Senate Floor Speech on Facebook and the Stock Option Tax Loophole
Wednesday, February 29, 2012
Mr. President, there has been a great deal of conversation recently about the need to close tax loopholes. This is a welcome development for those of us who have gone after these loopholes for years. It is particularly timely as the public is focusing more and more on how tax loopholes distort economic incentives and often benefit the wealthiest among us at the expense of most U.S. taxpayers.
Last week, President Obama released a framework for business tax reform that took aim at many corporate tax loopholes. I look forward to working with the administration and with my colleagues in the Senate to make real reform a reality — reform that brings greater fairness to the tax code, eliminates incentives for moving jobs and assets overseas, restores revenue lost to unjustified tax loopholes, and helps us reduce the deficit without damaging vital programs for education, transportation, health care and national security.
One recent and very public announcement illustrates dramatically our tax code’s distortions and the need for reform. At the center of this story is Facebook and its founder and CEO, Mark Zuckerberg.
Mr. Zuckerberg and his company have become a remarkable American business success story. As part of that success, Facebook is in the process of making its initial public offering of stock. The public documents Facebook is required to file as part of that offering tell another compelling story, about one of our tax code’s unjustified corporate loopholes.
According to its filings, when Facebook goes public, Mr. Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share. Mr. Zuckerberg’s shares, obviously, are going to be worth a great deal more than 6 cents, a total of about $7 million; they will apparently be worth more than 600 times as much, something in the neighborhood of $5 billion.
Here’s where the tax loophole comes in. Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options he received cost the company a mere 6 cents a share – that’s the expense shown on the company’s books. But the company can also – perfectly legally – later file a tax return claiming that those same options cost the company something close to what the shares actually sell for later on – perhaps $40 a share. And the company can take a tax deduction for that far large amount. So the books show a highly profitable company – profitable, in part, because of the relatively small expense the company shows on its books for the stock options it grants to its employees. But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books.
In addition, Facebook is allowed by law to carry back the so-called “loss” arising from this deduction for two years into the past, which means it can claim a tax refund for the income tax that it has paid over the past two years – a refund the company estimates at half a billion dollars. So instead of paying taxes to the treasury, this profitable company will claim a hefty refund on taxes already paid.
But that’s not all. The company says it will, as allowed by law, also carry forward the so-called losses arising from this tax deduction up to 20 years into the future, thereby reducing any tax it owes in the years ahead. Altogether, this loophole could give Facebook a tax break of up to $3 billion.
Now, the end result is that a profitable U.S. corporation – a success story – could end up paying no taxes at all for years, even decades.
I emphasize that Facebook’s actions are within the law. As with so much of our tax code, it’s not the law-breaking that shocks the conscience, it’s the stuff that’s perfectly legal.
For years, my Permanent Subcommittee on Investigations has identified this stock option tax loophole and tried to explain its cost, its unfairness, and why it should be closed. Facebook’s $3 billion tax break brings the issue into sharp focus.
Again: The stock-option loophole allows corporations to compensate their executives with stock options, report a specific stock option expense to their shareholders, and then later take a tax deduction for typically a much higher amount. Stock options grants are the only kind of compensation where the tax code allows companies to claim a higher expense for tax purposes than is shown on their books. Our Subcommittee found that the difference between what U.S. corporations tell the public and what they told the IRS was as much $61 billion in one year.
Facebook’s use of this loophole is the most pointed illustration yet of the cost of this loophole. It is difficult to get our minds around a $3 billion tax break for a single corporation. Just how big is it? Well, consider this: In 2009, the most recent year for which IRS data is available, taxpayers from 11 states in our union sent less than $3 billion in individual income tax revenue to the treasury.
How does this make any sense? After all, American taxpayers will have to make up for what Facebook’s tax deduction costs the Treasury. That $3 billion will either come out of the pockets of American families now, or it will add to the deficit which they will have to pay for later.
What could our nation do with the $3 billion it will lose when Facebook exploits the stock-option loophole? Well, we could reduce the federal deficit. Or we could pay for programs to protect our seniors and veterans, put cops on the beat, or teachers in classrooms. The three billion dollars Facebook will get in tax deductions would more than triple the budget of the Small Business Administration, which seeks to help American entrepreneurs create jobs and grow the economy. Three billion dollars would pay the Pentagon’s budget for housing of our military families for nearly two full years. It would pay the budget of the National Institute of Science and Technology for four years. It would more than triple what we plan to spend helping homeless veterans next year. It would pay six times over for the 24 Reaper unmanned aerial vehicles the Air Force plans to buy next year.
Now, some are going to argue that Facebook’s tax break is offset by the fact that Mr. Zuckerberg himself, as well as the other executives who are receiving stock options, will pay taxes as individuals. As various news reports indicate, Mr. Zuckerberg will face a substantial tax bill on the $5 billion in compensation he’s about to receive – perhaps in the neighborhood of a $2 billion tax bill. But it is unlikely that the individual taxes Mr. Zuckerberg pays will offset the tax revenues lost to this loophole. What the Treasury receives from Mr. Zuckerberg on the one hand, it will return and then some to his company with the other hand. We also should remember that Mr. Zuckerberg’s financial future is closely tied to that of his company—the value of the options and his retained interest make that clear. To the extent that his corporation benefits – and as I’ve shown, Facebook will benefit handsomely from the use of this loophole – Mr. Zuckerberg stands to benefit as well. Put simply, some of that big tax bill he faces right now will come back to him through the corporation that he will still own a huge part of and will control.
Madame President, our federal tax system is built on the principle that businesses, as well as individuals, ought to help pay our nation’s bills. Corporations impose plenty of costs on society – from environmental disasters, financial bailouts, product recalls, and more. Businesses also want and need government services, including efficient transportation systems, patent protections, even federal loan guarantees. Paying those costs is why we have a corporate income tax to begin with. Both businesses and individuals are required by law to contribute and ought to be willing to meet their civic obligations and pay their fair share.
There is no reason why Facebook and the other corporations who use this loophole should continue to receive these windfall tax deductions.
Senator Conrad and I earlier this month introduced S.2075, the Cut Unjustifed Tax Loopholes Act, or CUT Loopholes Act. This bill, similar to legislation that I have introduced in the past few Congresses, would close this loophole. Under our bill, corporations would no longer be allowed to claim tax deductions for options that are larger than the expense they report to their shareholders and to people considering buying their stock. It also would subject stock options to the same $1 million cap on deductions for executive compensation that now applies to other forms of compensation. At the same time, and this is important to know Madam President, our bill would leave unchanged the way the law applies to individuals who receive stock options, and it would leave in place incentive stock options often used by start-up companies. We would not affect that.
The stock-option loophole should have been closed long before Mr. Zuckerberg’s extraordinarily lucrative options became public. But surely the case of Facebook illustrates to the Senate, to the Congress, and to the American people that we must close this loophole.
I’ve spoken today about one corporate tax loophole, but there are many, many more. The momentum has never been stronger for tax reform that brings more fairness to the tax code, restores revenue lost to unjustified tax loopholes, reduces the deficit and protects important priorities. I look forward to working with our colleagues and with the President to turn that momentum into real reform.