10 companies shaved $182 million off their taxes, thanks to 20-year-old 'performance pay' loophole

(December 22, 2015, Washington, DC) A just-released report by the Center for Effective Government and the Institute for Policy Studies, CEO Stock(ing) Stuffers, identifies the 10 companies that benefited the most last year from a tax loophole that encourages excessive executive pay.

Key findings: 

• Ten corporations cut their 2014 tax bills by more than $182 million through CEO “performance pay” deductions. 
• The largest beneficiary was pharmaceutical wholesaler McKesson. CEO John Hammergren pocketed $112 million in fully deductible stock options and other “performance pay,” which translates into $39 million in tax savings for the firm. 
• The stock-pay incentives created by this “performance pay” loophole have deepened wealth inequality. Twenty CEOs who are not company founders hold more than $300 million worth of stock in their corporations. 

This loophole was made possible by a reform that turned 20 years old this week. Section 162(m) of the tax code, initiated on December 20, 1995, was intended to discourage excessive executive compensation by capping the amount corporations can deduct from their income taxes for executive pay at no more than $1 million per executive. But the law opened a massive loophole by exempting stock options and other so-called “performance pay.”

“This well-intentioned reform turned into one of the biggest policy boondoggles of the past two decades,” says Sarah Anderson, a report co-author and Global Economy Project Director at the Institute for Policy Studies. “Instead of reining in CEO compensation, it sent so-called ‘performance pay’ flooding into executive suites.”

“By closing this perverse loophole, we could right a policy wrong that has greatly contributed to wealth inequality and generate funds for greater public purpose,” notes Scott Klinger, another report co-author and director of Revenue and Spending Policies at the Center for Effective Government.

The Joint Committee on Taxation estimates that closing this CEO pay loophole would generate $50 billion in revenue over 10 years. The report lists four legislative proposals aimed at fixing this loophole.

The report is available at: http://www.foreffectivegov.org/sites/default/files/stocking-stuffers.pdf

Past IPS and CEG research on the "performance pay" loophole has been highlighted in the TV series "House of Cards" and many major media outlets, including Forbes, Guardian, CBS Moneywatch, Fortune, Politico, and CNN.