Floor Statements

Mr. President, I ask unanimous consent that the Senate proceed to morning business, with the understanding that the remarks that are made in morning business that relate to the bill that is currently on the floor be placed at the appropriate place in the proceedings as part of the debate on the Defense authorization bill but that we now technically move to morning business, with Senators limited to 10 minutes each.

I, again, thank Senator Salazar.

The Senator is correct. I think the unanimous consent agreement actually provides that all votes remaining on this bill begin at approximately 5:30. That is the expectation. And we again thank everybody who was involved in working out that unanimous consent.

Mr. President, I ask unanimous consent that after Senator Salazar is recognized, Senator Akaka be recognized at that point for his remarks in morning business.

Will the Senator yield for a quick reaction?

There has been no one in this Chamber who has worked harder to try to bring enough Senators together to pass a resolution calling for a change of course in Iraq than Senator Salazar. He has been absolutely intrepid. There is not a day that goes by when he is not working with colleagues looking for a path forward where we can accomplish a change in course, where we could not only begin the transition to a new mission--which is out of a civil war, out of the middle of this sectarian conflict--but also where there is, at a minimum, a goal set for the completion of that transition to those more limited ambitions which would be supportive of Iraq, supportive of their army, but part of a change of policy which would force the Iraqis to finally take responsibility for their own country.

I just want to commend the Senator for his insistence. He has a theme, and it is the correct theme, which is that a bipartisan solution and resolution is absolutely critical in foreign policy, and particularly in war. There is no partisan position in war which is right for the Nation. It is always in the middle of a security conflict--as we are in the middle of now--where there has to be a bipartisan approach. The Senator from Colorado has pled for it, called for it, worked for it, and has asserted his vast energy to try to achieve it.

We haven't accomplished it--it being 60 votes. The rules of the Senate are that it takes 60 votes to adopt something like this, and the Iraq resolutions are operating under that rule, so we need to get the 60. It is not because of a lack of effort on the part of many of us, but surely Senator Salazar is at the head of that list. The Senator from Colorado has put forth such Herculean efforts to get to that mass of 60 who could agree on a formula that could represent those goals--to begin the reduction of our troops and the transition to the new missions, which are not in the middle of sectarian conflict but supportive missions--and to have a binding period under Levin-Reed, and then a goal under some permutation of Levin-Reed to accomplish that in 9 months.

So I wanted to add my thanks to those of the Senator from Virginia, who very appropriately interrupted the Senator from Colorado, and I join in that interruption to thank him and to agree that the Senator from Virginia has been very much a part of an effort in this Senate to move this process forward over the last few years. And I want to also add my thanks to those of the Senator from Colorado of my dear friend from Virginia because he has played an important role to the extent that we have been able to move this process forward. He has been in the middle of that movement.

It is not nearly enough from my perspective. We have obviously tried to get to Levin-Reed, which would change the course in Iraq, and we haven't done that yet. But we are going to keep plugging away because it is critically important that we succeed in Iraq and that we recognize that the only way we are going to succeed is if the Iraqi Government works out the political differences among them because there is

no military solution. And the only hope of success is if the Iraqi leaders finally do what they promised to do a year ago, which is to work out their political differences.

If I could take one more minute of the Senator's time, there is a book out recently about President Bush. I am trying to remember the name of the author, who had great access to the President. In this book, in the appendix, there is a reference to the fact that I had previously told the President that I and many others had taken the message to the Iraqi leaders that they have to change, they have to work out their political differences; that the American people's patience has run out. The President was asked to refer to that and also to the debate on the Senate floor.

What was his reaction to these efforts to change course in Iraq and to tell the Iraqi leaders that it is their responsibility?

The President's response is interesting. He said, accurately, that when I told him this report, that a number of us go to Iraq repeatedly and tell the Iraqi leaders: You have lost the support of the American people. You guys better get your political act together because, folks, we are going to begin to reduce troops here. We can't save you from yourself--what was the President's response when I told him of that? He said:

Thank you, Senator. Thank you for carrying that message to

the Iraqi troops. They've got to hear that.

It was a positive response--not just to the message which many of us have carried, including the Senator from Virginia, the Senator from Colorado, and a dozen other Senators--but he thanked me and others for telling the Iraqi leaders what he, I think it is clear, would like to tell them himself.

(Ms. KLOBUCHAR assumed the Chair.)

And he confirmed it in this book.

If I can take 10 more seconds, I thank the Presiding Officer, Senator Klobuchar, for helping me out with the name of the author. It is Robert Draper.

Mr. President, there is a growing chasm in our country between the amount of money paid to our corporate executives and the earnings of the rank and file workers.

J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. In the U.S., in 1990, average pay for the chief executive officer, CEO, of a large U.S. corporation was 100 times average worker pay; in 2004, the difference was 300 times; today, it is nearly 400 times.

The single biggest factor responsible for this massive pay gap is stock options. Stock options are a huge contributor to executive pay. A key factor encouraging companies to pay their executives with stock options is a set of outdated and misguided Federal tax provisions that favor stock options over other types of compensation. That is why I am introducing today a bill to eliminate federal corporate tax breaks that give special tax treatment to corporations that pay their executives with stock options. It's called the Ending Corporate Tax Favors for Stock Options Act.

This bill has been endorsed by the Consumer Federation of America, Citizens for Tax Justice, the Tax Justice Network--USA, OMBWatch, the Financial Policy Forum, and the AFL-CIO, each of which sees it as needed to eliminate federal tax breaks providing special tax favors for corporations that issue large stock option grants to their executives.

Stock options give employees the right to buy company stock at a set price for a specified period of time, typically 10 years. Virtually every CEO in America is paid with stock options, which are a major contributor to sky-high executive pay.

According to Forbes magazine, in 2006, the average pay of CEOs at 500 of the largest U.S. companies was $15.2 million. Nearly half of that amount, 48 percent, came from stock options that had been cashed in for an average gain of about $7.3 million. In 2006, one CEO cashed in stock options for about $290 million; another cashed them in for about $270 million. Forbes also published a list of 30 CEOs who, in 2006, each had at least $100 million in vested stock options that had yet to be exercised. Corporate executives are, in short, showered with stock options and the millions of dollars they produce.

A key reason behind this flood of executive stock options is the tax code which, when combined with certain U.S. accounting rules, favors the issuance of stock option grants. Right now, U.S. accounting rules require companies to report their stock option expenses one way on the corporate books, while Federal tax rules require them to report the same stock options a completely different way on their tax returns. In most cases, the resulting book expense is far smaller than the resulting tax deduction. That means, under current U.S. accounting and tax rules, stock option tax deductions often far exceed the stock option expenses recorded by the companies.

Stock options are the only type of compensation where the Federal tax code permits companies to claim a bigger deduction on their tax returns than the corresponding expense on their books. For all other types of compensation, cash, stock, bonuses, and more, the tax return deduction equals the book expense. In fact, companies cannot deduct more than the compensation expense shown on their books, because that would be tax fraud. The sole exception to this rule is stock options. In the case of stock options, the tax code allows companies to claim a tax deduction that can be two, three, even ten times larger than the actual expense shown on their books.

When a company's compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it is a pretty tempting proposition for the company to pay its executives with stock options instead of cash or stock. It is a classic case of U.S. tax policy creating an unintended incentive for corporations to act.

The problem is that these mismatched stock option accounting and tax rules also shortchange the Treasury to the tune of billions of dollars each year, while fueling the growing chasm between executive pay and average worker pay. This same mismatch also results in companies reporting one set of stock option compensation expenses to investors and the public through their public financial statements, and a completely different set of expenses to the Internal Revenue Service on their tax returns. Such huge book-tax disparities breed confusion, distrust, and schemes to maximize the differences.

The bill I am introducing today would put an end to these contradictions and to the harmful, unintended consequences that have resulted. It would put a stop to the stock option book-tax disparity, an end to the conflicting stock option expenses reported to investors and Uncle Sam, and an end to the special tax treatment that currently fuels excessive stock option compensation.

To understand why this bill is needed it helps to understand how stock option accounting and tax rules got so out of kilter with each other in the first place.

Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board, FASB, in an all-out, knock-down battle over how companies should record stock option compensation expenses on their books.

U.S. publicly traded corporations are required by law to follow Generally Accepted Accounting Principles, GAAP, issued by FASB, which is overseen by the Securities and Exchange Commission, SEC. For many years, GAAP allowed U.S. companies to issue stock options to employees and, unlike any other type of compensation, report a zero compensation expense on their books, so long as, on the grant date, the stock option's exercise price equaled the market price at which the stock could be sold.

Assigning a zero value to stock options that routinely produced millions of dollars in executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they are granted to an employee, using a mathematical valuation tool such as the Black Scholes model. FASB proposed further that companies include that amount as a compensation expense on

their financial statements. Critics responded that it was impossible accurately to estimate the value of executive stock options on their grant date. A bruising battle over stock option expensing followed, involving the accounting profession, corporate executives, FASB, the SEC, and Congress.

