Opposition to Stock Tax Proposal Stiffens

May 13, 2002 (PLANSPONSOR.com) - As opposition continues to an Internal Revenue Service (IRS) plan to impose payroll taxes on incentive stock options and employee stock purchase plans, members of a panel against the proposal said poorer workers would suffer the most.

William Archer, president and chief executive of AeA, an electronics trade group, said lower-wage employees may shy away from stock plans if they know such plans will be more heavily taxed, according to a Dow Jones news report.

Archer said lesser-paid Americans also would be hardest hit because Social Security taxes are only imposed on the first $84,900 of a worker’s income. Higher paid people would presumably have income not similarly taxed, opponents point out.

Plan Particulars

Under the controversial IRS plan, employees would pay as much as 6.2% toward Social Security and 1.45% to cover Medicare on incentive stock options, or ISOs, and employee stock purchase plans, or ESPPs.

Currently, the IRS takes capital gains taxes on employees’ ISOs and ESPPs. Under the proposal, payroll taxes would be also be added on the difference between the price paid by the employee or option holder and the fair market value of the stock.

As of 2000, about 15 million people participated in ESPPs, and one million to two million workers held ISOs, said Corey Rosen, executive director of the National Center for Employee Ownership.  About 24% of publicly traded companies offer stock options, he added.

Panel members also said they fear the tax will dissuade employers from offering some pay incentives to their employees because of the added cost to change their accounting systems.

Accounting changes could cost companies at least $279 million in the first year, said Ronald Bird, chief economist at the Employment Policy Institute, which researches workplace trends and policies.

Trade groups like the American Benefits Council and big Wall Street firms have been mounting protests to the tax proposal, claiming that it will hurt employees’ productivity and ability to take ownership in their companies.

Capitol Hill Gets Protest Emails, Letters

As many as 20,000 e-mails and letters have been sent to Capitol Hill in protest, said James Delaplane, vice president of retirement policy for the American Benefits Council. Opponents want the IRS to withdraw the regulation, or to at least extend the proposal and give Congress a chance to step in, Delaplane said.

Monday’s panel presentation was held one day before a scheduled IRS hearing on the proposal. The proposal would become effective January 1, 2003, if passed.