Uncertainty Describes 2008 Election Results Impact on ESOPs -“The Election of 2008 and Its Impact on ESOPs”
[Note: Below are remarks delivered by ESOP Association President, J. Michael Keeling, at The ESOP Association’s 2008 Las Vegas Conference and Trade Show on November 14, 2008, on the impact of the Presidential Election. All rights reserved by The ESOP Association.]
I gave similar remarks as I give today in 1992, 1994, 1996, 1998, 2000, 2002, 2004, and 2006; never have I faced such a conflicting set of thoughts in crafting my remarks, such hesitancy, and even worry that my remarks will not help our ESOP community win our cause on Capitol Hill. I worry that all the wonderful progress our Foundation is building to make America aware of the power of employee-owned companies will be for naught, as my remarks may cause pessimism, and loss of hope.
But it would be wrong not to say what I think. I have a fiduciary duty to you, members of The ESOP Association—the best group of business people in America, the most progressive group of business leaders in America—not to tell you what I see for our ESOP cause in our nation’s capital in the year 2009, and even beyond in 2010.
Before I do, let me make it clear that, while it may be an old man’s feeble mindlessness—I believe in our democracy. I believe, that except for a few bad apples, the men and women who serve in Congress are good people.
I believe the men and women who work for President Bush are good people.
I believe the men and women who work for, and will work for President-elect Obama, are good people.
I believe the men and women who work for Senator McCain are good people.
If you disagree, then I have to disagree with you.
I cannot demonize our people, our Congress, our President, as the 24/7 cable news people do, or as the bloggers do.
Let me say, I have always enjoyed working for the Board of The ESOP Association, because as advocates of employee ownership that believe in the people, therefore believe that we will move forward with decency, not bile, not negativism.
Let me say, in the 30 year history of lobbying by The ESOP Association, we have never lobbied in an “us versus them” vain, with a negative story, but always with a positive attitude.
But reality is reality.
When I think of the 2008 election results, the major thought I have is Yogi Berra’s observation:
“This is déjà vu all over again.”
May I be personal? I grew up in Deep East Texas—where the style and culture was the same as the old South of plantations, slavery, and Jim Crow laws, in fact, and in practice.
I was the product of a segregated high school. My father served on the City Council, and had to struggle to have the streets paved in the part of town that was derisory called “the colored section,” and he had to struggle to get the City Council to buy chicken wire for a back stop for the only baseball field, that had no grass, in the so-called “colored section” of town.
As so many Americans of my background feel, Senator Obama’s election is n amazing tribute to the wonderful, majority make-up of America.
For me, the most brilliant moment of the campaign was when my son, 30 years old, said to me on election night, “When my friends and I talk about Senator Obama, we never talk about his race.”
Having said all of this, what the election results say to me is –
We are back to the 80s.
In 1984, we, the ESOP community had to fight for our lives in the House tax committee, the House Ways and Means Committee; we had to fight for our lives in 1985; we had to fight for our lives in 1987; we had to fight for our lives in 1989.
And while we had to fight for our lives, we won more often than we lost.
We survived.
The House Ways and Means Committee in the 80s was controlled by the Democrats—just like in 2009/2010.
So you say -- if there are threats to ESOP law, will we not win more than we lose, again?
First, will there be threats to ESOP law, and they will be different from the threats of the 80s.
The threats are clear –
One Congress will have to tend to major tax legislation in 2009/2010. Some say there were no big major tax bills in 2007/2008, why should there be such a bill, or bills, in 2009/2010?
Here are the reasons:
The current tax rate for capital gains will expire at the end of 2010, and go back to levels of the 20th Century.
The current tax rate for dividends will expire at the end of 2010, and go back to levels of the 20th Century.
After a one year repeal of the estate tax, it will revert to the levels of the 20th Century.
Congress must do something about the individual Alternative Minimum Tax that will soon tax couples making $75,000 or more to taxes in addition to their regular taxes. Let me say, in this day and age of two income families, $75,000 is not a high income for a wife and husband trying to raise a family, and make ends meet.
President-elect Obama has pledged to make major changes in the current Federal tax laws.
Two, let us not forget, the Chair of the House Ways and Means Committee, the most powerful person in America with regard to Federal tax law, has proposed, and is serious about a major overall tax reform effort. In 2007, he introduced a blue print for such a tax reform bill. For those who assumed his tax reform positions would go away, they have no sense of how the tax legislation process works. His 2007 positions are not vanishing in thin air, never to be heard of again.
And as you know, his 2007 tax reform proposal contained a very negative S ESOP proposal, that I will not go into detail about now, but which let me say would end basically all non-qualified deferred comp in an S ESOP, thus making it impossible for an S ESOP to compete for leadership in top executive positions.
To understand why ESOP law would be in the mix, you have to understand that there is a growing consensus, a bi-partisan consensus, that the Federal corporate tax rate on C corporations should be reduced, anywhere from 6 to 10 percentage points.
The Republicans are for this reduction because it jives with their core values that taxes should be lower; the Democrats are tilted for this alteration because some do believe our Federal tax rate is too high, and others see the rate reduction as a tactic to get the Republicans to support tax reform proposals that Democrats desire.
In fact, both Chair Rangel’s tax reform bill, and a Treasury Department proposal call for a reduction in the corporate tax rate.