In the end, after years of fighting and negotiation, FASB issued a new accounting standard, Financial Accounting Standard, FAS, 123R, which was endorsed by the SEC and became mandatory for all publicly traded corporations in 2005. In essence, FAS 123R requires all companies to record a compensation expense equal to the fair value on grant date of all stock options provided to an employee in exchange for the employee's services.

The details of this accounting rule are complex, because they reflect an effort to accommodate varying viewpoints on the true cost of stock options. Companies are allowed to use a variety of mathematical models, for example, to calculate a stock option's fair value. Option grants that vest over time are expensed over the specified period so that, for example, a stock option which vests over four years results in 25 percent of the cost being expensed each year. If a stock option grant never vests, the rule allows any previously booked expense to be recovered. On the other hand, stock options that do vest are required to be fully expensed, even if never exercised, because the compensation was actually awarded. These and other provisions of this hard-fought accounting rule reflect painstaking judgments on how to show a stock option's value.

Opponents of the new accounting rule had predicted that, if implemented, it would severely damage U.S. capital markets. They warned that stock option expensing would eliminate corporate profits, discourage investment, depress stock prices, and stifle innovation. Last year, 2006, was the first year in which all U.S. publicly traded companies were required to expense stock options. Instead of tumbling, both the New York Stock Exchange and Nasdaq turned in strong performances, as did initial public offerings by new companies. The dire predictions were flat out wrong.

During the years the battle raged over stock option accounting, relatively little attention was paid to the taxation of stock options. Section 83 of the tax code, first enacted in 1969 and still in place after more than three decades, is the key statutory provision. It essentially provides that, when an employee exercises compensatory stock options, the employee must report as income the difference between what the employee paid to exercise the options and the market value of the stock received. The corporation can then take a mirror deduction for whatever amount of income the employee realized.

For example, suppose a company gave an executive options to buy 1 million shares of the company stock at $10 per share. Suppose, 5 years later, the executive exercised the options when the stock was selling at $30 per share. The executive's income would be $20 per share for a total of $20 million. The executive would declare $20 million as ordinary income, and in the same year, the company would take a corresponding tax deduction for $20 million. Although in 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so taxpayers wouldn't be forced to subsidize millions of dollars in executive pay, the cap was not applied to stock options, allowing companies to deduct any amount of stock option compensation, without limit.

The stock option accounting and tax rules that evolved over the years are now at odds with each other. Accounting rules require companies to expense stock options on the grant date. Tax rules tell companies to deduct stock option expenses on the exercise date. Companies have to report grant date expenses to investors on their financial statements, and exercise date expenses on their tax returns. The financial statements report on all stock options granted during the year, while the tax returns report on all stock options exercised during the year. In short, company financial statements and tax returns report expenses for different groups of stock options, using different valuation methods, and resulting in widely divergent stock option expenses for the same year.

To examine the nature and consequences of the stock option book-tax differences, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing on June 5, 2007. Here is what we found.

To test just how far the book and tax figures for stock options diverge, the Subcommittee contacted a number of companies to compare the stock option expenses they reported for accounting and tax purposes. The subcommittee asked each company to identify stock options that had been exercised by one or more of its executives from 2002 to 2006. The subcommittee then asked each company to identify the compensation expense they reported on their financial statements versus the compensation expense on their tax returns. In addition, we asked the companies' help in estimating what effect the new accounting rule would have had on their book expense if it had been in place when their stock options were granted. At the hearing, we disclosed the resulting stock option data for nine companies, including three companies that were asked to testify. The subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with.

The data provided by the companies showed that, under then existing rules, the 9 companies showed a zero expense on their books for the stock options that had been awarded to their executives, but claimed millions of dollars in tax deductions for the same compensation. The one exception was Occidental Petroleum which, in 2005, began voluntarily expensing its stock options, but even this company reported massively greater tax deductions than the stock option expenses shown on its books. When the subcommittee asked the companies what their book expense would have been if the new FASB rule had been in effect, all 9 calculated book expenses that remained dramatically lower than their tax deductions. Altogether, the nine companies calculated that they would have claimed $1 billion more in stock option tax deductions than they would have shown as book expenses, even using the tougher new accounting rule. Let me repeat that just 9 companies produced a stock option book-tax difference of more than $1 billion.

KB Home, for example, is a company that builds residential homes. Its stock price has more than quadrupled over the past 10 years. Over the same time period, it has repeatedly granted stock options to its then CEO. Company records show that, over the past 5 years, KB Home gave him 5.5 million stock options of which, by 2006, he had exercised more than 3 million.

With respect to those 3 million stock options, KB Home recorded a zero expense on its books. Had the new accounting rule been in effect, KB Home calculated that it would have reported on its books a compensation expense of about $11.5 million. KB Home also disclosed that the same 3 million stock options enabled it to claim compensation expenses on its tax returns totaling about $143.7 million. In other words, KB Home claimed a $143 million tax deduction for expenses that on its books, under current accounting rules, would have totaled $11.5 million. That is a tax deduction 12 times bigger than the book expense.

Occidental Petroleum disclosed a similar book-tax discrepancy. This company's stock price has also skyrocketed in recent years, dramatically increasing the value of the 16 million stock options granted to its CEO since 1993. Of the 12 million stock options the CEO actually exercised over the past five years, Occidental Petroleum claimed a $353 million tax deduction for a book expense that, under current accounting rules, would have totaled just $29 million. That is a book-tax difference of more than 1200 percent.

Similar book-tax discrepancies applied to the other companies we examined. Cisco System's CEO exercised nearly 19 million stock options over the past 5 years, and provided the company with a $169 million tax deduction for a book expense which, under current accounting rules, would have totaled about $21 million. UnitedHealth's former CEO exercised over 9 million stock options in the past 5 years, providing the company with a $318 million tax deduction for a book expense which would have totaled about $46 million.

Safeway's CEO exercised over 2 million stock options, providing the company with a $39 million tax deduction for a book expense which would have totaled about $6.5 million.

Altogether, these 9 companies took stock option tax deductions totaling $1.2 billion, a figure five times larger than the $217 million that their combined stock option book expenses would have been. The resulting $1 billion in excess tax deductions represents a windfall for these companies simply because they issued lots of stock options to their CEOs.

Tax rules that produce outsized tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue huge stock option grants, because they know the stock options will produce a relatively small hit to the profits shown on their books, while also knowing that they are likely to get a much larger tax deduction that can dramatically lower their taxes.

The data we gathered for nine companies alone disclosed stock option tax deductions that were five times larger than their book expenses, generating over $1 billion in excess tax deductions. To gauge whether the same tax gap applied to stock options across the country as a whole, the subcommittee asked the IRS to perform an analysis of some newly obtained stock option data.

For the first time last year, large corporations were required to file a new tax Schedule M-3 with their tax returns. The M-3 Schedule asks companies to identify differences in how they report corporate income to investors versus what they report to Uncle Sam, so that the IRS can track and analyze significant book-tax differences. The first batch of M-3 data, which became available earlier this year, applies mostly to 2004 tax returns.

In analyzing this data, the IRS found that stock option compensation expenses were one of the biggest factors in the difference between book and tax income reported by U.S. corporations. The data shows that, in 2004, stock option compensation expenses produced a book-tax gap of about $43 billion, which is about 30 percent of the entire book-tax difference reported for the period. That means, as a whole, corporations took deductions on their tax returns for stock option compensation expenses which were $43 billion greater than the stock option expenses actually shown on their financial statements for the same year. Those massive tax deductions enabled the corporations, as a whole, to legally reduce their 2004 taxes by billions of dollars, perhaps by as much as $15 billion.

When asked to look deeper into who benefited from these stock option deductions, the IRS was able to determine that the entire $43 billion book-tax difference was attributable to about 3,200 corporations nationwide, of which about 250 corporations accounted for 82 percent of the total difference. In other words, a relatively small number of corporations was able to generate $43 billion in tax deductions simply by handing out substantial stock options to their executives.

There were other surprises in the data as well. One set of issues disclosed by the data involves what happens to unexercised stock options. Under the current mismatched set of accounting and tax rules, stock options which are granted, vested, but never exercised by the option holder turn out to produce a corporate book expense but no tax deduction.

Cisco Systems told the subcommittee, for example, that in addition to the 19 million exercised stock options previously mentioned, their CEO holds about 8 million options that, due to a stock price drop, will likely expire without being exercised. Cisco calculated that, had FAS 123R been in effect at the time those options were granted, the company would have had to show a $139 million book expense, but would never be able to claim a tax deduction for this expense since the options would never be exercised. Apple made a similar point. It told the subcommittee that, in 2003, it allowed its CEO to trade 17.5 million in underwater stock options for 5 million shares of restricted stock. That trade meant the stock options would never be exercised and, under current rules, would produce a book expense without ever producing a tax deduction.

