President's 2015 Budget Proposes Elimination of Dividend Deductibility for Public Companies

President Obama's proposed 2015 budget includes some provisions that would affect ESOP companies. Most notably, the General Explanations of the Administration's Fiscal Year 2015 Revenue Proposals (the so-called "Green Book") says the "the proposal would repeal the deduction for dividends paid with respect to employer stock held by an ESOP that is sponsored by a publicly traded corporation." This is a change from the President's 2014 budget proposal, which called for eliminating the deduction for all C corporations with $5 million or more in revenue.

The discussion (see pages 197-98) covers the competing policy interests around ESOPs, noting the policy goals of, on the one hand, "encouraging employee ownership, which in turn has been viewed as having a productivity incentive effect," and reducing the risks of asset concentration on the other. The budget explanation argues that the best way to balance those competing policy goals is to eliminate the dividend deduction only for public companies, stating that "Ownership of stock of a publicly traded corporation through an ESOP seems unlikely to offer significant productivity incentives to employees because their aggregate ownership interests in the corporation are more likely to be small relative to the ownership interests of public shareholders."

The budget also includes provisions that would affect ESOP companies, such as limits on contributions to retirement plans in general and eliminating the exemption on taxation for carried interest and pass-through payroll tax. The President's budget is not expected to become law, but it will serve as a blueprint for the Democratic Party.