As members of the House Ways and Means Committee, we are deeply involved in conversations on tax policy and its impact on small businesses. As we consider the different facets of tax reform, we must look out for the business entities that are not only increasing productivity, but are also creating sustainable jobs in this tough economy, showing signs of high employee retention and providing stable retirement savings options for their employees. The ESOP (Employee Stock Ownership Plan) model, commonly used by S corporations to provide a retirement savings alternative to the traditional pension plan, highlights these qualities. It’s easy to see why our nation’s S-ESOPs are just the type of businesses we should promote and incent as part of comprehensive tax reform.
In a recent study, Alex Brill – who served as tax advisor to the Simpson-Bowles Commission and is now a scholar at the American Enterprise Institute – reminded us that, while our Tax Code needs to be simplified and some expenditures need to be eliminated, we need to figure out what works and what doesn’t before slicing it to pieces. Brill’s report looked specifically at how private ESOP companies encourage the formation of employee-owned private businesses to generate important economic and social benefits that would not occur without some kind of tax preferences.
The report confirms what we already know: employee-owned companies have demonstrated higher productivity and increased economic resilience despite economic fluctuations. The employee stake in the success of the company also goes a long way toward preventing outsourcing and keeping jobs in the cities and towns in which employees live. All of these benefits support the fact that private ESOP companies also have stronger job-creation and job-retention track records than their counterparts.
Especially as the traditional pension plan is on the decline, private ESOP companies are increasingly providing strong and sustainable retirement savings for their workers. The ESOP structure affords small and medium-sized businesses the ability to support employee retirement savings that employees may not have otherwise, though it’s important to note that some risk may be involved if employees rely solely on their employer stock for all retirement savings. By allowing employees to benefit from the economic gains of their employers and put those gains into retirement savings accounts, the Tax Code has created billions of dollars in savings that wouldn’t otherwise exist.
Private ESOP companies are increasingly supporting strong communities and growing local economies. A good example is Dexter Apache Holdings, Inc. with operations in Wisconsin and Iowa, which adopted the ESOP model in 1987. Dexter Apache has seen its business grow more than 30 percent over the past three years, and has been able to hire more than 40 new employees during that time despite a tough economy. Leer, Inc., a Dexter Apache subsidiary located in New Lisbon, Wisconsin has been able to provide employees a retirement savings account, through their ownership in the business, which is 10 times the benefit they were receiving prior to adopting the ESOP model.
The Brill analysis makes a strong and compelling case not only for continuing to provide the incentives that keep ESOP models intact, but also to encourage formation of the private employee ownership culture. Making this transition will help ensure productive employees, growing businesses, and a stronger economy.
It’s time to reach across the aisle, find the common ground that we know exists, and do everything we can to get our economy back on track and create the good paying jobs we need to sustain economic growth. By fostering highly productive companies, allowing employers to hire and retain employees, and then encouraging saving for sound retirement, the ESOP model can continue to help American workers and middle class families. We must keep this in mind while tackling comprehensive tax reform.
Kind and Paulsen are both members of the Ways and Means Committee.