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| (Harrer/Bloomberg photo) |
On the Senate floor this morning Sen. Carl Levin urged his colleagues to close a tax loophole that will give Facebook a $3 billion tax break.
In effect, Levin is going to war with Mark Zuckerberg (if the senator saw the film, “The Social Network,” he surely would have thought twice). Levin is raising questions about the upcoming Initial Public Offering of Facebook stock and how Zuckerberg’s company can exploit special tax breaks.
To put that into perspective, when you look at the amount of income tax dollars sent to the federal government, three states have a total that is less than $3 billion.
Levin’s floor statement is long, but it’s well worth the read. Here’s an edited version:
“One recent and very public announcement illustrates dramatically our tax code’s distortions and the need for reform. At the center of this story is Facebook and its founder and CEO, Mark Zuckerberg.
“Mr. Zuckerberg and his company have become a remarkable American business success story. As part of that success, Facebook is in the process of making its initial public offering of stock. The public documents Facebook is required to file as part of that offering tell another compelling story, about one of our tax code’s unjustified corporate loopholes.
“According to its filings, when Facebook goes public, Mr. Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share. Mr. Zuckerberg’s shares, obviously, are going to be worth a great deal more than 6 cents — a total of about $7 million; they will apparently be worth more than 600 times as much (after the IPO), something in the neighborhood of $5 billion.
“Here’s where the tax loophole comes in. Under current law, Facebook can – perfectly legally – tell investors, the public, and regulators that the stock options he received cost the company a mere 6 cents a share – that’s the expense shown on the company’s books. But the company can also – perfectly legally – later file a tax return claiming that those same options cost the company something close to what the shares actually sell for later on – perhaps $40 a share. And the company can take a tax deduction for that far larger amount.
“So the books show a highly profitable company – profitable, in part, because of the relatively small expense the company shows on its books for the stock options it grants to its employees. But when it comes time to pay taxes, to pay Uncle Sam, the loophole in the tax code allows the company to take a tax deduction for a far larger expense than they show on their books.
“… Altogether, this loophole could give Facebook a tax break of up to $3 billion.
“Now, the end result is that a profitable U.S. corporation – a success story – could end up paying no taxes at all for years, even decades.
“… For years, my Permanent Subcommittee on Investigations has identified this stock option tax loophole and tried to explain its cost, its unfairness, and why it should be closed. Facebook’s $3 billion tax break brings the issue into sharp focus.
“Again: The stock-option loophole allows corporations to compensate their executives with stock options, report a specific stock option expense to their shareholders, and then later take a tax deduction for typically a much higher amount. Stock options grants are the only kind of compensation where the tax code allows companies to claim a higher expense for tax purposes than is shown on their books. Our subcommittee found that the difference between what U.S. corporations tell the public and what they told the IRS was as much $61 billion in one year.
“Facebook’s use of this loophole is the most pointed illustration yet of the cost of this loophole. It is difficult to get our minds around a $3 billion tax break for a single corporation. Just how big is it? Well, consider this: In 2009, the most recent year for which IRS data are available, taxpayers from 11 states in our union sent less than $3 billion in individual income tax revenue to the treasury.
“How does this make any sense? After all, American taxpayers will have to make up for what Facebook’s tax deduction costs the Treasury. That $3 billion will either come out of the pockets of American families now, or it will add to the deficit which they will have to pay for later.
“What could our nation do with the $3 billion it will lose when Facebook exploits the stock-option loophole?
“Well …the three billion dollars Facebook will get in tax deductions would more than triple the budget of the Small Business Administration, which seeks to help American entrepreneurs create jobs and grow the economy.
“Three billion dollars would pay the Pentagon’s budget for housing of our military families for nearly two full years. It would pay the budget of the National Institute of Science and Technology for four years. It would more than triple what we plan to spend helping homeless veterans next year. It would pay six times over for the 24 “Reaper” unmanned aerial vehicles the Air Force plans to buy next year.
“Now, some are going to argue that Facebook’s tax break is offset by the fact that Mr. Zuckerberg himself, as well as the other executives who are receiving stock options, will pay taxes as individuals. As various news reports indicate, Mr. Zuckerberg will face a substantial tax bill on the $5 billion in compensation he’s about to receive – perhaps in the neighborhood of a $2 billion tax bill. But it is unlikely that the individual taxes Mr. Zuckerberg pays will offset the tax revenues lost to this loophole. What the Treasury receives from Mr. Zuckerberg on the one hand, it will return and then some to his company with the other hand.
“We also should remember that Mr. Zuckerberg’s financial future is closely tied to that of his company—the value of the options and his retained interest make that clear. To the extent that his corporation benefits – and as I’ve shown, Facebook will benefit handsomely from the use of this loophole – Mr. Zuckerberg stands to benefit as well. Put simply, some of that big tax bill he faces right now will come back to him through the corporation that he will still own a huge part of and will control.
“ … Our federal tax system is built on the principle that businesses, as well as individuals, ought to help pay our nation’s bills. Corporations impose plenty of costs on society – from environmental disasters, financial bailouts, product recalls, and more.
“Businesses also want and need government services, including efficient transportation systems, patent protections, even federal loan guarantees. Paying those costs is why we have a corporate income tax to begin with. Both businesses and individuals are required by law to contribute and ought to be willing to meet their civic obligations and pay their fair share.
“There is no reason why Facebook and the other corporations who use this loophole should continue to receive these windfall tax deductions.
“… I’ve spoken today about one corporate tax loophole, but there are many, many more. The momentum has never been stronger for tax reform that brings more fairness to the tax code, restores revenue lost to unjustified tax loopholes, reduces the deficit and protects important priorities. I look forward to working with our colleagues and with the president to turn that momentum into real reform.”