In both of these cases, under FAS 123R, it is possible that the stock options given to a corporate executive would have produced a reported book expense greater than the company's tax deduction. While the M-3 data indicates that, overall, accounting expenses lag far behind claimed tax deductions, the possible financial impact on an individual company of a large number of unexercised stock options is additional evidence that existing stock option accounting and tax rules are out of kilter and should be brought into alignment. Under our bill, if a company incurred a stock option expense, it would always be able to claim a tax deduction for that expense.

A second set of issues brought to light by the data focuses on the fact that the current stock option tax deduction is typically claimed years later than the initial book expense. Normally, a corporation dispenses compensation to an employee and takes a tax deduction in the same year for the expense. The company controls the timing and amount of the compensation expense and the corresponding tax deduction. With respect to stock options, however, corporations may have to wait years to see if, when, and how much of a deduction can be taken. That is because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options.

UnitedHealth, for example, told the subcommittee that it gave its former CEO 8 million stock options in 1999, of which, by 2006, only about 730,000 had been exercised. It does not know if or when he will exercise the remaining 7 million options, and so cannot calculate when or how much of a tax deduction it will be able to claim for this compensation expense.

Right now, stock options are the only form of compensation in which the book expense and tax deduction often take place in different years, and the timing of the deduction is under the control of the employee, rather than the employer. Under current law, it is not unusual for a stock option tax deduction to be claimed 3, 5, or even 10 years after the year in which the stock option compensation was granted. Our bill would completely eliminate this delay and uncertainty, by requiring stock option expenses to be deducted in the same year as they appear on the company books.

If the rules for stock option tax deductions were changed as suggested in our bill, companies would typically be able to take the deduction years earlier than they do now, without waiting to see if and when particular options are exercised. Companies would also be allowed to deduct stock options that are vested but never exercised. In addition, by requiring stock option expenses to be deducted in the same year they appear on the company books, stock options would become more consistent with how other forms of compensation are treated in the tax code.

Right now, U.S. stock option accounting and tax rules are mismatched, misaligned, and out of kilter. They allow companies collectively to deduct billions of dollars in stock option expenses in excess of the expenses that actually appear on the company books. They disallow tax deductions for stock options that are given as compensation but never exercised. They often force companies to wait years to claim a tax deduction for a compensation expense that could and should be claimed in the same year it appears on the company books.

The bill we are introducing today would cure these problems. It would bring stock option accounting and tax rules into alignment, so that the two sets of rules would apply in a consistent manner. It would accomplish that goal simply by requiring the corporate stock option tax deduction to equal the stock option expenses shown on the corporate books each year. Stock option deductions would no longer exceed the expenses recorded on a company's publicly available financial reports. Stock option expenses for both accounting and tax purposes would be the same.

Specifically, the bill would end use of the current stock option deduction under Section 83 of the tax code, which allows corporations to deduct stock option expenses when exercised in an amount equal to the income declared by the individual exercising the option, replacing it with a new Section 162(q),

which would require companies to deduct the stock option expenses shown on their books each year.

The bill would apply only to corporate stock option deductions; it would make no changes to the rules that apply to individuals who have been given stock options as part of their compensation. Individuals would still report their compensation on the day they exercised their stock options. They would still report as income the difference between what they paid to exercise the options and the fair market value of the stock they received upon exercise. The gain would continue to be treated as ordinary income rather than a capital gain, since the option holder did not invest any capital in the stock prior to exercising the stock option and the only reason the person obtained the stock was because of the services they performed for the corporation.

The amount of income declared by the individual after exercising a stock option will likely often be greater than the stock option expense booked and deducted by the corporation who employed that individual. That is in part because the individual's gain often comes years later than the original stock option grant, and the underlying stock will usually have gained in value. In addition, the individual's gain is typically provided, not by the corporation that supplied the stock options years earlier, but by third parties active in the stock market.

Consider, for example, an executive who exercises options to buy 1 million shares of stock at $10 per share, obtains the shares from the corporation, and then immediately sells them on the open market for $30 per share, making a total profit of $20 million. The individual's corporation didn't supply the $20 million. Just the opposite. Rather than paying cash to its executive, the corporation received a $10 million payment from the executive in exchange for the 1 million shares. The $20 million profit from selling the shares was paid, not by the corporation, but by third parties in the marketplace who purchased the stock. That's why it makes no sense for the company to declare as an expense the amount of profit that an employee, or sometimes a former employee, obtained from unrelated parties in the marketplace.

The bill we are introducing today would put an end to the current approach of using the stock option income declared by an individual as the tax deduction claimed by the corporation that supplied the stock options. It would break that old artificial symmetry and replace it with a new symmetry more consistent with other tax code provisions, one in which the corporation's stock option tax deduction would match its book expense.

I consider the current approach to corporate stock option tax deductions to be artificial, because it uses a construct in the tax code that, when first implemented over thirty years ago, enabled corporations to calculate their stock option expense on the exercise date, when there was no consensus on how to calculate stock option expenses on the grant date. The artificiality of the approach is demonstrated by the fact that it allows companies to claim a deductible expense for money that generally does not come from a company's coffers, but from third parties in the stock market. Now that U.S. accounting rules provide a detailed rule for calculating stock option expenses on the grant date, however, there is no longer any need to rely on an artificial construct that calculates corporate stock option expenses on the exercise date using third party funds.

Our bill would eliminate the existing grant date-exercise date disparity between U.S. accounting and tax rules, and eliminate the stock option double standard by ensuring that companies' stock option tax deductions are equal to, and not greater than, the actual stock option expenses shown on their books.

It is also important to note that the bill would not affect in any way current tax provisions that provide favored tax treatment to so- called Incentive Stock Options under Sections 421 and 422 of the tax code. Under these sections, in certain circumstances, corporations can surrender their stock option deductions in favor of allowing their employees with stock option gains to be taxed at a capital gains rate instead of ordinary income tax rates. Many start-up companies use these types of stock options, because they don't yet have taxable profits and don't need a stock option tax deduction. So they forfeit their stock option corporate deduction in favor of giving their employees more favorable treatment of their stock option income. Incentive Stock Options would not be affected by our legislation and would remain available to any corporation providing stock options to its employees.

And again, as mentioned earlier, the bill would have no effect on the tax treatment of stock options for individuals; the bill would affect only corporations.

The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. Right now, Section 162(m) of the tax code applies a $1 million cap on corporate deductions for the compensation paid to the top executives of publicly held corporations. The purpose of this cap is to eliminate any taxpayer subsidy for compensation that exceeds $1 million annually and is paid to a top corporate executive. As currently written, however, the cap does not apply to compensation paid in the form of stock options. By exempting stock option compensation from the $1 million cap, the provision creates a significant incentive for corporations to pay their executives with stock options. The bill would eliminate this favored treatment of executive stock options by making deductions for this type of compensation subject to the same $1 million cap that applies to other forms of compensation covered by Section 162(m).

The bill also contains several technical provisions. First, it would make a conforming change to the research tax credit so that stock option expenses claimed under that credit would match the stock option deductions taken under the new tax code section 162(q). Second, the bill would authorize the Secretary of the Treasury to adopt regulations governing how to calculate the deduction for stock options issued by a parent corporation to the employees of a subsidiary.

Finally, the bill contains a transition rule for applying the new Section 162(q) stock option tax deduction to existing and future stock option grants. This transition rule would make it clear that the new tax deduction would not apply to any stock option exercised prior to the date of enactment of the bill.

The bill would also allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of Financial Accounting Standard, FAS, 123R, and exercised after the date of enactment of the bill. The effective date of FAS 123R is June 15, 2005 for most corporations, and December 31, 2005, for most small businesses. Prior to the effective date of FAS 123R, most corporations would have shown a zero expense on their books for the stock options issued to their executives and, thus, would be unable to claim a tax deduction under the new Section 162(q). For that reason, the bill would allow these corporations to continue to use Section 83 to claim stock option deductions on their tax returns.

For stock options that vested after the effective date of FAS 123R and were exercised after the date of enactment, the bill takes another tack. Under FAS 123R, these corporations would have had to show the appropriate stock option expense on their books, but would have been unable to take a tax deduction until the executive actually exercised the option. For these options, the bill would allow corporations to take an immediate tax deduction, in the first year that the bill was in effect, for all of the expenses shown on their books with respect to these options. This ``catch-up deduction'' in the first year after enactment would enable corporations, in the following years, to begin with a clean slate so that their tax returns the next year would reflect their actual stock option book expenses for that same year.

After that catch-up year, all stock option expenses incurred by a company each year would be reflected in their annual tax deductions under the new Section 162(q).

