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Walmart Slashed Tax Bill By Giving Top Execs Big Bonuses

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This article is more than 9 years old.

The largest private employer in the U.S. continues to exploit tax breaks to rewards its executives, according to the Institute for Policy Studies (IPS), a D.C. based think tank which has researched executive compensation, and Americans for Tax Fairness (ATF), a tax reform coalition. That finding was published in a report released today, Walmart’s Executive Bonuses Cost Taxpayers Millions, focusing on the retail giant's tax strategy.

The report comes just two days ahead of Walmart's annual shareholder meeting which will be held at 7 a.m. on Friday, June 6, 2014, in Bud Walton Arena on the University of Arkansas campus in Fayetteville, Arkansas. You can watch the shareholder meeting via webcast on Walmart's website.

Walmart executives are expected to tout the company's achievements at the shareholder meeting, including the news that the company has paid more than $500 million in bonuses to hourly associates. However, the report notes that over the last six years, the company paid the equivalent of more than 50% of that amount to just eight executives. Those executives took home nearly $300 million in "performance pay" which the company notes is tax deductible: of those eight, one executive, recently retired CEO Michael Duke, claimed $116 million in stock options and other performance based pay.

ATF notes that the pay structure for executives has allowed Walmart to save $104 million in federal tax. The reason can be traced to a 1993 change in the tax law which exempts stock options and performance pay from total income when figuring executive pay limitations. The law which governs deductibility of corporate pay, at section 162(m) of the Tax Code says:

In the case of any publicly held corporation, no deduction shall be allowed under this chapter for applicable employee remuneration with respect to any covered employee to the extent that the amount of such remuneration for the taxable year with respect to such employee exceeds $1,000,000.

However, the law goes on to exempt certain kinds of compensation, including that which is "payable solely on account of the attainment of one or more performance goals." The exemption allows companies to exempt stock options and performance pay from the cap because it was thought to align closely with corporate growth (the more the company earns, the more stock options you deserve).

In practice, that didn't happen: many companies pay out huge corporate bonuses even as the company's own stock is falling. The report singles out Goldman Sachs as an example: in December 2008, with Goldman shares trading at record lows, the bank’s executives received ten times more stock options than in the prior year. Other companies, like Exelon Corp., manipulated earnings, according to a Bloomberg report, solely for the purpose of calculating performance pay: Exelon executives received more than $20 million in performance pay deductible to the company even as operating profits and the company's market value fell by more than half.

Why so much emphasis on performance pay? Easy. Companies are not allowed to deduct executive pay in excess of the cap: the law was originally written to limit what could be considered a "reasonable" business expense for purpose of corporate tax deductions. Cash bonuses based on longevity, for example, would be included for purposes of the cap. However, exempting performance based compensation from the cap makes the potential for corporate deductions practically unlimited.

Frank Clemente, executive director at ATF calls it "truly one of the most perverse loopholes of all time" noting that "the bigger the executive bonuses the less Walmart pays in taxes."

Rep. Lloyd Doggett (D-TX) thinks that manipulating bonuses to escape the cap needs to stop. He has authored a bill, Stop Subsidizing Multimillion Dollar Corporate Bonuses Act (H.R. 3970), that would close the "CEO loophole." The bill wouldn't limit the ability of companies to pay their executives big dollars but it would include performance pay for purposes of figuring the deductibility cap. Rep. Doggett says about his proposal, "Publicly held companies like Walmart can continue paying their executives multimillion dollar bonuses; just don’t expect the American taxpayer to pick up your tab. It makes no sense for working families to subsidize those making nearly 300 times the average worker."

Sen. Jack Reed (D-RI) and Sen. Richard Blumenthal (D-CT) have introduced an identical bill (S. 1476) in the Senate. The bill is also similar to that proposed by Rep. Dave Camp (R-MI), Chairman of the House Ways & Means Committee, under his tax reform plan.

The estimated savings to taxpayers of Doggett's bill, according to the Joint Committee on Taxation, would be $50 billion over 10 years. To put that into context, $50 billion is nearly twice the proposed budget for the Department of Justice (downloads as a pdf) for the next fiscal year, or nearly 1-1/2 times the budget of the Department of Homeland Security (downloads as a pdf).

Of course, the focus of the bill is on executive compensation. Pay for the Walmart's executives is a far cry from what it pays its employees. ATF claimed in an April report that Walmart’s regular workers cost U.S. taxpayers an estimated $6.2 billion in public assistance including food stamps, Medicaid and subsidized housing. That, coupled with tax breaks for its executives, according to the report, results in a "double burden on U.S. taxpayers" while the company continues to boosts its bottom line.

Exactly how big is that bottom line? Walmart ranks #20 on the Forbes List of the world's biggest public companies (that ranking is based on four metrics: sales, profits, assets and market value). Walmart ranked #1 on the Fortune 500 and #2 on the Global 500 in 2013. Sales last year for the company reached a whopping $476.53 billion.

Author's note: After the story first appeared, a Walmart spokesperson reached out to me and asked that I post the following statement in response:

This is the same group that put out a similar flawed report last year, based on promoting their agenda rather than on the facts. Unlike some companies, Walmart pays billions of dollars a year in U.S. federal, state and local taxes, helping to fund education, public safety, and infrastructure improvements in the communities where we operate. Walmart is a pay for performance company.  Our executive compensation program has been developed in the same way as other companies across America, and it complies with the federal tax laws.

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