Policy Proposals

Seeking help to get proposals to decrease wealth gap in the American Jobs Plan

The American Jobs Plan  (“AJP” or infrastructure bill) could decrease the wealth gap, anchor productive capital in the US and help make better union jobs, by incentivizing worker and (multi-stakeholder) ownership as the government invests trillions of dollars in US businesses.

Workers and communities should get long-term benefit from these investments to keep the wealth created local.

The White House may consider such ideas because, for example, Jared Bernstein, Council of Economic Advisors to President Biden in Employee Ownership, ESOPs, Wealth and Wages (2016 for ESCA) concluded that shared employee ownership decreased the wealth gap in 2 ways: by expanding equity ownership and by flattening the pay differential within employee owned companies. His conclusion (p. 15) were these: 1) to have a government agency such as the SBA or Commerce Department “provide direct assistance, at no cost, to small businesses that want to set up shared ownership plans;” 2) to have other corporate tax benefits such as “bonus depreciation, deduction or the interest cost from debt financing… contingent on offering ownership shares to workers.”

There has long been bi-partisan support for democratic employee ownership in Congress.

 I would be happy to work with any legislative staff to help craft any of these into the AJP.

Questions about the policy proposals below:

1. Who would be the most effective champions in the Administration, Senate and the House?

2. Is it best to craft a single “best” policy proposal, or is it a better strategy to provide a menu of approaches seeking to attract the interest of the most effective champions?

3. Who do you have access to among the prospective champions?

Relevant Policy Ideas to Propose to Potential Sponsors:

1) Provide business owners with a clear and easy path to sell their companies to their employees by providing the types of loans, grants, technical support and worker ownership training enabled by (for example) the programs offered by the  Colorado Employee Ownership Commission  and the NYC Owner to Owners Business Transition Hotline. The Main Street Employee Ownership Act of 2018 directed the US Small Business Administration (SBA) to increase its lending to employee-owned companies and to provide technical assistance to help business owners sell to their employees. However, this process has moved slowly in many places, with several exceptions such as Buffalo, NY and Los Angeles.

2) Provide Workers a First Right of Refusal to Buy a Company - Provide workers with a 90–120-day window for an inclusive employee group to make a viable offer to purchase a company which the owner wishes to sell. There is initial discussion of this in the NY legislature. At New Era Windows Cooperative a union-negotiated first right of refusal assisted a worker buyout of the company.

3) Employee Ownership Bank https://www.govtrack.us/congress/bills/116/s1661 proposed by Sen. Bernie Sanders, requires the Department of the Treasury to establish the U.S. Employee Ownership Bank, which must provide, in accordance with specified terms, conditions, and other requirements, financial assistance to increase employee ownership of a company. The bill specifies that, in general, if an employer orders the closing of a plant or facility, the employer must offer its employees an opportunity to purchase the plant or facility through an employee stock-ownership plan or an eligible worker-owned cooperative.

4) Change tax laws to encourage creation of patient capital resources for worker owners and cooperatives.

• There are 2 key features of Italian co-op law that create pools of worker-controlled equity capital which should be considered by the US.  Italian co-op law supporting worker buyouts for 30 years;  Key Italian co-op laws. These Italian laws and their impact provide a stark contrast to the US rules for Employee Stock Ownership Plans (ESOPs) and co-ops. A key flaw in ESOPs is that each employee is allocated his/her share of 100% of the company value, even though s/he has not been there to contribute to all of it. This creates a “repurchase liability” problem for most successful, mature ESOPs. The cost of continuously repurchasing employee shares, which are required to be valued at market rates, cuts deeply into the cash flow needed for company growth. This has caused many ESOP companies to be sold to outside investors ending employee ownership.

• For co-ops under US law, retained earnings that are not allocated to co-op members are taxed at the corporate rate. In Italy, those same retained earnings were held tax free until 2004 (and are now 30-70% tax free) because they are serving a community need beyond the needs of the current workers. That difference is the economic core of the Italian worker co-op community strength. In addition, Italian co-ops are required to contribute 3% of their profits into one of the co-op federation equity funds, which have served as a huge capital resource for the creation of additional cooperative businesses.  Tax changes in the US mirroring those Italian co-op laws could provide a substantial source of equity capital for the worker co-op and shared ownership sectors.

• Provide all types of employee and shared ownership with the same tax advantages provided to ESOPs. This proposal would provide all the tax breaks available to ESOPs, to all types of democratic shared ownership entities as described by the American Sustainable Business Association and 1Worker1Vote in its Ownership4All Campaign.

5) Fair Exchange – workers and citizens equity when governments invests in businesses - In the 2006-8, I led a global online think tank out of Ohio Employee Ownership Center (OEOC) at Kent State University about using broad ownership to combat the negative impact of globalization, which included several conferences and papers funded by the Ford Foundation and German Marshall Fund of the US, and produced research and publications funded by the Alfred P. Sloan Foundation on “Fair Exchange policy” – meaning a government investment in private business (grants, bailouts, equity investments) in which workers and citizens interests are adequately protected and local stakeholders get a fair long-term return.  The “Fair Exchange” materials include:

• Fair Exchange Summary – basic idea

• Fair Exchange Brochure – examples of state and local government use of Fair Exchange

• “Fair Exchange: Providing citizens with equity managed by a community trust in return for government subsidies or tax breaks to businesses”, Cornell Journal of Law and Public Policy (2006) –  historical evidence on best/worst practices of national and regional governments investments in private businesses and proposals for state & federal laws.

• Fair Exchange Legislative Synopsis – state & federal proposals

6) Employee Equity Loan Act  Encouraging Inclusive Growth: The Employee Equity Loan Act  (EELA) is an article in Challenge 2019 by Richard May, Robert Hockett and Christopher Mackin. They propose that government provide patient capital by loaning funds to private equity funds focused on long term investment to enable conversion of companies to ESOPs. This proposal has merit, but only involves loans to ESOPs. The ESOP Trust model protects workers as retirees, not as workers. ESOP workers do not have the legal right to fend off a takeover to protect their jobs. These key flaws in ESOP law that should change to enable long-term sustainable employee ownership. Nonetheless, the EELA could help increase worker ownership in big companies.

 The expense and regulation involved in ESOPs is only feasible for certain large, profitable companies. Conversion to employee ownership trusts (EOTs) and worker co-ops are much less expensive and more flexible options for smaller companies. There would be many more of them if they were also incentivized by tax savings, and if the government provided loans and technical assistance to support for such conversion.

7) Government Contracting Preferences -These ideas could also be achieved by incentivizing broad ownership through government preferences in grants and contracts to companies that provide broad-based employee ownership.

Contact: Attorney Deborah Groban Olson, deb [at] esoplaw.com, 313-300-6517, www.esoplaw.com