The current differences between stock option accounting and tax rules make no sense. They require companies to show one stock option expense on their books and a completely different expense on their tax returns. They require corporations to report one set of

figures to their investors and a different set of figures to the IRS.

The current book-tax difference is the historical product of accounting and tax policies that have not been coordinated or integrated. The resulting mismatch has allowed companies to take tax deductions that, usually, are many times larger than the actual stock option book expenses shown on their books, which not only shortchanges the Treasury, but also provides a windfall to companies doling out huge stock options, and creates an incentive for those companies to keep right on doling out those options and producing outsized executive pay.

Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their actual expenses. In 2004, companies used the existing book-tax disparity to claim $43 billion more in stock option tax deductions than the expenses shown on their books. We cannot afford this multi-billion dollar loss to the Treasury, not only because of deep federal deficits, but also because this stock option book-tax difference contributes to the ever deepening chasm between the pay of executives and the pay of average workers.

I urge my colleagues to join me in enacting this bill into law this year.

I ask unanimous consent that the text of thje bill and a bill summary be printed in the Record.

Mr. President, there is a growing chasm in our country between the amount of money paid to our corporate executives and the earnings of the rank and file workers.

J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. In the U.S., in 1990, average pay for the chief executive officer, CEO, of a large U.S. corporation was 100 times average worker pay; in 2004, the difference was 300 times; today, it is nearly 400 times.

The single biggest factor responsible for this massive pay gap is stock options. Stock options are a huge contributor to executive pay. A key factor encouraging companies to pay their executives with stock options is a set of outdated and misguided Federal tax provisions that favor stock options over other types of compensation. That is why I am introducing today a bill to eliminate federal corporate tax breaks that give special tax treatment to corporations that pay their executives with stock options. It's called the Ending Corporate Tax Favors for Stock Options Act.

This bill has been endorsed by the Consumer Federation of America, Citizens for Tax Justice, the Tax Justice Network--USA, OMBWatch, the Financial Policy Forum, and the AFL-CIO, each of which sees it as needed to eliminate federal tax breaks providing special tax favors for corporations that issue large stock option grants to their executives.

Stock options give employees the right to buy company stock at a set price for a specified period of time, typically 10 years. Virtually every CEO in America is paid with stock options, which are a major contributor to sky-high executive pay.

According to Forbes magazine, in 2006, the average pay of CEOs at 500 of the largest U.S. companies was $15.2 million. Nearly half of that amount, 48 percent, came from stock options that had been cashed in for an average gain of about $7.3 million. In 2006, one CEO cashed in stock options for about $290 million; another cashed them in for about $270 million. Forbes also published a list of 30 CEOs who, in 2006, each had at least $100 million in vested stock options that had yet to be exercised. Corporate executives are, in short, showered with stock options and the millions of dollars they produce.

A key reason behind this flood of executive stock options is the tax code which, when combined with certain U.S. accounting rules, favors the issuance of stock option grants. Right now, U.S. accounting rules require companies to report their stock option expenses one way on the corporate books, while Federal tax rules require them to report the same stock options a completely different way on their tax returns. In most cases, the resulting book expense is far smaller than the resulting tax deduction. That means, under current U.S. accounting and tax rules, stock option tax deductions often far exceed the stock option expenses recorded by the companies.

Stock options are the only type of compensation where the Federal tax code permits companies to claim a bigger deduction on their tax returns than the corresponding expense on their books. For all other types of compensation, cash, stock, bonuses, and more, the tax return deduction equals the book expense. In fact, companies cannot deduct more than the compensation expense shown on their books, because that would be tax fraud. The sole exception to this rule is stock options. In the case of stock options, the tax code allows companies to claim a tax deduction that can be two, three, even ten times larger than the actual expense shown on their books.

When a company's compensation committee learns that stock options can produce a low compensation expense on the books, while generating a generous tax deduction that is multiple times larger, it is a pretty tempting proposition for the company to pay its executives with stock options instead of cash or stock. It is a classic case of U.S. tax policy creating an unintended incentive for corporations to act.

The problem is that these mismatched stock option accounting and tax rules also shortchange the Treasury to the tune of billions of dollars each year, while fueling the growing chasm between executive pay and average worker pay. This same mismatch also results in companies reporting one set of stock option compensation expenses to investors and the public through their public financial statements, and a completely different set of expenses to the Internal Revenue Service on their tax returns. Such huge book-tax disparities breed confusion, distrust, and schemes to maximize the differences.

The bill I am introducing today would put an end to these contradictions and to the harmful, unintended consequences that have resulted. It would put a stop to the stock option book-tax disparity, an end to the conflicting stock option expenses reported to investors and Uncle Sam, and an end to the special tax treatment that currently fuels excessive stock option compensation.

To understand why this bill is needed it helps to understand how stock option accounting and tax rules got so out of kilter with each other in the first place.

Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board, FASB, in an all-out, knock-down battle over how companies should record stock option compensation expenses on their books.

U.S. publicly traded corporations are required by law to follow Generally Accepted Accounting Principles, GAAP, issued by FASB, which is overseen by the Securities and Exchange Commission, SEC. For many years, GAAP allowed U.S. companies to issue stock options to employees and, unlike any other type of compensation, report a zero compensation expense on their books, so long as, on the grant date, the stock option's exercise price equaled the market price at which the stock could be sold.

Assigning a zero value to stock options that routinely produced millions of dollars in executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they are granted to an employee, using a mathematical valuation tool such as the Black Scholes model. FASB proposed further that companies include that amount as a compensation expense on

their financial statements. Critics responded that it was impossible accurately to estimate the value of executive stock options on their grant date. A bruising battle over stock option expensing followed, involving the accounting profession, corporate executives, FASB, the SEC, and Congress.

In the end, after years of fighting and negotiation, FASB issued a new accounting standard, Financial Accounting Standard, FAS, 123R, which was endorsed by the SEC and became mandatory for all publicly traded corporations in 2005. In essence, FAS 123R requires all companies to record a compensation expense equal to the fair value on grant date of all stock options provided to an employee in exchange for the employee's services.

The details of this accounting rule are complex, because they reflect an effort to accommodate varying viewpoints on the true cost of stock options. Companies are allowed to use a variety of mathematical models, for example, to calculate a stock option's fair value. Option grants that vest over time are expensed over the specified period so that, for example, a stock option which vests over four years results in 25 percent of the cost being expensed each year. If a stock option grant never vests, the rule allows any previously booked expense to be recovered. On the other hand, stock options that do vest are required to be fully expensed, even if never exercised, because the compensation was actually awarded. These and other provisions of this hard-fought accounting rule reflect painstaking judgments on how to show a stock option's value.

Opponents of the new accounting rule had predicted that, if implemented, it would severely damage U.S. capital markets. They warned that stock option expensing would eliminate corporate profits, discourage investment, depress stock prices, and stifle innovation. Last year, 2006, was the first year in which all U.S. publicly traded companies were required to expense stock options. Instead of tumbling, both the New York Stock Exchange and Nasdaq turned in strong performances, as did initial public offerings by new companies. The dire predictions were flat out wrong.

During the years the battle raged over stock option accounting, relatively little attention was paid to the taxation of stock options. Section 83 of the tax code, first enacted in 1969 and still in place after more than three decades, is the key statutory provision. It essentially provides that, when an employee exercises compensatory stock options, the employee must report as income the difference between what the employee paid to exercise the options and the market value of the stock received. The corporation can then take a mirror deduction for whatever amount of income the employee realized.

For example, suppose a company gave an executive options to buy 1 million shares of the company stock at $10 per share. Suppose, 5 years later, the executive exercised the options when the stock was selling at $30 per share. The executive's income would be $20 per share for a total of $20 million. The executive would declare $20 million as ordinary income, and in the same year, the company would take a corresponding tax deduction for $20 million. Although in 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so taxpayers wouldn't be forced to subsidize millions of dollars in executive pay, the cap was not applied to stock options, allowing companies to deduct any amount of stock option compensation, without limit.

The stock option accounting and tax rules that evolved over the years are now at odds with each other. Accounting rules require companies to expense stock options on the grant date. Tax rules tell companies to deduct stock option expenses on the exercise date. Companies have to report grant date expenses to investors on their financial statements, and exercise date expenses on their tax returns. The financial statements report on all stock options granted during the year, while the tax returns report on all stock options exercised during the year. In short, company financial statements and tax returns report expenses for different groups of stock options, using different valuation methods, and resulting in widely divergent stock option expenses for the same year.

To examine the nature and consequences of the stock option book-tax differences, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing on June 5, 2007. Here is what we found.

