Thursday, September 2, 2004

Smitherman: Tax stock options


Proposal a surprise; Cranley will conduct hearings

By Kevin Aldridge
Enquirer staff writer

Councilman Christopher Smitherman proposed Wednesday that Cincinnati start applying its earnings tax to stock options, a popular form of compensation for corporate executives.

The city's 2.1 percent earnings tax is levied on those who work or live in Cincinnati. But local executives - some of whom exercise millions of dollars in stock options - are not taxed on this form of compensation.

Smitherman said the move could net the city about $3 million in additional revenue and help sew up an estimated $10.5 million hole in next year's budget.

"It is a question of: What is a person's total compensation?" Smitherman said at council's first session after its summer break. "An executive (in Cincinnati) could receive $1 million in (earnings) subject to city tax, but could also exercise $27 million in stock options that would not be taxed. That, to me, is unfair."

Stock options are the right to buy shares at a set price, frequently at a discount to their fair market value. For example, an option exercised to buy stock at $30 when the stock is trading at $40 on the market yields a gain of $10, which is taxable even if the stock isn't sold.

At one time, those who received stock option income from a Cincinnati-based company had to pay the city tax on those earnings. But in 1998, City Council decided to stop taxing stock options as part of a series of tax reforms.

Ohio defines taxable income as that which individuals report on their federal W-2 withholding forms. The Internal Revenue Service considers compensation from options as income, therefore, making it taxable.

Cincinnati is the only city in the state that does not tax such earnings.

"We must treat all workers the same," Smitherman said. "I want my neighbor who receives stock options to be taxed on his total or her total compensation. This is too corporate-friendly, and we need to close the loop."

Officials at the Greater Cincinnati Chamber of Commerce expressed concern that taxing stock options could put Cincinnati at a competitive disadvantage in the world of corporate recruiting.

Doug Moormann, the chamber's vice president of government affairs, said taxing stock options creates an economic disincentive for the very people who make decisions on where to locate a headquarters.

More than a half-dozen Fortune 500 companies are headquartered downtown.

"We are very fortunate to have major publicly traded companies headquartered in Cincinnati," Moormann said. "We would be very concerned about the creation of any disincentives toward growing those operations."

Councilman David Pepper said Smitherman's proposal "came out of the blue" and that he hadn't had time to fully digest it.

"You may end up losing a lot more than you gain in the long run if you do something that chases companies and high wage earners out of the city," Pepper said. "There are so many different jurisdictions in the area - some without earnings taxes - where people can move without even really thinking about it."

Council's finance committee will discuss the stock options tax further on Monday. Councilman John Cranley, who chairs the committee, said he intends to hold a series of public hearings on the matter.

"We can't do anything to put ourselves at a competitive disadvantage," Cranley said. "If (a stock options tax) does, then I'd probably be against it."

E-mail kaldridge@enquirer.com



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