Business Groups Protest Proposed Options Tax

A plan to assess payroll taxes on some types of stock options and employee stock plans drew protests Tuesday from high-tech companies and business groups, which said the proposed levy could lead many businesses to cancel stock-option programs.

“Because of the additional cost and complexities of compliance, and because of the prospect of filing claims, soliciting employee consents and restating payroll filings, some employers may decide not to offer these important programs to their employees,” Bill Blaylock, a vice president and tax director with Texas Instruments Inc., told Internal Revenue Service officials during a public hearing on the proposed tax. He and nine other witnesses urged the IRS to withdraw or delay the tax.

The IRS proposed in November that gains from incentive stock options and employee stock-purchase plans be subject to the same Social Security, Medicare and unemployment taxes taken out of regular paychecks.

The tax, 15.3% in all, would be levied when employees cash in stock options or buy stock at special discount prices through their employer. Employees and employers would split the burden equally. A congressional tax committee has estimated that it would raise $23 billion over 10 years.

Incentive stock options and employee stock purchase plans have mushroomed in popularity over the last decade as a low-cost way to boost loyalty and spread wealth among employees.

“This tax will disproportionately affect rank-and-file employees,” said David Sherwood, benefits tax counsel for Microsoft Corp.

Business groups said the tax would weigh heaviest on employees at the lower end of the wage scale because they would pay a larger percentage than those whose earnings exceed the Social Security cap of $84,900.

Businesses will be liable for the tax as of January 2003 unless the IRS reconsiders, or Congress says otherwise.