To test just how far the book and tax figures for stock options diverge, the Subcommittee contacted a number of companies to compare the stock option expenses they reported for accounting and tax purposes. The subcommittee asked each company to identify stock options that had been exercised by one or more of its executives from 2002 to 2006. The subcommittee then asked each company to identify the compensation expense they reported on their financial statements versus the compensation expense on their tax returns. In addition, we asked the companies' help in estimating what effect the new accounting rule would have had on their book expense if it had been in place when their stock options were granted. At the hearing, we disclosed the resulting stock option data for nine companies, including three companies that were asked to testify. The subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with.

The data provided by the companies showed that, under then existing rules, the 9 companies showed a zero expense on their books for the stock options that had been awarded to their executives, but claimed millions of dollars in tax deductions for the same compensation. The one exception was Occidental Petroleum which, in 2005, began voluntarily expensing its stock options, but even this company reported massively greater tax deductions than the stock option expenses shown on its books. When the subcommittee asked the companies what their book expense would have been if the new FASB rule had been in effect, all 9 calculated book expenses that remained dramatically lower than their tax deductions. Altogether, the nine companies calculated that they would have claimed $1 billion more in stock option tax deductions than they would have shown as book expenses, even using the tougher new accounting rule. Let me repeat that just 9 companies produced a stock option book-tax difference of more than $1 billion.

KB Home, for example, is a company that builds residential homes. Its stock price has more than quadrupled over the past 10 years. Over the same time period, it has repeatedly granted stock options to its then CEO. Company records show that, over the past 5 years, KB Home gave him 5.5 million stock options of which, by 2006, he had exercised more than 3 million.

With respect to those 3 million stock options, KB Home recorded a zero expense on its books. Had the new accounting rule been in effect, KB Home calculated that it would have reported on its books a compensation expense of about $11.5 million. KB Home also disclosed that the same 3 million stock options enabled it to claim compensation expenses on its tax returns totaling about $143.7 million. In other words, KB Home claimed a $143 million tax deduction for expenses that on its books, under current accounting rules, would have totaled $11.5 million. That is a tax deduction 12 times bigger than the book expense.

Occidental Petroleum disclosed a similar book-tax discrepancy. This company's stock price has also skyrocketed in recent years, dramatically increasing the value of the 16 million stock options granted to its CEO since 1993. Of the 12 million stock options the CEO actually exercised over the past five years, Occidental Petroleum claimed a $353 million tax deduction for a book expense that, under current accounting rules, would have totaled just $29 million. That is a book-tax difference of more than 1200 percent.

Similar book-tax discrepancies applied to the other companies we examined. Cisco System's CEO exercised nearly 19 million stock options over the past 5 years, and provided the company with a $169 million tax deduction for a book expense which, under current accounting rules, would have totaled about $21 million. UnitedHealth's former CEO exercised over 9 million stock options in the past 5 years, providing the company with a $318 million tax deduction for a book expense which would have totaled about $46 million.

Safeway's CEO exercised over 2 million stock options, providing the company with a $39 million tax deduction for a book expense which would have totaled about $6.5 million.

Altogether, these 9 companies took stock option tax deductions totaling $1.2 billion, a figure five times larger than the $217 million that their combined stock option book expenses would have been. The resulting $1 billion in excess tax deductions represents a windfall for these companies simply because they issued lots of stock options to their CEOs.

Tax rules that produce outsized tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue huge stock option grants, because they know the stock options will produce a relatively small hit to the profits shown on their books, while also knowing that they are likely to get a much larger tax deduction that can dramatically lower their taxes.

The data we gathered for nine companies alone disclosed stock option tax deductions that were five times larger than their book expenses, generating over $1 billion in excess tax deductions. To gauge whether the same tax gap applied to stock options across the country as a whole, the subcommittee asked the IRS to perform an analysis of some newly obtained stock option data.

For the first time last year, large corporations were required to file a new tax Schedule M-3 with their tax returns. The M-3 Schedule asks companies to identify differences in how they report corporate income to investors versus what they report to Uncle Sam, so that the IRS can track and analyze significant book-tax differences. The first batch of M-3 data, which became available earlier this year, applies mostly to 2004 tax returns.

In analyzing this data, the IRS found that stock option compensation expenses were one of the biggest factors in the difference between book and tax income reported by U.S. corporations. The data shows that, in 2004, stock option compensation expenses produced a book-tax gap of about $43 billion, which is about 30 percent of the entire book-tax difference reported for the period. That means, as a whole, corporations took deductions on their tax returns for stock option compensation expenses which were $43 billion greater than the stock option expenses actually shown on their financial statements for the same year. Those massive tax deductions enabled the corporations, as a whole, to legally reduce their 2004 taxes by billions of dollars, perhaps by as much as $15 billion.

When asked to look deeper into who benefited from these stock option deductions, the IRS was able to determine that the entire $43 billion book-tax difference was attributable to about 3,200 corporations nationwide, of which about 250 corporations accounted for 82 percent of the total difference. In other words, a relatively small number of corporations was able to generate $43 billion in tax deductions simply by handing out substantial stock options to their executives.

There were other surprises in the data as well. One set of issues disclosed by the data involves what happens to unexercised stock options. Under the current mismatched set of accounting and tax rules, stock options which are granted, vested, but never exercised by the option holder turn out to produce a corporate book expense but no tax deduction.

Cisco Systems told the subcommittee, for example, that in addition to the 19 million exercised stock options previously mentioned, their CEO holds about 8 million options that, due to a stock price drop, will likely expire without being exercised. Cisco calculated that, had FAS 123R been in effect at the time those options were granted, the company would have had to show a $139 million book expense, but would never be able to claim a tax deduction for this expense since the options would never be exercised. Apple made a similar point. It told the subcommittee that, in 2003, it allowed its CEO to trade 17.5 million in underwater stock options for 5 million shares of restricted stock. That trade meant the stock options would never be exercised and, under current rules, would produce a book expense without ever producing a tax deduction.

In both of these cases, under FAS 123R, it is possible that the stock options given to a corporate executive would have produced a reported book expense greater than the company's tax deduction. While the M-3 data indicates that, overall, accounting expenses lag far behind claimed tax deductions, the possible financial impact on an individual company of a large number of unexercised stock options is additional evidence that existing stock option accounting and tax rules are out of kilter and should be brought into alignment. Under our bill, if a company incurred a stock option expense, it would always be able to claim a tax deduction for that expense.

A second set of issues brought to light by the data focuses on the fact that the current stock option tax deduction is typically claimed years later than the initial book expense. Normally, a corporation dispenses compensation to an employee and takes a tax deduction in the same year for the expense. The company controls the timing and amount of the compensation expense and the corresponding tax deduction. With respect to stock options, however, corporations may have to wait years to see if, when, and how much of a deduction can be taken. That is because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options.

UnitedHealth, for example, told the subcommittee that it gave its former CEO 8 million stock options in 1999, of which, by 2006, only about 730,000 had been exercised. It does not know if or when he will exercise the remaining 7 million options, and so cannot calculate when or how much of a tax deduction it will be able to claim for this compensation expense.

Right now, stock options are the only form of compensation in which the book expense and tax deduction often take place in different years, and the timing of the deduction is under the control of the employee, rather than the employer. Under current law, it is not unusual for a stock option tax deduction to be claimed 3, 5, or even 10 years after the year in which the stock option compensation was granted. Our bill would completely eliminate this delay and uncertainty, by requiring stock option expenses to be deducted in the same year as they appear on the company books.

If the rules for stock option tax deductions were changed as suggested in our bill, companies would typically be able to take the deduction years earlier than they do now, without waiting to see if and when particular options are exercised. Companies would also be allowed to deduct stock options that are vested but never exercised. In addition, by requiring stock option expenses to be deducted in the same year they appear on the company books, stock options would become more consistent with how other forms of compensation are treated in the tax code.

Right now, U.S. stock option accounting and tax rules are mismatched, misaligned, and out of kilter. They allow companies collectively to deduct billions of dollars in stock option expenses in excess of the expenses that actually appear on the company books. They disallow tax deductions for stock options that are given as compensation but never exercised. They often force companies to wait years to claim a tax deduction for a compensation expense that could and should be claimed in the same year it appears on the company books.

The bill we are introducing today would cure these problems. It would bring stock option accounting and tax rules into alignment, so that the two sets of rules would apply in a consistent manner. It would accomplish that goal simply by requiring the corporate stock option tax deduction to equal the stock option expenses shown on the corporate books each year. Stock option deductions would no longer exceed the expenses recorded on a company's publicly available financial reports. Stock option expenses for both accounting and tax purposes would be the same.

Specifically, the bill would end use of the current stock option deduction under Section 83 of the tax code, which allows corporations to deduct stock option expenses when exercised in an amount equal to the income declared by the individual exercising the option, replacing it with a new Section 162(q),

which would require companies to deduct the stock option expenses shown on their books each year.

