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By Corey Rosen, NCEO

For the first time in many years, there seems to be rising and serious interest among some members of Congress in making employee ownership a much more prominent policy objective.

While the immediate impetus is coming from the offices of Representative Velazquez (D-NY) and Senators Gillibrand (D-NY) and Baldwin (D-WI), employee ownership has always been a bipartisan effort. This was recently demonstrated by the unopposed passage of the Main Street Employee Ownership Act, which was spearheaded by Velazquez and Gillibrand with cosponsorship by Senators Risch (R-ID), Collins (R-ME), and Young (R-IN).

An informal group of employee ownership advocates, the Quinsigamond Group, has published a white paper outlining a series of ideas for next steps. (NCEO staff have been involved in this process as well.) The core theme of the paper is that for ESOPs and other forms of broad-based employee ownership to reach the next level, they need to be able to compete more effectively against private equity firms in their ability to purchase both existing private companies and divestitures from public companies.

The proposal that seems most likely to gain traction is the creation of Employee Owned Investment Corporations, or EOICs. Modeled after existing Small Business Investment Corporations, EOICs would be privately funded but could borrow a portion of their capital from the federal government, generally up to twice what the EOIC’s investors commit. The current rates on SBIC loans are between 9% and 16%. EOICs would address the gaps in subordinated debt and transaction expertise that currently hinder employee ownership transactions, especially for corporate divestitures.

EOIC investors would qualify for a 50% reduction in taxable interest income for investments in ESOP companies where the ESOP owns a meaningful share of the equity. This incentive is analogous to that provided in prior legislation, repealed in 1992, that gave banks a 50% exclusion of interest income from loans to ESOPs. The current proposal, however, focuses specifically on subordinated debt. A handful of private equity firms now focus on ESOPs, but their total capital is a fraction of one percent of the total available to private equity funds doing traditional leveraged buyouts–buyouts that often leave employees at risk.

A variant of this idea was presented in October at a Harvard Law School Forum lecture by Christopher Mackin of Ownership Associates and Rutgers University. (The lecture is available on YouTube here.) Focused on larger firms—and inspired by the Federal Home Loan Bank Act of 1932—the Employee Equity Loan Act (EELA) “proposes that over a ten-year period, the Federal Government provide an annual guarantee of $100 billion to SBA/EDA certified lending institutions for the purpose of lending to certified broad‐based employee ownership trusts. The guarantee should apply to the full spectrum of ‘lower middle market’ privately held businesses of up to $300 million in revenue and employing up to 3,000 employees.”

A second idea would extend tax incentives to corporate sellers of a division to an ESOP. In 2016, over $100 billion in divestiture sales took place, compared to a a maximum of several hundred million per year in ESOP transactions. For a divestiture team, selling to an ESOP is rarely attractive; the corporate owners usually can get a higher price by selling to an outside buyer or private equity firm. To help level the playing field, some portion of the taxable gain on the sale (up to a reasonable limit such as the first $20 million to $50 million) could be exempt from tax. As in Section 1042 of the current tax law, the ESOP would have to hold a minimum percentage, such as 30%, after the sale. There would also be a minimum holding period for the sold shares or assets and a clawback of avoided gains by the seller if the acquiring firm fails to retain a significant percentage of employee ownership over a meaningful period.

Finally, private equity and investment firms could be given a tax incentive to incorporate ESOPs into their transactions, something that very rarely occurs now. Rules would be similar to those for divestitures.

These ideas are intended as a complement to legislation now before Congress, H.R. 2092 and S. 1589, the Promotion and Expansion of Private Employee Ownership Act. These bills, which now have 71 House and 39 Senate sponsors, would:

  • Allow owners of S corporations to receive a tax deferral on the sale of stock to a qualifying ESOP under the same terms currently allowed for sales of stock to a C corporation
  • Allow banks to deduct 50% of the interest income they receive from loans to S corporation ESOPs that own more than 50% of the stock.
  • Provide needed technical assistance through the Department of the Treasury to companies that may be interested in forming an S ESOP
  • Ensure that small businesses that become ESOPs retain their SBA certification

What Next?

Other than H.R. 2092 and S. 1589, these ideas are just that—ideas. Over the coming months, the Quinsigamond Group plans to flesh out the details and consider changes. Working with congressional staff, we will be seeking additional support from both parties. Meanwhile, we would welcome both feedback and involvement. (For contact information, see the white paper.)

The time seems ripe for this new effort. Economic inequality–more specifically wealth inequality and the accompanying economic insecurity–are key issues for both parties. Other ideas to address these problems have little chance of becoming law. Employee ownership is a practical solution that does.

Contributing editor Corey Rosen is founder and senior staff member of the National Center for Employee Ownership.