President's Economic Recovery Advisory Board Report Lists Changes in ESOPs

The President's Economic Recovery Advisory Board is a commission of notable nongovernmental experts convened to consider ways to spur economic recovery. Paul Volcker chairs the board. One of its mandates is to look at ideas on tax simplification, greater tax compliance, and corporate tax reform. The board's August 2010 "Report on Tax Reform Options" consolidates ideas gathered from a variety of people (a copy of the report in PDF format is at this link). It does not make specific recommendations, but lists the pros and cons of each idea. It does not represent Administration policy, and the ideas it covers include a large range of possible changes, many of which would be "sacred cows." Along with a much more detailed discussion of a variety of options, the report very briefly lists "smaller tax expenditures that experts have mentioned as possible base-broadeners in a business tax reform."

One of these is ESOPs. The report's entire language on ESOPs follows (see p. 79 of the report):

ESOP plans are employer-sponsored retirement plans that typically invest entirely in stock of the employer. Special rules allow employers to deduct dividends paid to stock in ESOPs and allow employees to defer paying capital gains taxes on certain employer-stock transactions. Some argue that the special treatment given to ESOPs, which is even more favorable than other employer-sponsored retirement accounts, results in a lack of diversification in employees' retirement savings that can and, historically has, sometimes resulted in outsized losses to retirement wealth. Eliminating these special provisions and treating ESOP plans like other employer-sponsored retirement plans would raise revenues and harmonize tax incentives with other retirement plans.

It is not entirely clear what these "special provisions" are, but the language suggests it is the Section 1042 tax deferral for sellers to an ESOP in a C corporation (even though the language says "employees," I presume they mean sellers to an ESOP because otherwise the text is nonsensical) and dividend deductibility.

While any discussion of reductions in ESOP benefits tells us that at least some influential voices think ESOPs are too favored by the tax code, it is well to keep in mind that commissions like these almost never result in any policy changes (just as a similar one under President Bush on retirement plans did not), that the report discusses hundreds of possible changes, and that it is not endorsing any specific change.