The bill would apply only to corporate stock option deductions; it would make no changes to the rules that apply to individuals who have been given stock options as part of their compensation. Individuals would still report their compensation on the day they exercised their stock options. They would still report as income the difference between what they paid to exercise the options and the fair market value of the stock they received upon exercise. The gain would continue to be treated as ordinary income rather than a capital gain, since the option holder did not invest any capital in the stock prior to exercising the stock option and the only reason the person obtained the stock was because of the services they performed for the corporation.

The amount of income declared by the individual after exercising a stock option will likely often be greater than the stock option expense booked and deducted by the corporation who employed that individual. That is in part because the individual's gain often comes years later than the original stock option grant, and the underlying stock will usually have gained in value. In addition, the individual's gain is typically provided, not by the corporation that supplied the stock options years earlier, but by third parties active in the stock market.

Consider, for example, an executive who exercises options to buy 1 million shares of stock at $10 per share, obtains the shares from the corporation, and then immediately sells them on the open market for $30 per share, making a total profit of $20 million. The individual's corporation didn't supply the $20 million. Just the opposite. Rather than paying cash to its executive, the corporation received a $10 million payment from the executive in exchange for the 1 million shares. The $20 million profit from selling the shares was paid, not by the corporation, but by third parties in the marketplace who purchased the stock. That's why it makes no sense for the company to declare as an expense the amount of profit that an employee, or sometimes a former employee, obtained from unrelated parties in the marketplace.

The bill we are introducing today would put an end to the current approach of using the stock option income declared by an individual as the tax deduction claimed by the corporation that supplied the stock options. It would break that old artificial symmetry and replace it with a new symmetry more consistent with other tax code provisions, one in which the corporation's stock option tax deduction would match its book expense.

I consider the current approach to corporate stock option tax deductions to be artificial, because it uses a construct in the tax code that, when first implemented over thirty years ago, enabled corporations to calculate their stock option expense on the exercise date, when there was no consensus on how to calculate stock option expenses on the grant date. The artificiality of the approach is demonstrated by the fact that it allows companies to claim a deductible expense for money that generally does not come from a company's coffers, but from third parties in the stock market. Now that U.S. accounting rules provide a detailed rule for calculating stock option expenses on the grant date, however, there is no longer any need to rely on an artificial construct that calculates corporate stock option expenses on the exercise date using third party funds.

Our bill would eliminate the existing grant date-exercise date disparity between U.S. accounting and tax rules, and eliminate the stock option double standard by ensuring that companies' stock option tax deductions are equal to, and not greater than, the actual stock option expenses shown on their books.

It is also important to note that the bill would not affect in any way current tax provisions that provide favored tax treatment to so- called Incentive Stock Options under Sections 421 and 422 of the tax code. Under these sections, in certain circumstances, corporations can surrender their stock option deductions in favor of allowing their employees with stock option gains to be taxed at a capital gains rate instead of ordinary income tax rates. Many start-up companies use these types of stock options, because they don't yet have taxable profits and don't need a stock option tax deduction. So they forfeit their stock option corporate deduction in favor of giving their employees more favorable treatment of their stock option income. Incentive Stock Options would not be affected by our legislation and would remain available to any corporation providing stock options to its employees.

And again, as mentioned earlier, the bill would have no effect on the tax treatment of stock options for individuals; the bill would affect only corporations.

The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. Right now, Section 162(m) of the tax code applies a $1 million cap on corporate deductions for the compensation paid to the top executives of publicly held corporations. The purpose of this cap is to eliminate any taxpayer subsidy for compensation that exceeds $1 million annually and is paid to a top corporate executive. As currently written, however, the cap does not apply to compensation paid in the form of stock options. By exempting stock option compensation from the $1 million cap, the provision creates a significant incentive for corporations to pay their executives with stock options. The bill would eliminate this favored treatment of executive stock options by making deductions for this type of compensation subject to the same $1 million cap that applies to other forms of compensation covered by Section 162(m).

The bill also contains several technical provisions. First, it would make a conforming change to the research tax credit so that stock option expenses claimed under that credit would match the stock option deductions taken under the new tax code section 162(q). Second, the bill would authorize the Secretary of the Treasury to adopt regulations governing how to calculate the deduction for stock options issued by a parent corporation to the employees of a subsidiary.

Finally, the bill contains a transition rule for applying the new Section 162(q) stock option tax deduction to existing and future stock option grants. This transition rule would make it clear that the new tax deduction would not apply to any stock option exercised prior to the date of enactment of the bill.

The bill would also allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of Financial Accounting Standard, FAS, 123R, and exercised after the date of enactment of the bill. The effective date of FAS 123R is June 15, 2005 for most corporations, and December 31, 2005, for most small businesses. Prior to the effective date of FAS 123R, most corporations would have shown a zero expense on their books for the stock options issued to their executives and, thus, would be unable to claim a tax deduction under the new Section 162(q). For that reason, the bill would allow these corporations to continue to use Section 83 to claim stock option deductions on their tax returns.

For stock options that vested after the effective date of FAS 123R and were exercised after the date of enactment, the bill takes another tack. Under FAS 123R, these corporations would have had to show the appropriate stock option expense on their books, but would have been unable to take a tax deduction until the executive actually exercised the option. For these options, the bill would allow corporations to take an immediate tax deduction, in the first year that the bill was in effect, for all of the expenses shown on their books with respect to these options. This ``catch-up deduction'' in the first year after enactment would enable corporations, in the following years, to begin with a clean slate so that their tax returns the next year would reflect their actual stock option book expenses for that same year.

After that catch-up year, all stock option expenses incurred by a company each year would be reflected in their annual tax deductions under the new Section 162(q).

The current differences between stock option accounting and tax rules make no sense. They require companies to show one stock option expense on their books and a completely different expense on their tax returns. They require corporations to report one set of

figures to their investors and a different set of figures to the IRS.

The current book-tax difference is the historical product of accounting and tax policies that have not been coordinated or integrated. The resulting mismatch has allowed companies to take tax deductions that, usually, are many times larger than the actual stock option book expenses shown on their books, which not only shortchanges the Treasury, but also provides a windfall to companies doling out huge stock options, and creates an incentive for those companies to keep right on doling out those options and producing outsized executive pay.

Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their actual expenses. In 2004, companies used the existing book-tax disparity to claim $43 billion more in stock option tax deductions than the expenses shown on their books. We cannot afford this multi-billion dollar loss to the Treasury, not only because of deep federal deficits, but also because this stock option book-tax difference contributes to the ever deepening chasm between the pay of executives and the pay of average workers.

I urge my colleagues to join me in enacting this bill into law this year.

I ask unanimous consent that the text of thje bill and a bill summary be printed in the Record.

Mr. President, I ask unanimous consent that the Committee on Homeland Security and Governmental Affairs' Subcommittee on Oversight of Government Management, the Federal Workforce, and the District of Columbia be authorized to meet on Friday, September 28, 2007, at 10 a.m. in order to conduct a hearing entitled ``The Role of Federal Executive Boards in Pandemic Preparedness.''

Mr. President, I support the passage of the Matthew Shepard Local Law Enforcement Hate Crimes Prevention Act of 2007. We have all heard the story of Matthew Shepard: the 21-year-old student at the University of Wyoming who was brutally beaten--his skull smashed-- and tied to a fence with a rope and left to die--because he was homosexual. No one should be targeted because of the color of their skin, their religion, their gender or their sexual orientation.

In April of this year, I joined Senators Kennedy, Smith, and others in introducing hate crimes legislation. This amendment, which is identical to that legislation, for the first time will expand the definition of a hate crime to include gender, gender identity, disability, and sexual orientation. It gives the Justice Department jurisdiction over crimes of violence committed because of a person's actual or perceived race, color, religion, national origin, gender, sexual orientation, or disability. Existing law only covers race, color, religion, or national origin-based hate crimes, where the victim was engaging in one of six `specified activities.' It will also strengthen the ability of the Federal, State, and local governments to investigate and prosecute hate crimes based on race, ethnic background, religion, gender, sexual orientation, and disability.

Some have said that this bill will take away first amendment rights. That is just not true. This law would punish violent acts, not beliefs. This legislation only applies to violent, bias-motivated crimes and does not infringe on any conduct protected by the first amendment. The first amendment right to organize against, preach against and speak is not impinged.

America's diversity is one of our greatest strengths. Our tolerance for each other's differences is part of the lamp that can help bring light to a world which is enveloped in bigotry and intolerance.

America has taken many steps throughout our history on a long road to become a more inclusive Nation.

We are hopefully about to take another one if we adopt the Matthew Shepard Hate Crimes Prevention Act of 2007.

Mr. President, I strongly support the Children's Health Insurance Program Reauthorization Act of 2007, a bipartisan bill that would provide health care insurance to millions of children who are not now covered.

I hope the President will reconsider his position and sign the bipartisan compromise when it reaches his desk.

