THE BLOG
01/07/2015 02:43 pm ET Updated Mar 09, 2015

Dems Maneuver to Curb CEO Pay Loophole

Mark Wilson via Getty Images

Right out of the blocks, House Democrats are pushing a tax reform in the 114th Congress that tackles the extreme gaps between CEO and worker pay.

The "CEO/Employee Pay Fairness Act" would deny corporate tax deductions for executive compensation over $1 million -- unless they raise salaries for lower-level workers to keep pace with cost of living and labor productivity increases. Rep. Chris Van Hollen (D-Md.) authored the bill.

In a letter to colleagues, House Democratic Leader Nancy Pelosi said the bill would "help ensure that workers share in the fruit of their productivity."

According to Politico, the bill could be voted on through a procedure known as a Motion to Recommit on January 8, when the House is expected to consider legislation to approve the Keystone pipeline. The Republican majority is sure to shoot down the motion, but the maneuver gives Democrats an opportunity to draw attention to their priorities for the new session.

The "CEO/Employee Pay Fairness Act" is just the latest move to address a massive loophole in the tax code that encourages excessive executive compensation. A 1993 amendment to the tax code caps the total executive pay corporations can deduct off their taxes at no more than $1 million -- unless the pay is so-called "performance" pay.

Thanks to this loophole, corporations can simply declare the stock-based rewards they lavish on executives "performance-based" and then go on to deduct the many millions involved as a basic business expense. The more they pay their CEO, the less they pay in taxes.

There have been several efforts to close the perverse loophole for all corporations -- with no exceptions for those handing out employee raises. In the last session, Sen. Jack Reed (D-RI) and Sen. Richard Blumenthal (D-CT) introduced the Stop Subsidizing Multimillion Dollar Corporate Bonuses Act (S. 1476), legislation that would keep the $1 million deductibility cap but remove the "performance pay" loophole. Rep. Lloyd Doggett (D-TX) introduced a companion bill (H.R. 3970) in the U.S. House of Representatives. These bills would save taxpayers $50 billion over 10 years. Patty Murray (D-WA), then Senate Budget Committee Chair, introduced a similar bill (S. 2162) that would use the stricter deductibility limits to pay for expanding the Earned Income Tax Credit.

These reforms would build on a provision in Obamacare that eliminated the "performance pay" loophole for health insurance companies. An Institute for Policy Studies report calculated that this reform generated at least $72 million in additional public revenue last year from America's 10 largest publicly held health insurance companies.

In deciding to lift up this bill in the first week of the session, Democrats no doubt took note of polls showing public support for ending perverse incentives for excessive executive pay. A Hart Research Associates poll, for example, showed 63 percent of Americans want to "Prevent corporations from avoiding taxes when they award their executives millions of dollars in stock options."

While the Dems have next to no chance of prevailing this week, their maneuver will raise awareness of a CEO pay loophole so outrageous it will be hard for Republicans to defend indefinitely.