And here is what is important, both propose that the rate reduction decrease in revenues be paid for elimination of so-called corporate tax “loopholes,” and this is where ESOP law comes into the picture.
Chair Rangel has put forward a proposal that says the S ESOP use of non-qualified deferred comp is a tax loophole; the Treasury Department says all ESOP tax benefits are loopholes that should be eliminated. [The Congressional Budget Office has said the same thing by the way.]
But there are more changes in comparison to the 80s.
The collapse of the stock market has triggered a “war” on 401(k) plans specifically, and on defined contribution plans in general
The drumbeat from the leaders of the two House committees with jurisdiction over ERISA plans is that all retirement savings plans should not have any risk, that all private sector plans should be like defined benefit plans. [The two committees are the House Ways and Means Committee, and the House Education and Labor Committee.]
These leaders are joined by prominent media pundits, such as Jane Bryant Quinn, a nice person who I spoke with just recently about ESOPs, but who says, “An employee who works for a company with an ESOP should find another job,” and her remarks go along with what we have read in national newspapers recently, which is, “the stupidest thing a person can do is own stock in the company where they work.”
What is an ESOP? It is defined contribution plan, primary invested in one asset, employer stock. So efforts to change defined contribution plans, to limit risk to almost zero, will reverberate against ESOP’s standing in the law.
We must be aware of the overall current rants against 401(k) plans, and defined contribution plans.
What do we know about President-elect Obama’s view of ESOPs?
All we know is what was written in a letter to Illinois ESOP advocates in 2005. In this letter, he express a generalized recognition that employee ownership, and ESOPs can be positive, and have some kind of role in our nation. But he concludes that recent examples of ESOP companies going under trigger a thought that perhaps ESOP law needs change to prevent too much risk.
What I now say is pure speculation on my part, but I do not believe I am too far off the mark. As an elected official representing Chicago in the Illinois State Legislature, and in the Congress representing the rest of Illinois as well, President-elect Obama has to have had many an employee of United Airlines complain about the United ESOP. He has to have heard complaints from the failed Peoria company, Foster and Gallagher, and as a former law professor at the University of Chicago, the many law suits arising there from.
What about the early news of those on his transition team of economic advisors?
In the 80s one worked for a U.S. Senator, and told me in no uncertain terms that ESOPs are flim flam.
It is rumored that perhaps the new Secretary of Treasury will be Lawrence Summers who vigorously opposed former Senator Breaux’s pro-S ESOP position in 1999 and 2000.
Reading through the tax policy team of the President-elect’s transition office, I see only one person who comes from a background that was pro-ESOP.
Here is also what is different from the 80s.
In the 80s we had a friend in the White House for ESOPs: President Ronald Reagan. Whenever the negative ESOP view would surface in the Treasury Department in the 80s, I can assure you that the word from the White House set the men and women at Treasury straight on ESOP law.
But even more important, we had friends of ESOPs among the Democrats who served on the House Ways and Means Committee in the 80s: Beryl Anthony, Jake Pickle, Charles Rangel, Jim Jones, L.F. Payne, and others.
Today, right now, we do not have one Democrat on Ways and Means who we can be sure will lead the charge to protect ESOP law, or to expand ESOP law, when the tax bills of 2009 and 2010 are written in that Committee, keeping in mind what that Committee does represent, based on past data, 80 to 85% of what becomes law.
We must move more Democrats to be for ESOPs.
We must persuade Democrats on Ways and Means to be for ESOPs.
If your member of Congress is a Democrat, but does not serve on Ways and Means, ask her or him to convey to her or his colleagues on Ways and Means a pro-ESOP message.
We have already had progress in this regard -- our New England friends have met with nearly all House members in New England, all of whom are Democrats now. Some are members of Ways and Means.
Our California ESOP leaders have met with key Democrats on Ways and Means who are from California.
We have had a business with interests in Tennessee liaison for ESOPs with a member of Ways and Means from Tennessee.
An ESOP advocate in North Carolina persuaded his Democratic member to call directly the Ways and Means staff about the negative S ESOP proposal.
And if your member of Congress is a Republican, continue to persuade her or him to be for ESOPs, and to convey that view to the top Republican member on Ways and Means, who Chair Rangel will listen to on tax issues that are not “super” issues, and the ESOP issues are not at this time “big-time, super” issues in Ways and Means.
And let us not be only on the defense.
In 1990, our former super Champion on Ways and Means, Beryl Anthony, said that we had to be on the offense, as a good offense is the best defense. He said by putting forward pro-ESOP proposals we would uncover those members of Congress who would stand up for ESOPS.
We will be on the offense, and we will try to get men and women to say, “Yes, I support more employee ownership through ESOPs, by publicly endorsing pro-ESOP proposals.”
We need you to ask for that support once our current ESOP champions introduce pro-ESOP legislation.
Let us be bold for more employee ownership through ESOPs.
Let us not intend to fail, even in this time of uncertainty.
Let us remember we are in the push for ESOPs for the long term.
We can win; we will win with you and your company’s help.
Thank you.
This article originally ran as the Washington Report in the November 2008 issue of the ESOP Report.
Comments
1. Marc Mathieu said...
Terrific description, at the same time, we invite Europe to set up a "European ESOP". However, we have to convince 27 countries; nothing federal here!
Best wishes from Europe, Michael
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