WASHINGTON, DC – At a time when essential federal programs from education to Medicare to defense spending are facing growing budget austerity, U.S. Senators Jack Reed (D-RI) and Richard Blumenthal (D-CT) are reintroducing the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act.  This legislation would close a major loophole in current corporate tax law by putting an end to unlimited tax write-offs on performance-based executive pay.  In their most recent estimate, the Joint Committee on Taxation estimated that this loophole costs U.S. taxpayers about $50 billion over a 10 year timeframe.

In 1993, Congress limited the deductibility of certain executive pay to $1 million, with an exception for performance-based compensation.  As a result, over the last two decades, compensation packages for top executives have often been structured to avoid paying taxes on corporate earnings.  The Economic Policy Institute estimates that between 2007 and 2010, a total of $121.5 billion in executive compensation was deductible from corporate earnings, and roughly 55 percent of this total was for performance-based compensation.

“Businesses and their shareholders -- not the government -- should determine executive pay.  But the federal government should ensure that American taxpayers aren’t subsidizing multimillion dollar bonuses.  Under current law, this performance-based corporate tax loophole helps push up the debt and forces the middle-class to subsidize executive pay at some of the most profitable companies out there.  The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act will restore fairness to the tax code and ensure corporations, not taxpayers, are the ones who pay for multimillion dollar bonuses,” said Senator Reed.

“Even as income inequality rises and middle-class wages stagnate, American taxpayers are subsidizing tens of billions of dollars in corporate bonuses.  We should be investing in working families, not using taxpayer dollars for tax breaks to corporations that overpay their executives.  Corporations should be free to pay their executives whatever they wish, just not at the expense of American taxpayers -- many struggling to make ends meet,” said Senator Blumenthal.

Companion legislation is being introduced in the U.S. House of Representatives by Congressman Lloyd Doggett (D-TX).

“When taxpayers are forced to subsidize multimillion dollar bonuses to corporate executives, small businesses and families must pay more.  Under our proposal, giant corporations can continue heaping excessive compensation on executives, but the American taxpayer will no longer have to pick up part of the tab. It is wrong to compel working families to subsidize those at the very top, who are being paid hundreds of times what the average worker earns,” said Congressman Doggett.

The Atlantic Monthly notes that: “Between 1940 and 1970, average CEO pay remained below $1 million (in 2000 dollars).  According to the Economic Policy Institute, from 1978 to 2013, CEO pay at American firms rose a stunning 937 percent, compared with a mere 10.2 percent growth in worker compensation over the same period, all adjusted for inflation.  In 2013, the average CEO pay at the top 350 U.S. companies was $15.2 million.”

The Stop Subsidizing Multimillion Dollar Corporate Bonuses Act would allow a publicly traded corporation to deduct only up to $1 million in pay per employee, regardless of the form that compensation takes.

“In many ways our corporate tax system is broken and this is a common-sense solution to help fix it.  I hope we can get bipartisan support for closing this loophole,” stated Reed.

In 2006, Senator Chuck Grassley (R-IA), the then-chair of the Senate Committee on Finance, stated: “162(m) is broken. …It was well-intentioned.  But it really hasn’t worked at all.  Companies have found it easy to get around the law.  It has more holes than Swiss cheese.  And it seems to have encouraged the options industry.  These sophisticated folks are working with Swiss-watch-like devices to game this Swiss-cheese-like rule.”

Specifically, the Reed-Blumenthal Stop Subsidizing Multimillion Dollar Corporate Bonuses Act would:

  • Broaden the scope of corporations subject to 162(m) FROM: “publically held corporations that issue any class of common equity securities registered under section 12 of the Securities Exchange Act of 1934 (the ’34 Act)” TO: “any corporation that qualifies as an issuer whose securities are registered under section 12 of the ‘34 Act or that is required to file reports under section 15(d) of the ‘34  Act”  The effect of this would be to capture all corporations that file periodic reports, such as quarterly and annual filings, with the Securities and Exchange Commission (SEC) for the benefit of investors.
  • Broaden the number of employees FROM: “the CEO and the 3 highest compensated officers” TO: “all current and former employees.”
  • Eliminate the exception for commission-based remuneration and for performance-based compensation.