New ESOP Legislation Introduced

Dana Rohrabacher (R-CA), arguably the most conservative member of Congress, has paired with Bernie Saunders (D-VT), the only Socialist member of Congress, to introduce H.R. 1462, "The Employee Ownership Act of 1999." The bill, drafted by Rohrabacher, would provide that a company that is at least 50% owned by an employee ownership trust, allows each employee one vote on all corporate issues, and includes 90% of all full-time employees to participate in the trust would not pay any federal income tax. Moreover, employees or other current owners selling their stock back to the company would not pay tax, estates could receive a tax credit for transfers of stock to the trust, and non-trust owners would not pay tax on the first 25% of dividends they receive.

The bill has 34 cosponsors, but even its strongest advocates do not believe it will actually pass. Rohrabacher instead sees this as a means of generating discussion of how employee ownership can be made a larger part of America's economic agenda.

On a more modest note, Senators John Breaux (D-LA) and Orrin Hatch (R-UT) have introduced legislation (S. 1132) that would allow employer tax deductions on dividends paid on ESOP shares that employees choose to reinvest in employer stock. A similar bill (H.R. 2124) has been introduced in the House by Cass Ballenger (R-NC), Karen Thurman (D-FL) and others. Currently, only dividends passed through to employees or used to pay an ESOP loan are deductible. Some public companies have obtained private letter rulings for a "dividend switchback" program that, in effect, allows employees to reinvest dividends through a 401(k) program, although there are some limitations on this approach. The legislation, if passed, would not exempt the reinvestment from potential securities laws issues that could limit their appeal to private companies (although recent securities rules changes could lessen these concerns). The Ballenger bill also would permit distributions from ESOPs for education and first-time home mortgage costs without requiring a 10% penalty tax for the employee.