August 4, 1976
Page 25600
Mr. MUSKIE. Mr. President, I urge the Senate not to liberalize the employee stock ownership plan provisions in the tax bill. The changes reported by the Finance Committee in section 804 of the bill are too costly and inefficient to be adopted at this time.
Over the next 5 years, section 804 as reported by the Finance Committee would be the most costly new tax provision in the entire bill now before the Senate. According to the initial Joint Committee on Internal Revenue taxation estimates, it would reduce revenue collections during this 5-year period by over $3.2 billion. The joint committee estimates the section 804 revenue loss will grow from $235 million in 1977 to $917 million in 1981. I believe these estimates are quite conservative, and the actual losses may prove to be much greater, especially in 1977 when the impact of the retroactive benefits provided by section 804 would occur.
Section 804 would make a series of major changes to the ESOP provisions first enacted in 1975 that would turn them from being rarely used to provisions used by many major U.S. corporations.
Section 804 would provide an additional 2 percent investment tax credit — 12 percent instead of 10 percent — in 1977and subsequent years for corporations that contribute shares of their own stock equal in value to the additional credit to employee stock option plan trusts — plans — popularly known as ESOP's. Section 804 also would make a number of technical changes to insure that corporations incur no costs to themselves or their shareholders for establishing and maintaining these trusts.
Very significantly, section 804 also provides that corporations may claim an additional 1 percent investment credit for 1975 as well as an additional 1 percent for 1976 if they establish ESOP's under these new rules within 90 days of enactment. In effect, the liberalized ESOP rules would be made retroactive.
The tax bill now before us, as it has been amended by recent Senate floor action, would raise only approximately $300 million of revenue from tax reforms. Amendments adopted by the Senate have reduced tax reform revenues almost $700 million below the level of the bill reported by the Finance Committee that would have raised approximately $1 billion in fiscal year 1977.
The bill in its current state obviously falls far short of the $2 billion revenue gain target set by the Congress in the first concurrent resolution.
I urge the Senate to recoup a significant part of these revenue losses by not adopting the substantial retroactive liberalization of the ESOP investment tax credit provisions contained in the Finance Committee amendments.
There has been growing debate in recent years concerning ESOP's. Their general merit relative to other types of employee benefit plans is subject to widely conflicting opinions. The general debate over ESOP involves several sophisticated macroeconomic and corporate financing concepts. However, the effect of section 804 is much easier to understand, and does not directly involve these complexities.
Section 804 simply would result in the Federal Treasury transferring revenues to trusts established for the benefit of employees of those U.S. corporations that utilize the investment tax credit.
The situation that can and will develop from enactment of section 804 would work as follows.
Assume a publicly traded corporation annually has $1 billion of purchases that qualify for the investment tax credit and 100,000 employees. Its annual investment tax credit at the current 10 percent rate therefore is $100 million. An additional 2 percent credit would reduce its tax liability by an additional $20 million annually.
Under section 804, the corporation would be entitled to the additional tax reduction if it transfers its stock in an equal amount — $20 million — to a trust for the benefit of its employees. The corporation would obtain this stock by acquiring its outstanding stock in the public market.
Nothing other than the stock reflecting the additional 2 percent investment tax credit would be contributed to the trust. Administrative costs of forming and maintaining the trust would be paid by the trust.
Each year, $20 million of the company's stock would be transferred to the trust. At the end of the seventh year, the value of the stock contributed in the first year would be paid to the employees.
Each employee would receive an average of $200 annually — calculated by dividing the $20 million additional tax credit by the 100,000 employees. The $200 additional annual benefit provided under this example would be conservative in many cases. Employees of highly capital intensive companies, in fact, could receive average annual benefits well in excess of $200 each.
The net effect of section 804 in the case I have just described would be to reduce Treasury revenues to the extent of the additional 2 percent credit and to transfer this revenue to the qualifying employees.
One variation to the pattern I have just described would permit companies to issue new common stock to be placed in the ESOP instead of acquiring its outstanding stock in the public market.
Corporations greatly in need of the additional cash flow from the 2 percent credit tax savings for further capital investments would choose this issuance of new stock method. However, this method is unlikely to be chosen by a majority of publicly traded companies because it will have the effect of reducing a corporation's earnings per share which the pattern I first described would not do.
It is important to note that the investment tax credit ESOP benefits will generally be in addition to, and not substituted for, employee benefit plans already in effect for tens of millions of employees. Many companies already use stock bonus, profit sharing, and thrift plans to foster employee stock ownership that would not be affected at all by these additional investment tax credit ESOP benefits. ESOP plans would not have to be substituted for these other types of benefit plans.
If adopted, section 804 in its present form would be an inefficient mechanism for fostering increased employee stock ownership. Section 804 does not require a corporation to match the Treasury investment credit tax reductions with any contribution of its own funds to the employee trust. Nor does it require a corporation to invest any more capital to obtain the 2 percent additional credit than the corporation must invest to obtain the 10 percent credit.
To the extent ESOP's would be funded under the more liberal rules of section 804 with an additional 1 percent tax credit for acquisitions made in 1975 and that part of 1976 which has already passed, section 804 would have absolutely no incentive effect at all for the acquisition of assets which have already been purchased. Thus, to the extent the provision is retroactive, it is solely a major windfall for qualifying corporate employees.
In addition to being inefficient, the benefits of section 804 would be distributed on a discriminatory basis. As contrasted to the general individual tax credits which were extended by the Senate last month, a much more limited segment of the U.S. work force would receive the benefits made available under section 804. Beneficiaries must work for profitmaking corporations. Benefits will not be available for Government workers, military personnel, self-employed persons, persons working for nonprofit corporations, persons working for partnerships, or for employees of those corporations that pay no Federal income taxes.
Section 804 benefits would be relatively more valuable for employees of taxpaying companies with the highest ratio of qualifying capital acquisitions to employees. Thus, for example, employees of leasing companies that lease qualified assets but have relatively few employees would benefit substantially, while employees of more labor intensive companies would not.
Within the group of employees of taxpaying corporations, the value of benefits for each employee of the same company increases proportionally with his salary. Higher income level employees will benefit most from enactment of section 804 in its present form.
The usefulness of ESOP's from a public policy standpoint is still very unclear. The ESOP concept clearly needs additional evaluation before massive permanent commitments of additional Federal revenues should be made in the form of section 804 investment credits or any other form. Therefore, I urge the Senate not to liberalize the investment tax credit incentive available to corporations that form ESOP's.
The failure to date of the Senate to meet the 1977 budget resolution target of a $2 billion net revenue gain from closing existing tax preferences makes it all the more important for the Senate not to permanently adopt the extremely costly, inefficient, and discriminatory new ESOP tax expenditure incorporated in the bill reported by the Finance Committee.
The Senate is already far short of its budget resolution revenue target. Adoption of the pending amendment to reduce the revenue losses from the liberalized ESOP rules will bring the Senate significantly closer to that target. Thus, I strongly urge adoption of the pending amendment