Editorials and Opinion Pieces

Hands Off Stock Options

BY: Damon B. Ansell, special to the Washington Times
DATE: April 18, 2002
SECTION: PART A; OP-ED; Pg. A19
LENGTH: 772 words

Hands off stock options
Senate throws out baby with the bath water

Reacting to the Enron debacle, a long list of Senate co-sponsors have lined up to support the so-called "Ending Double Standards for Stock Options Act" (S. 1940). Recently, Sens. Carl Levin, John McCain, Peter Fitzgerald, Richard Durbin, and Mark Dayton were rumored to be trying to attach the Stock Options Act to the energy bill without success. With the return of Congress, they may try again.

Unfortunately for these cheerleaders of legislating, their proposal bears little relevance to the challenges that Enron's shareholders actually face. Mere mortals understand the basics of the Enron collapse: Enron executives shifted debt onto subsidiary companies' portfolios, effectively hiding an earnings fallout from investors. But the Stock Options Act that Messrs. Levin, McCain, et al. support would change the tax structure that applies to earnings, resulting in tax liability on a greater proportion of earnings for all companies, good and bad.

For most of us, more taxable earnings, and hence more money taken away by taxes, will result in less total profit reported by the companies we invest in through mutual funds and 401(k) retirement plans. Less profit means that our investments will depreciate in value. Furthermore, as a company's profit margin shrinks, the company is less likely to contribute matching funds to employee 401(k) plans, causing further losses for small investors. Finally, Levin-McCain will force companies to reduce, or even eliminate, the number of options issued to employees in order to maintain growth in reported earnings. The less companies share with employees the benefits of growth and success, the less personal investment will employees show in their workplace. Productivity declines.

At present, successful and growing companies deduct stock options expenses from the amount the federal government defines as taxable corporate income. Claims are filed when a portion of company stock changes hands; the exchange constitutes a profit on existing value, not profit income of the ordinary sort. Thus the deduction.

Ten years ago, the Financial Accounting Standards Board instituted a footnote requirement, detailing the amount a company ascribes to stock options expenses and the exact impact on earnings. Levin-McCain would compel companies to expense the estimate of the future value of stock options expenses, depriving investors of accurate information needed to judge a company's financial performance in the present.

Overall, Levin-McCain will increase the amount of taxable corporate income for companies that provide employment and benefits such as retirement matching funds for millions of Americans. Higher taxes will reduce the number of jobs and the quality of benefits offered to these hard-working Americans. Levin-McCain is an implicit tax increase for this reason: Companies will pay more taxes to comply.

The point is, Levin-McCain will cause taxes on company profits to increase without enforcing existing disclosure requirements for company holdings. Nor can the bill's sponsors and supporters accept the fact that businesses fail and investment is not a risk-free means of saving, because such an admission is political suicide for those who would ride every new national crisis into the pocketbooks of taxpayers.

Fortunately, President Bush supports a number of actions that will strengthen retirement security without raiding the profits of employers. The Bush Tax Relief Plan raised the contribution limits for IRA and 401(k) accounts and increased the amount of "catch-up" contributions allowed for workers aged 50 and over. The president's proposal for strengthening retirement security would ensure that workers who have participated in 401(k) plans for three years have the freedom to choose where to invest their retirement savings, and offer individuals the option of investing a portion of their Social Security taxes in personal retirement accounts. The president supports ideas like Individual Development Accounts to provide savings matches and tax-free growth for low-income Americans invested in retirement accounts, and expanded disclosure requirements for quarterly investment reports filed by employers.

These ideas and others address the real problem with retirement savings: The individuals hoping to live off of these funds are not well-informed about their investments, and cannot afford to invest enough to provide for themselves through two decades of retirement. Levin-McCain addresses neither of these concerns, but instead raids the profits of the very companies that employ these individuals and administer their benefit structures.

Without a doubt, workers need more information about the stock holdings of their companies and the composition of their own portfolios. In part, this is a personal responsibility, although greater availability of advice will aid individual investors in making more informed choices. Empowering workers to invest with confidence and enforcing existing disclosure laws will likely deter the next Enron scandal; threatening a de facto tax increase on law-abiding companies in the name of reform insults the intelligence of hard-working Americans.