million when they were issued. Starbucks CEO Howard Schultz was given stock options valued at $12 million in 2008 that are worth more than $100 million today. While these executives must pay taxes on any payout, companies are allowed a tax deduction for that higher price. In the case of Karmazin, for example, SiriusXM could deduct the $165 million as if it had paid it in cash, reducing the company's federal tax bill by an estimated $57 million.
These are essentially bridge loans that companies are giving themselves to boost executive salaries when times are tough and later pawn off the costs on shareholders and the Treasury. Barring another market collapse, this tax break to the companies could deprive the federal government of tens of billions of dollars in the coming decade. The newspaper reported that of the billions of shares issued in the aftermath of the market collapse, only about 11 million have been exercised.
Democratic Sen. Carl Levin of Michigan has tried for nearly a decade to close the loophole, which would add $25 billion to federal coffers over the next decade. Beyond the compelling issue of tax fairness, Washington needs to address the harm to the nation from a tax break that encourages the removal of billions of dollars from the economy. It is unfair enough that executives were effectively rewarded for the vast collapse in consumer confidence. Now these same companies are enjoying the fruits of a recovery that taxpayers underwrote.