Currently, 6.6 million children are enrolled in CHIP. There are still 9 million uninsured children nationwide, 6 million of which are eligible for either Medicaid or CHIP. In Michigan, while 55,000 children are covered under CHIP, 90,000 Michigan children are currently eligible for Medicaid or MIChild, Michigan's CHIP program, but are not receiving services. In addition, according to the Robert Wood Johnson Foundation, the recent decline in employer-sponsored health care coverage is threatening the access to private health care coverage for many more children. In fact, the Census Bureau has reported that, between 2004-2006, the number of uninsured children has increased by approximately one million children.

Although the existing CHIP has been successful, it still fails to address the problem fully. Too many children qualify for the program but are unable to receive insurance because of inadequate funding.

Much like the Senate bill to reauthorize this successful children's health program, the bill we will pass today will reauthorize CHIP and increase funding for the program by $35 billion over 5 years. The Children's Health Insurance Program Reauthorization Act of 2007, a compromise worked out between the House and Senate, would ensure that there is sufficient funding to cover the children currently enrolled and to expand the program to additional children in need.

The Congressional Budget Office estimates that 3.8 million uninsured children would gain health coverage under this plan and according to a study done by The Urban Institute, 80 percent of the children covered under CHIP will come from families under 200 percent of the Federal poverty level.

We have a moral obligation to provide Americans access to affordable and high quality health care. No person, young or old, should be denied access to adequate health care, and the expanded and improved Children's Health Insurance Program is an important step toward achieving that goal.

Mr. President, let me add my commendation to Senators Webb and McCaskill and the others who fought so hard for this amendment. The heart of this amendment has remained. There have been some changes in it. But the substance of this amendment, the crying need for a commission to look into the contract abuses and waste and fraud is very strong. This amendment is going to do some important work for the country and for the next time we are in a situation where we have such massive spending as we have in this war.

Mr. President, I ask unanimous consent--I have cleared this with my friend, Senator Warner--that we vitiate the vote on the Menendez amendment--that has been done? Fine.

Mr. President, I will yield half the time in opposition to the Coburn amendment to the two Senators from Pennsylvania, half to Senator Specter and half to Senator Casey.

Mr. President, I move to reconsider the vote.

Mr. President, I call up the managers' package at the desk. This package has been agreed to in our unanimous consent agreement. This is the package that is referred to in that unanimous consent agreement.

Mr. President, just 30 seconds. I hope the Senate will vote for cloture. Let me give the rundown of amendments we have now adopted.

One hundred ninety-one amendments have now been adopted through either clearance in voice vote or rollcall. We have a lot of amendments left. We will be here tomorrow, and we will be here on Monday. If cloture is invoked, we will work the best we can to see if we can get some germane amendments adopted, even those that we agree by unanimous consent may not be germane but should be adopted. I hope cloture is invoked. We will be here tomorrow and Monday to work on amendments.

Mr. President, is there any objection if we proceed to morning business?

Mr. President, I ask unanimous consent that the Senate proceed to a period of morning business, with Senators allowed to speak for up to 10 minutes each.

Would that be enough, I ask Senator Brown? Ten minutes? You can ask unanimous consent to extend it.

Mr. President, for the Committee on Armed Services I report favorably the following nomination lists which were printed in the Records on the dates indicated, and ask unanimous consent, to save the expense of reprinting on the Executive Calendar that these nominations lie at the Secretary's desk for the information of Senators.

Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. President, I ask unanimous consent that the Senate now resume consideration of H.R. 1585, and immediately after the bill is reported the debate time be 2 minutes equally divided and controlled between the leaders or their designees with respect to the following pending amendments: Biden amendment No. 2997 and Kyl-Lieberman amendment No. 3017; that each amendment be modified with the changes at the desk, and that no amendments be in order to either amendment prior to the vote; that upon the use or yielding back of time, without further intervening action or debate, the Senate proceed to vote in relation to the Biden amendment, as modified; that upon the disposition of that amendment, there be 2 minutes of debate equally divided and controlled prior to a vote in relation to the Kyl-Lieberman amendment, as modified; that each amendment be subject to a 60-vote threshold, and that if the amendment does not achieve that threshold, it be withdrawn; and that the second vote in this sequence be

limited to 10 minutes; further that upon disposition of these amendments, the next amendment in order be Coburn amendment No. 2196.

Mr. President, I also would give notice that it is our intention, since we are alternating back and forth, that the next amendment we will attempt to call up will be the Webb amendment No. 2999, but that is not part of the UC agreement.

Senator Biden will control the time.

Mr. President, I have discussed with the Senator from Delaware modifying his amendment expressing the sense of Congress on Federalism in Iraq.

My concern with the wording of the amendment stems from the fact that the Iraqi Sunnis did not participate fully in the drafting of the constitution of Iraq and the Sunni community voted overwhelmingly against it but were unable to prevent its adoption in a referendum. As a result of their dissatisfaction with the constitution, an agreement was made to convene a Constitutional Review Commission to review the constitution and to make recommendations for changes to the Iraqi Council of Representatives for submission to the Iraqi people. One of the benchmarks that the Iraqi political leaders agreed among themselves called for the Constitutional Review Commission to be formed by September 2006; for the Commission to complete its work by January 2007; and for a constitutional amendments referendum to be held, if required, in March 2007.

The Constitutional Review Commission has not completed its work despite several extensions of time; the most recent extension being until the end of this year. In recognition of the agreement to have a Constitutional Review Committee, the legislation establishing procedures for the creation of new federal regions in Iraq will not go into effect until 18 months after enactment of the legislation, which is April 2008.

Accordingly, I appreciate the modifications that Senator Biden is making to his amendment to reflect that the political settlement regarding federalism referred to in his amendment should be based upon the ``final'' provisions of the Iraq constitution. This will allow for the possibility of changes being made as a result of the work of the Constitutional Review Commission. I also appreciate Senator Biden's modifying the amendment to note that whatever the political settlement is, be it pursuant to the current or revised constitutional provisions, it should be based on the ``wishes of the Iraqi people and their elected leaders'' as we don't want to suggest that we are trying to impose anything on the Iraqis.

Mr. President, I ask for the yeas and nays.

I move to lay that motion on the table.

The motion to lay on the table was agreed to.

Reserving the right to object--and I won't--is this the amendment which the unanimous consent agreement, previously arrived at, referred to?

Reserving the right to object, is there any time agreement on this amendment?

Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.

Mr. President, I want to speak for a few minutes in support of the Webb-McCaskill amendment that would establish a contracting commission relative to contracting in Iraq, but it also does another very important thing, which is it broadens the jurisdiction of the Special Inspector General for Iraq Reconstruction, or SIGIR. Over the last 4 years, the United States has spent more than $20 billion on reconstruction contracting in Iraq. In report after report, the Special Inspector General for Iraq Reconstruction, SIGIR, has demonstrated that this effort was poorly planned, inadequately staffed, and poorly managed.

For example, the special inspector general has reported that plumbing was so poorly installed at the Baghdad Police College that dripping sewage not only threatened the health of students and inspectors but could have affected the structural integrity of the building.

The special inspector general reported that the security walls built for the Babylon Police Academy in Hilla were full of gaps and deficiencies, some of which were filled with sandbags; lighting systems and guard towers called for in the contract were never installed. As a result, the academy was vulnerable to attack.

The special inspector general reported that a prison in Nasiriyah was originally supposed to house 4,400 inmates, but the scope was reduced to the point where it would only house 800. After most of the available money had been spent, the contract was terminated due to schedule delays and cost overruns.

He reported that neither the government nor the contractor could verify the status of a new oil pipeline from Kirkuk to Baiji because project monitoring was very limited and sporadic. However, at least 25 percent of the welds on the pipeline was defective, and one major canal crossing was only 10 percent complete. The failure to complete this project resulted in the loss of as much as $14.8 billion in oil revenues to the Iraqi Government.

He reported that after the Army Corps of Engineers spent $186 million on primary health care centers throughout Iraq, the contract was terminated with only 6 health care centers completed, 135 partially constructed, and the remainder ``descoped.'' The special inspector general determined that the contractor had lacked qualified engineering staff, failed to check the capacity of its subcontractors, failed to properly supervise the work, and failed to enforce quality control requirements.

The Department of Defense has spent even more money on logistical support contracts for U.S. forces in Iraq and Afghanistan. There have been numerous indications of fraud, waste, and abuse in these contracts as well. For example, recent press reports indicate that the Department of Defense contracting officials in Iraq and Kuwait received millions of dollars in kickbacks, tainting several billion dollars of DOD logistics support contracts. Similarly, the Armed Services Committee held a hearing in April on Halliburton's LOGCAP contract for logistics support in Iraq. Our committee learned that the company was given work that appears to have far exceeded the scope of the contract. All of this added work was provided to the contractor without competition. The contractor resisted providing us with information that we needed to monitor and control costs. There are almost $2 billion of overcharges on the contract, and the contractor received highly favorable settlements on these overcharges.

