WASHINGTON - As we look for ways to reduce the deficit and increase tax fairness, there is more focus in Washington than ever on the need to close tax loopholes. As someone who has fought for years against unjustified tax loopholes, I'm glad the public is becoming more aware of just how damaging they can be. Not long ago, I went to the floor of the Senate to tell my colleagues about one example that is helping build momentum for reform.
At the center of this story is a remarkable American business success story: Facebook and its founder, Mark Zuckerberg. As part of that success, Facebook is in the process of making its initial public offering of stock.
According to documents the company has filed as part of its stock offering, when Facebook goes public, Mr. Zuckerberg plans to exercise options to purchase 120 million shares of stock for 6 cents a share, or about $7 million. Mr. Zuckerberg's shares, obviously, are going to be worth a great deal more than 6 cents; they will likely be worth more than 600 times as much, something in the neighborhood of $5 billion in total.
Here's where the tax loophole comes in. Under current law, Facebook can - perfectly legally - record on the company's financial books that the stock options he received cost the company just pennies a share. But the company can also - perfectly legally - later file a tax return claiming that those same options cost the company something close to the real value of the shares - perhaps $40 a share. And the company can take a tax deduction for that far larger amount.
Stock options are the only kind of compensation expense where corporations are allowed to deduct more than the expense they actually incur.
In addition, Facebook is allowed by law to use this deduction to claim a refund of taxes paid over the last two years, a refund the company estimates at half a billion dollars. So instead of paying taxes to the Treasury, this profitable company will claim a hefty refund of taxes already paid.
And the company says it will, as allowed by law, also use its deduction to reduce its taxes for up to 20 years into the future. Altogether, this loophole could give Facebook a tax break of up to $3 billion and, despite its profits, eliminate its federal income tax bill for years.
Facebook's actions are within the law. As with so much of our tax code, it's not the law-breaking that shocks the conscience, it's the stuff that's perfectly legal.
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.
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 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, we could reduce the federal deficit. Or we could pay for programs to protect our seniors and veterans, put cops on the beat, or teachers in classrooms. That money would more than triple the annual budget of the Small Business Administration, which seeks to help American entrepreneurs create jobs and grow the economy.
Some claim Mr. Zuckerberg's taxes will make up the loss, but what the Treasury receives from him on the one hand, it will return and then some to his company with the other hand. Given that his financial future is tied to that of his company, he also benefits when Facebook's taxes disappear.
There is no reason why Facebook and other profitable corporations should continue to use the stock option loophole to receive windfall tax deductions.
In February, I introduced the Cut Unjustifed Tax Loopholes Act, or CUT Loopholes Act, with Sen. Conrad, Senate Budget Committee Chairman. Our bill includes provisions, similar to legislation that I have introduced in the past few Congresses, to close the stock option loophole. Under our bill, corporations would no longer be allowed to claim stock option tax deductions that are larger than the expense they report to their shareholders and investors.
The stock option loophole should have been closed long before Mr. Zuckerberg's lucrative options became public. But surely the case of Facebook illustrates to the Senate, to the Congress, and to the American people why we must close this loophole.
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Carl Levin is the senior U.S. senator from Michigan.