Levin Corporate Loophole Plan in U.S. Raises $200 Billion: Taxes

Senator Carl Levin’s push to close tax loopholes will target corporate deductions for stock options and rates on investment income known as carried interest, seeking to raise at least $200 billion by one estimate.

In a memo to Democratic Senate committee leaders on Friday, the Michigan Democrat described proposals to end what he called excessive corporate tax deductions, scrap the blended tax rate for derivatives such as commodity futures and strengthen enforcement of the tax code, Bloomberg BNA reported.

Levin -- chairman of a Senate investigations subcommittee that has jurisdiction over offshore banking and tax practices and federal waste, fraud and abuse -- plans to introduce a measure called the Cut Unjustified Tax Loopholes Act.

Ultimately, he said he wants to attach the proposals to Congress’s broader effort to avert deep budget cuts through sequestration, due to begin in March.

The plan is estimated to raise at least $200 billion over 10 years, according to a person with knowledge of the details. Levin told reporters he was sharing ideas with fellow senators and had asked the congressional Joint Tax Committee to estimate budget costs and savings for the provisions.

In the memo, which his office provided to Bloomberg BNA, he said corporations pay an effective tax rate of 15 percent due to various deductions and loopholes even though the top marginal rate set in the tax code is 35 percent.

Thirty of the largest U.S. multinational corporations, with combined profits of $160 billion, paid no corporate income tax at all from 2008 to 2010, according to Levin’s summary.

“U.S. multinational corporations can use a myriad of tax loopholes to keep their taxes far lower than their domestic competitors,” Levin’s office said in the memo.

Options Deductions

Levin’s proposal would require that corporations take stock option tax deductions at the time the options are shown in their expenses and would disallow deductions greater than the expense shown. Currently, corporations can deduct on their tax returns more than their actual expenses on stock options, the only type of compensation for which that is allowed, his office said.

That means corporations can report higher earnings to investors and reduce or eliminate those earnings on their tax returns. For example, he said, Facebook Inc. was able to book stock options given to its founder at six cents per share and later claim a tax deduction at $40 per share. Facebook was able to take a $16 billion tax deduction when it went public, and net loss carryforward rules will allow it to use the deduction to lower its tax bill for years, the senator’s office reported.

A spokeswoman for Facebook had no immediate comment on the senator’s statements.

Whether the stock options deduction constitutes a loophole may be a subject of debate. An employee has taxable compensation income tied to the value of the stock, and the corporation gets a deduction for a corresponding amount, said Kenneth H. Bridges, a certified public accountant with Bridges and Dunn-Rankin LLP of Atlanta. That gives it parity, he said.

Blended Rate

To the government, the net revenue effect would be the same if the corporation paid the compensatory amount to the employee in cash, and the employee used the money to buy stock from the company, Bridges said.

The legislation Levin envisions would end a favorable “blended tax rate” that applies to certain derivatives. According to his memo, the short term capital gain from some derivatives, including commodity futures, is not taxed at the long term capital gains rate, but at a blended rate of 60 percent long term and 40 percent short term, even if the derivatives are held for seconds. The lower rate reduces taxes by about 10 percent, his office reported.

Hedge Funds

Levin would end the exclusion of tar sands oil from the Oil Spill Liability Trust Fund, which he said would recognize that oil sands and other unconventional oils have become a more significant part of the nation’s commercial energy industry. As much as half of the oil shipped to the United States from Canada in 2012 was from tar sands, and 30 percent of Canadian oil produced in 2011 was from tar sands, Levin’s office reported.

Levin also proposed that hedge fund managers be required to pay ordinary income tax rates on all of their income from management services, ending a carried interest loophole.

The senator also promised more than a dozen provisions related to offshore tax havens and potential abuses, resembling a list he provided to Senate Finance Committee members in 2012.

His new proposal would penalize offshore financial institutions and jurisdictions that impede U.S. tax enforcement; defer tax deductions for corporations that move jobs and operations offshore until the corporation repatriates the profits from offshore operations and pays taxes on them; and treat offshore funds deposited in U.S. bank accounts as repatriated funds subject to taxes, among other provisions.

Regular Order

The legislative route for Levin’s proposal remains unclear but could pose challenges, especially if proponents do not move it through the Finance Committee. Senator Orrin Hatch from Utah, ranking Republican on the committee, told reporters Jan. 31 that any legislation should follow the regular process of committee consideration before coming to the Senate floor.

“Well, if they’d go through regular order, I guess we’d look at some of those so-called tax expenditures but I’ve got to tell you if they just say take it or leave it, that’s not the way to do legislation,” Hatch said.

A spokesman for Levin, Gordon Trowbridge, told BNA the legislative path has yet to be determined; the tax provisions are but a piece of a much broader effort to stop the sequester cuts, and Levin told reporters he was fully aware of proposals his colleagues may be drafting to deal with the bigger picture.

“He’s just interested in letting his colleagues know that these ideas can help accomplish what we need to do to avoid sequestration,” Trowbridge said in an email.

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