Unfortunately, the special inspector general does not have jurisdiction over Department of Defense logistic support contracts, and the Department of Defense inspector general who does have jurisdiction refused for several years to send auditors to Iraq and is now playing catchup. As a result, billions of dollars have been spent on these contracts without sufficient oversight.

In addition, there have been numerous reports of abuses by private security contractors operating in Iraq. More recently, the Iraqi Government has complained about an incident in which employees of Blackwater, Inc., allegedly opened fire on innocent Iraqis in Baghdad. This incident is apparently the latest in a long series of similar cases in which Blackwater employees were alleged to have used excessive force.

Unfortunately, the special inspector general does not have jurisdiction over private security contractors. The DOD inspector general does not have jurisdiction over State Department contractors like Blackwater either. Published reports in the last few weeks indicate that the State Department inspector general has systematically avoided looking into allegations of contract abuse in Iraq.

In short, despite almost 5 years of allegations of waste, fraud, and abuse in Iraq contracting, we continue to have huge gaps in our oversight of these activities. The Webb-McCaskill amendment will address these gaps by, first, establishing an independent commission to look into Federal agency contracting for reconstruction, logistical support, and the performance of private security and intelligence functions in Iraq and Afghanistan; and, second, expanding the jurisdiction of the special inspector general to logistical support contracts and contracts for the performance of private security and intelligence functions in Iraq and Afghanistan.

Under this provision, the special inspector general, in collaboration with other relevant inspectors general, would conduct a comprehensive series of audits of logistical support contracts and private security contracts in Iraq and Afghanistan comparable to the audits the special inspector general has already conducted for Iraq reconstruction contracts. The commission would review these materials, conduct hearings, and issue a report identifying lessons learned and making specific recommendations for improvements that should be made in future contracting.

So the Webb-McCaskill amendment would ensure that we finally have appropriate oversight over the full range of contracting in Iraq and Afghanistan. It will ensure that we are in a position to learn from the mistakes we have made, and we will be better positioned to avoid making similar mistakes in the future. I hope there will be a broad bipartisan vote for Webb-McCaskill, just the way there is already broad bipartisan sponsorship for their amendment.

Mr. President, I thank the Senator for his question. Our committee, as the Senator knows perhaps better than any other Member of this body, has a huge responsibility month

after month, year after year, on the authorization bill. Most of our focus is on that bill in terms of staff assignments.

We also from time to time do have oversight hearings. We have had a couple on Iraq, but in terms of what is needed with the immense fraud and abuse and waste that has gone on in Iraq, we could assign our committee nothing else and still not catch up to what needs to be done relative to the waste and the fraud and the abuse that has taken place in Iraq contracting. We have perhaps three or four staff members assigned to investigation. They are in the middle of an investigation now. They could not possibly--with the very small number of staffers assigned to that responsibility--take on the breadth of work which needs to be done relative to Iraq.

Also, this amendment not only has a contracting commission, but it also is going to amend the Special Inspector General Act relative to Iraq to fill in a number of gaps which exist in the inspector general's jurisdiction.

The areas which I just outlined that the current special inspector general does not have jurisdiction over, we must have a modification of that jurisdiction in order that the special inspector general will have that capability which is now omitted from the tasking of the special inspector general. As the Senator also knows because he was responsible for the appointment of a number of these commissions, our committee supports, and indeed has led the way, in the creation of independent commissions all the time. It was not an abdication of our jurisdiction or our authority when the Packard Commission was created, when the section 800 commission was created, or when the Service Acquisition Reform Act Commission was recently created. There are many commissions that we appoint, and we are leading the way and have led the way to have created, and in no way does that diminish the jurisdiction of our committee.

In fact, it is quite the opposite. The creation of these commissions has been able to lead to reforms, legislative reforms at times, which our committee then is able to take up and adopt, hopefully, in many cases, and in fact has adopted in many cases.

So there is nothing novel about the creation of commissions. As a matter of fact, I think the Senator from Virginia, perhaps almost on his own, was the creator of a commission which we recently heard from to give us the independent assessment of the military capability of the Iraqi military forces, the commission led by General Jones.

Did we outsource to the Packard Commission, the reforms they recommended?

I don't think working closely with the Commission collaboratively in any way means they are not going to report to us. They will continue to report to the Congress. There is no shift of the reporting function. As a matter of fact, the IG for Iraq does not have the authority which should have been given to him, and would now be given to him by this bill, for instance, on logistics support contracts. Why in heaven's name should the special IG not have logistics support contracts jurisdiction?

I have never seen as much fraud, waste, and abuse. There is no analogy in the history of this country, I don't believe, for the amount of fraud and waste and abuse that is taking place in Iraq and Afghanistan. I don't think our committee could do anything else if we took on that responsibility. I think we would be having hearings every week, when we need to have hearings on all of the other matters under our jurisdiction. I don't know that we could do an authorization bill properly if we took on this responsibility. It is too massive.

I wonder whether the Senator can give me one example in American history where there has been this degree of waste, fraud, and abuse. We now see a massive investigation taking place because of the alleged fraud of a number of members of the armed services. I cannot remember anything comparable. This is a massive undertaking. It is most appropriate that we have a special commission to do that. There is no reason why they should not work in concert with an IG. We don't want them overlapping and conflicting.

The issue is whether we are going to take on this responsibility one way or the other. This is only one practical way to do it. I wish we had the resources and time in our committee to do the kind of oversight that has to be done relative to Iraq. To me, it has been the most shocking abuse of the taxpayers' dollars that we have seen. As a practical matter, I think the former chairman of the committee would acknowledge it would take a huge amount of staff and committee time.

I want to give one example. We have an ongoing investigation right now, and it is very small relative to the size and scope of this one. We wanted to talk to a witness. During this investigation, a number of witnesses talked to us voluntarily, but a few witnesses would not. In our committee, we don't even have subpoena power unless the full committee votes for it. The Senator from Virginia was very helpful to me, as he remembers, in getting the full committee to vote for a subpoena. I extended my appreciation to him then, and I do it publicly now for his cooperation and that of Senator McCain. Every one of those subpoenas required a vote. Then there had to be a hearing. We have to go through a hearing of our committee to hear from a witness that is subpoenaed, even though that should be through a discovery process. Even our rules are so limiting in our committee that we could not undertake an investigation of this scope.

This is a massive undertaking. To me, it would be suggesting, for instance, that if there was an Iran-Contra Commission, somehow or other the appointment of that Iran-Contra Commission--there was a special committee of the Congress. Was that an abdication of the work of the existing committee? I don't think so. It fit a special need at that time. Each of the committees from which that special committee was drawn didn't have the resources to do it on their own. So each of these are designed for a purpose.

I don't know why there would be objection. The reason for the length of time that the amendment takes is twofold: One is that this is a major investigation that will take a lot of time because its scope is huge. Secondly, we want to take it out of politics. I think the sponsors will speak to this, and perhaps already have. This should not be something where there is going to be a report in the middle of a Presidential campaign. It ought to end after that campaign is over. I think they provide for interim reporting, as I remember, in January after the Presidential campaign.

So I hope there will be bipartisan support. It is not a political effort. The report comes after the Presidential

campaign. There is no practical way that our committee has the resources to undertake the travel and the responsibility and the scope of this. This is huge. There has never been this degree of waste that I know of in American history. I know enough about this already from our one hearing, on one matter, involving one contractor, involving the scope of a contract that we touched literally with the tail of an elephant or donkey. It is massive.

I plead with the former chairman here, who knows exactly the responsibilities of our committee, who knows more than anyone in this body what responsibilities our committee has, that there is no practical way, given our bill that comes up every year, given our nominations process with which the Senator is fully familiar--we have four nominations that we have to hear tomorrow. We have dozens of nominations each year. On top of all of that, we have oversight, which we try to do in a number of areas. We had oversight on the Boeing contract. That was one contract that took a significant amount of time. We did some major good. I don't know the magnitude, but if you look at the Boeing contract, for instance, this contracting abuse scandal has to be a multiple of 10 to 100 times that one investigation. I plead with my friend to support this as the only practical way to get our hands around this situation.

If the Senator from Illinois would yield for just a moment, I would only urge our colleagues--and I know Senator Warner joins me in this--we have over 300 amendments that have been filed. We are clearing some. We have cleared 10 more.

We have about 300 still that need to be addressed one way or the other. Either they are going to be resolved, voted on, or dropped. We need the full cooperation of every Senator to address this very large number of amendments. We have made some progress in clearing amendments. We had two votes today on important amendments. We look forward to those three to five votes in the morning. But we still need the full cooperation of every Senator, and I would urge them to work with our staffs to see if we can clear as many additional amendments as possible.

Mr. President, I ask unanimous consent that the order for the quorum call be rescinded.