Executive Pay Of Austerity Advocates Saves Companies More Than $1 Billion Via Tax Loophole

Alan Simpson, co-chairman of the National Commission on Fiscal Responsibility and Reform, speaks during the Moment Of Truth P
Alan Simpson, co-chairman of the National Commission on Fiscal Responsibility and Reform, speaks during the Moment Of Truth Project event in Washington, D.C., U.S., on Friday, April 19, 2013. Erskine Bowles and Simpson, the deficit-reduction duo, are trying to rekindle congressional interest in a $2.5 trillion package of spending cuts and tax increases with new details showing how it could work. Photographer: Julia Schmalz/Bloomberg via Getty Images

WASHINGTON -- Companies in the Fix the Debt coalition, which advocates for federal austerity policies, qualified for $1 billion or more in tax breaks tied to executive pay packages from 2009 to 2011, according to a new report by the liberal think tanks Institute for Policy Studies and Campaign for America's Future.

The four highest-paid executives at the firms received a total of $6.3 billion in pay over the period, according to the report. Federal tax law allows companies to deduct executive pay based on performance from the firm's tax bill as a business expense. This performance-based compensation includes stock options, stock awards and other types of incentive pay. These 90 companies qualified for tax perks totaling between $1 billion and $1.5 billion over the course of three years, depending on how many types of pay firms actually deducted.

Companies can choose to be more or less aggressive about their tax deductions, and some types of incentive pay exist in a gray area where certain companies choose to claim deductions and others do not. Firms do not make their tax filings public, although they release estimates of overall taxes paid in SEC filings. The IPS-CAF study was based on actual payments to executives that were taxable in the years 2009, 2010 and 2011 that would have qualified for deductions, but whether firms chose to take them is not a matter of public record.

Fix the Debt is one of several austerity advocacy groups tied to Wall Street billionaire Peter Peterson, who started a think tank devoted to deficit reduction in 2008 and has bankrolled multiple public relations campaigns on the issue.

A total of 125 CEOs are officially members of the coalition, including CEOs of 90 public companies. The IPS-CAF report only examined tax perks for public companies in the coalition. The same CEO pay loophole is available to private companies, but private firms do not have to disclose executive pay to the SEC.

The coalition urges a host of spending cuts and tax reforms, including benefit cuts for Social Security, Medicare and Medicaid, as a means to reduce the federal budget deficit. A spokesman for the group told HuffPost that while the group doesn't advocate for specific policies, it does insist that comprehensive tax reform be part of any debt deal.

"It's a lot easier for groups like this to sit on the sidelines and throw stones than to talk about the 4 million meals that are going to be eliminated for seniors because Congress wouldn't pass a debt deal," Fix the Debt spokesman Jon Romano said. "All of our supporters understand that there is going to be pain associated with a comprehensive debt deal and that people are going to have to give something up to get a debt deal in place. But everything has to be on the table. We're a campaign about fixing the debt. This is not about protecting special interests, this about what's in the best interest of the American people."

The group is currently airing an online video pushing to cut Social Security benefits by using a more conservative measure of inflation to calculate annual cost-of-living increases.

The CEO pay loophole being used by Fix the Debt companies is extremely popular in corporate America. According to a report by Citizens for Tax Justice, Fortune 500 companies skipped out on $11.2 billion in taxes in 2011 alone thanks to this loophole.

"The stock option loophole is a major reason why corporations are paying record-low federal income tax rates," said Matthew Gardner, executive director of the Institute on Taxation and Economic Policy. "The worst of it is that there is no 'cost' to a corporation that uses stock options to pay its executives, so there's no justification for allowing them to deduct it as an expense. It's not an expense."

Sen. Carl Levin (D-Mich.) has introduced legislation that would eliminate the loophole, but the plan is rarely included in deficit reduction talks on Capitol Hill.

The highest-paid executive in the Fix the Debt coalition is UnitedHealth Group CEO Stephen Hemsley, who received $198.9 million from 2009 to 2011, which would have qualified his company for $67.7 million in tax breaks. UnitedHealth declined to comment for this article.

Some of the companies eligible for the biggest tax breaks from CEO pay are run by politically influential executives.

According to the IPS-CAF report, Honeywell could have lowered its tax burden by as much as $21.5 million based on CEO David Cote's $70.1 million in pay from 2009-2011 -- the fifth-highest break among the firms analyzed. Cote serves on Fix the Debt's steering committee, and is also close with President Barack Obama, who named him to the Simpson-Bowles Commission, where he served as the second-ranking Republican. (Alan Simpson and Democrat Erskine Bowles also co-chair Fix the Debt.)

Honeywell is very aggressive about minimizng its tax payments, paying nothing at all in federal income taxes between 2008 and 2010, and receiving $34 million in tax rebates from the federal government during that period.

"Mr. Cote's compensation is aligned with the company's strong growth and reflects our variable, at-risk and long-term compensation plan that’s based on sustainable, profitable growth and stock price appreciation," said Honeywell spokesman Rob Ferris. "Honeywell is in compliance with U.S. tax law for treatment of corporate tax deductions for CEO pay."

President Obama named former Verizon CEO Ivan Seidenberg to his Export Council in 2010. From 2009 and 2011, Verizon qualified for $29.9 million in tax breaks from Seidenberg's $94.2 million in pay, third-highest among the Fix the Debt CEOs. Seidenberg stepped down from Verizon in 2011 but remains a member of Fix the Debt. Verizon declined to comment for this article.

Verizon disputed IPS' methodology and told HuffPost it only had $32.9 million in deductible CEO pay for Seidenberg during those years, which would have reduced the firm's tax bill by $11.5 million. Verizon said its deductions were the sum of $3 million in salary, $10.4 million in short-term incentive pay and $19.5 million in long-term incentive payments recognized during the years. Verizon did not provide documentation to verify the claims.

"We strongly dispute the IPS findings -- which are simply inaccurate with respect to Verizon," company spokesman Robert Varettoni told HuffPost. "We fully comply with tax law, which makes performance-based compensation deductible provided we obtain the requisite shareholder approval."

The IPS-CAF report based its Verizon calculations on a 2012 SEC filing which stated that Seidenberg exercised $20 million in stock options from 2009 - 2011 in 2012 which were tax deductible. Seidenberg cashed in another $30 million in stock options from the period in 2011, and $25 million in 2010. In addition, Seidenberg received $10,434 in non-equity performance compensation, including $3.5 million in 2011, $3.0 million in 2010 and $3.9 million in 2009.

Although the scope of the federal budget deficit has been a major political issue over the past four years, it has faded in recent months as Congress has considered gun legislation and immigration reform.

The deficit itself is also shrinking rapidly. With no policy changes, Goldman Sachs economists expect it to fall from $775 billion in 2013 to $475 billion by the end of 2015 due to economic growth.



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