Vote Explanation for H.R. 5719 — Empowering Employees through Stock Ownership Act

I voted in favor of H.R. 5719, the Empowering Employees through Stock Ownership Act, which passed the U.S. House of Representatives with bipartisan support.

This legislation would allow workers at privately-held firms and start-ups to defer the income taxes on their stock options for up to 7 years or until a “triggering event” — stock buy-backs, acquisitions, or the company going public — occurs that allows the stock to be sold, whichever is sooner. The deferral of taxes is only granted if a company provides equity participation for at least 80% of the full time employees, beyond those who own 1% or more of the company’s stock, the CFO, CEO, and the 4 highest paid officers.

Startup companies commonly compensate their employees by giving them an ownership stake in the company through stock options, which allows employees to buy a set amount of stock when it reaches a certain price. Options often have a vesting period, which requires the employee to stay with the company for a certain amount of time before gaining the right to exercise the options. If the employee exercises his or her options when the stock price is higher than the option price, he or she realizes a gain, which is subject to a tax.

Unfortunately, employees at private companies and start-ups usually cannot sell their shares to make a profit that could be put toward their tax bill because there is no public market for the shares. Consequently, they may be required to include the value of stock-based compensation in income for tax purposes well before they generally have the ability to sell shares to cover this tax liability.

As a result of our current tax system, these workers lose out on the opportunity to gain wealth and ownership as their company succeeds, which could negatively impact the ability for start-ups and private companies to compete with large public companies in attracting and retaining top talent.

While I am concerned that this legislation does not have a funding offset, its cost is quite low, and I firmly believe that by promoting employee ownership and providing these companies with an incentive to use stock options as a tool to empower their workers, H.R. 5719 helps startups, boosts innovation, and grows our economy.