President's Budget Includes Repeal of ESOP Dividend Deduction

President Obama's proposed budget for the 2014 fiscal year would "eliminate section 404(k) ESOP dividend deduction for large C corporations," and calculates that the move would increase federal tax revenue by $407 million that fiscal year, rising to $722 million in 2023. The explanation of this proposal specifies that "large" C corporations would be those with $5 million or more in annual revenue. Companies smaller than that would still be allowed to deduct applicable dividends, although such companies represent an extremely small number of ESOP companies.

The administration states its main reason for the proposal is the worry that a concentration of employee assets in company stock creates risks for employees. Analysis by the NCEO suggests that the risks of concentration do not apply to the great majority of ESOP companies, which tend to provide diversified retirement plans in addition to their ESOPs.

Reacting to the proposal, Michael Keeling of the ESOP Association said, "The long-term implications would be awful for the future of a very successful policy of encouraging a more inclusive capital ownership structure in America that can address job sustainability and income inequality, if the policy reasons cited for the proposal by the Administration become the policy of our national government."

[Note: this article has been corrected. It originally described the expected revenue increase as $407 billion to $722 billion.]