State Legislation on Employee Ownership
There has been increasing interest in employee ownership in state legislatures. This article describes existing state employee ownership legislation and key pending bills. The NCEO also has model state legislation that includes suggested language on four issues: creating a state employee ownership center, providing tax incentives to help support feasibility studies, providing that employee-owned firms owned and/or controlled by qualifying individuals through an ESOP trust will be eligible for state set-aside programs, and allowing professional corporations to be owned by ESOPs.
State Employee Ownership Centers
In 2020, Colorado governor Jared Polis created the Employee Ownership Office as a standalone center in the Colorado Office of Economic Development and International Trade (OEDIT). The office will have its own dedicated staff. It has $1.75 million in funding over the following two years.
The office will operate an “Employee Ownership Navigator” to provide advice to business owners about ownership models, as well as to connect them to local approved advisors.
The office will also offer a new certification for companies that provide ownership to 20% or more of workers. The companies will be included in statewide branding campaigns and will be listed on its website.
Finally, the office will continue offering a modest loan program already in place under the OEDIT to support employee ownership conversions as well as grants to help pay for setup costs. That fund is targeted mostly at small worker cooperatives.
Massachusetts created an employee ownership center through its budget process in 2019. The office had existed in the 1990s as part of the Massachusetts government but lost its funding in the recession of 1999. In 2019, legislators restored that funding. The office is staffed by two nonprofits, Working Wealth and the ICA Group.
In 2021, S. 261 was introduced to make the state center permanent and a part of the Massachusetts Office of Business Development. The office would “provide education, conduct outreach and promote efforts to create an overall environment in the commonwealth which will expand and enhance employee ownership, increase the number of employee owned companies, publicize and promote the benefits of employee involvement and ownership to policy makers and the general public, encourage collaborative outreach efforts regarding involvement and ownership in the workplace, research and evaluate employee involvement and employee ownership in the commonwealth, showcase employee ownership initiatives in the commonwealth, facilitate and coordinate the sharing of existing information and resources, and provide grants pursuant to the provisions of this chapter.”
The office would be able to accept outside funding as well as government support. It would be governed by a 19-person advisory committee, including representatives from employee-owned companies.
Hearings on the bill were held in October 2021, and the bill is pending as of November 2021.
In 2021, the State Affairs Committee of the Texas House of Representatives passed H.B. 2246 , “An act relating to companies in which employees have ownership interests through employee stock ownership plans.” The bill would do a number of things:
- Allow professional corporations to be owned by ESOPs, provided that the voting trustees are licensed in that profession.
- Allow certified Historically Underutilized Businesses (HUBs) to adopt an ESOP without losing their status as an HUB.
- Create contracting preferences at the state, city, council, and special district level for ESOPs.
- Establish an Employee Ownership Assistance Office in the Texas Economic Development and Tourism Office.
The bill did not get added to the calendar for a final vote, but will be reintroduced in the next session. Texas is unusual in that its legislature meets only for a short period of time every two years, so a number of bills with wide support do not make it onto the calendar because of time limitations.
Colorado became the first state to pass a law that helps cover some of the costs to convert to employee ownership. On June 23, 2021, Governor Jared Polis signed into law H.B. 21-1311, a bill that makes sweeping changes to Colorado tax law, notably a provision to provide $10 million annually in tax credits over the next six years to fund the professional service costs of conversions to employee ownership. The funds could be used to convert to an ESOP, an employee ownership trust, or a worker cooperative. ESOPs can qualify for a credit equal to 50% of the conversion costs up to $50,000; cooperative and employee ownership trusts can get up to $25,000 (see page 21 of the bill).
House File 2284, “An Act relating to employee stock ownership plans,” became law in 2012. It provides a 50% reduction in Iowa capital gains taxes for business owners selling to an ESOP as long as the ESOP owns at least 30% of the company after the sale. The provision apparently requires sellers to choose between the Iowa tax break and the Section 1042 federal tax incentive, which have significant differences. First, the Iowa legislation does not require the seller to buy qualified reinvestment property (stocks and bonds of U.S. operating companies) with the proceeds of the sale. Secondly, the Iowa legislation does not distinguish between C and S corporations, while Section 1042 only applies to C corporations. Because Iowa law (as almost all states) conforms business tax deductions to federal tax deductions, sellers to an ESOP in a C corporation owning 30% or more of the stock of the company already could defer capital gains taxes. So a seller in this circumstance could either use the federal deduction for state purposes and get a tax deferral by following the rules for reinvesting in qualified replacement property or take the Iowa 50% reduction in capital gains taxes and not be taxed on 50% of the gain regardless of what was done with he money. Owners of S corporations are not eligible for the federal tax deferral, so the seller would normally take the 50% Iowa exclusion.
In 2013, Nebraska amended a 1987 bill (LB 775) that provides Nebraska residents with a one-time capital gains tax exclusion from the sale of stock in an employee’s company. The law requires that the company have at least five employees, but in the 2013 revision (effective 2014), the law allowed a sale to an ESOP trust to qualify as well. That means that both ESOP participants and sellers to an ESOP (provided they are employees at the time) can exclude gains from the sale of employer stock from taxable income for state tax purposes. (We were unable to locate the bill providing this exclusion, but the form for claiming the exclusion can be found here.)
In September 2016, the Missouri state legislature passed legislation (H.B. 2030) that parallels the Iowa bill, with the additional provision that the same exclusion applies to participants in ESOPs who sell their stock. The law is set to sunset in 2023 unless renewed.
New York has traditionally been a state where it is difficult to operate as a majority ESOP-owned engineering, architectural, landscape architectural, or land survey firm. Existing law requires that a majority of the owners be licensed professionals. Following a 60-0 vote on May 4, 2021, the New York Senate passed S. 5261, a bill that would allow majority-owned ESOPs to qualify under New York corporate practice rules for these firms if 75% or more of the company’s voting trustees or ESOP plan committee (often the board of directors) are members of the profession.
The bill now goes to the House.
The Nebraska legislature passed a bill, LB 49, that would authorize the ownership of public accounting firms by ESOPs. The ESOP could own up to 49% of the firm. The bill passed in 2019 by a vote of 47-0 and was signed into law. Most states already allow minority ESOP-owned CPA firms, and Minnesota allows majority ownership.
H.B. 2246, described in more detail above, would allow professional corporations to be owned by ESOPs, provided that the voting trustees are licensed in that profession.
Qualification for Set-Aside Contracts
H.B. 2246, described in more detail above, would also allow certified Historically Underutilized Businesses (HUBs) to adopt an ESOP without losing their status as an HUB. It would also create contracting preferences at the state, city, council, and special district level for ESOP-owned companies.