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Startups Could Suffer Under Bill Aimed at Compensation Packages

March 10, 2020, 8:45 AM

Venture capitalists are pushing back against a Senate proposal to rein in an executive tax perk, arguing it could make it hard for startups to compete with large corporations.

The proposal (S. 3341), from 2020 presidential candidate Bernie Sanders (I-Vt.) and Sen. Chris Van Hollen (D-Md.), represents the latest salvo Democrats have fired at deferred compensation and income from capital assets, which they see as contributing to widening wealth inequality in the U.S.

Van Hollen acknowledged the initial pushback.

“We are sensitive to that. Obviously we want to continue to promote startups,” he told Bloomberg Tax. “My view is there is a lot of confusion about those provisions.”

The bill would tax deferred compensation upon vesting—when employees are first eligible for it—rather than when money is distributed. The money raised would be directed to struggling multi-employer pension plans.

Anyone making more than $130,000 per year with more than $100,000 in deferred compensation would see a tax increase, Van Hollen said. That could present a huge headache for startups hoping to compete with corporations, because equity options they may use to lure employees would be taxable for years before employees could cash out, critics say.

“If you are going to give this deferred comp as a package to acquire somebody, and if you say you don’t have the tax benefit anymore, then you will have to make up the compensation with something else,” said Jennifer Blouin, an accounting professor at the Wharton School of the University of Pennsylvania.

Although the measure isn’t likely to gain traction this Congress, it fits into a push from Sen. Ron Wyden (D-Ore.) to tax increases in asset prices on an annual basis, regardless of whether they are cashed out. Wyden aims to introduce that legislation later this year, with an eye towards having a measure in place if Democrats win the White House and the Senate in November.

That adds some urgency for opponents of the Sanders-Van Hollen proposal to fight it, or to call for higher income and deferred compensation thresholds for when the tax kicks in, over concern that the proposal could end up in Wyden’s blueprint for tax reform.

“The CEO and Worker Pension Fairness Act levels the playing field between rank-and-file workers and top executives by eliminating the tax breaks that top executives can receive on tax preferred retirement plans that can contain tens or even hundreds of millions of dollars,” a spokesman for Sanders told Bloomberg Tax in an email. “By applying the changes to only highly compensated employees and exempting incentive and qualified stock options, the legislation strikes a good balance between protecting start-up employees while eliminating costly and unnecessary tax loopholes for executives.”

Impact on Startups

Van Hollen said the salary and vesting thresholds support his argument that the bill, if passed into law, wouldn’t negatively affect startups.

“It seems to provide ample ability for startups to provide non-cash incentives,” he said.

But Rich Wong, a general partner at the venture capital firm Accel and a board member of the National Venture Capital Association, said the measure “works against progressivism,” because it would steer employees towards higher-salaried, corporate jobs, and away from startups.

“If you don’t have those resources personally, then you have to stay at the big company job,” he said.

Historically, startup salaries are lower. “But obviously you are hoping that the next company you build is the next Tesla, the next SpaceX,” and that an employee shares in the success of the startup through equity, he said.

Kyle Pomerleau, a resident fellow at the American Enterprise Institute, said the proposal fits politically within a broader push among Democrats toward allowing fewer income tax deferrals, although he disagrees with it.

“I think politically it’s somewhat smarter than, like, say, a wealth tax, because you can point to, ‘well the Republicans tried to do it,’” he said.

Republicans considered the step as a budgetary offset to offset broader tax cuts in a draft version of the 2017 tax law. The offset idea was quickly dropped due to similar pushback.

Van Hollen said he was open to feedback, and possibly, changes.

“We’ll obviously take input and suggestions with regards to these proposals,” Van Hollen said. “We invite people’s comments and, I don’t think we did, but we want to make sure we don’t have any negative impact on startup opportunities.”

(Michael Bloomberg also sought the Democratic presidential nomination. He endorsed Joe Biden on March 4. Bloomberg Tax is operated by entities controlled by Bloomberg.)

To contact the reporters on this story: Colin Wilhelm in Washington at cwilhelm@bloombergtax.com; Kaustuv Basu in Washington at kbasu@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com

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