The Holy Grail for those preferring to work within the current predatory capitalist system rather than overthrow it is to combine market-based incentives with progressive but not redistributive policies. Given the vast, untapped waste lands of anachronistic and inequality-enabling U.S. tax, financial, labor and commerce regulations, it’s refreshing to note three new developments that can feed the evolving, aspirational “Ownership for All” movement.
First, the U.S. Department of Agriculture (USDA) has released new rules to expand access to capital for rural businesses including rural cooperatives effective this month. “These changes allow businesses to use the New Markets Tax Credit as a form of equity. For the first time, employees of a business are also allowed to qualify for loan guarantees to purchase stock in a business by forming an Employee Stock Ownership Plans (ESOP) or worker cooperative.” Expanded loan eligibility, including in urban areas, would be eligible for projects that process, distribute, aggregate, store and/or market locally or regionally produced foods. A key point to note is that “the stock ownership provisions are modeled after rural cooperative businesses. Co-ops have been economic development partners with USDA for decades. A January 2016 USDA report indicated that cooperatives earned $6.5 billion in net income and generated $246.7 billion in total revenue in 2014.”
Second, the U.S. Small Business Administration (SBA) recently released its “comments notice” as part of a formal approval process for lending to food and consumer cooperatives under its 7(a) and 504 loan program categories. Previously, the SBA allowed lending to worker cooperatives through its Intermediary Lending Program so this latest action will help to expand the SBA reach beyond worker cooperatives. Additionally, the most recent SBA PRIME program had a special focus on educating potential borrowers about worker cooperatives. When official, these new SBA policies will allow cooperative businesses, including the financing of conversions of other corporate structures to cooperatives, to access government-backed micro, general small business, disaster, equipment and real estate loans, loan guarantees, and other forms of assistance for the first time since its founding on July 30th, 1953. This momentous change symbolizes a “civil rights” expansion for cooperatives in terms of SBA lending resources, 63 years in the making, to achieve equal corporate standing with other forms of for-profit enterprises.
Last but not least and starting in January 2017, the National Credit Union Administration (NCUA) regulating the nation’s 6,400 credit unions composed of 100 million members and over $1 trillion in assets, will be issuing new regulatory guidelines on business lending. Personal guarantees will be required and small business loans will be stratified so that not all business loans will fall under the existing 12.5% assets cap giving credit unions more business lending capacity. The idea is that credit unions will make business loans with greater flexibility and more autonomy through a more principles-based methodology that emphasizes sound risk management practices for business lending. It is hoped that these changes will facilitate individual credit unions (cooperatives themselves) being able to lend to other local and regional cooperatives including worker cooperatives, helping to form a nationwide cooperative lending ecosystem.
These advances, while laudable and a long-time coming, represent just the regulatory tip needed to melt America’s lethal inequality-iceberg. “Ownership4All” is the “fair share” (worker ownership version of “fair trade”) campaign to provide start-up and transitioning worker and union cooperatives with the same tax benefits that ESOPS currently enjoy and level the not-already-privileged ownership community playing field for those first knocking on the worker ownership door.
Worker and employee ownership offer three metrics of hope for America’s deeply unequal workplace society. First, worker-owners at employee-owned businesses tend to earn more in income and retirement than their counterparts at traditional firms. Second, worker and union cooperatives appear to be more resilient and have a higher rate of surviving the first five critical operating, start-up years. Third, worker-owned businesses were better at maintaining their fiscal health during the 2008 Great Recession.
The initial step in the “Ownership4All” campaign is recognition that all corporate structures promoting ownership should benefit from equal conditions (advantages and disadvantages) so that investors and existing owners of capital and enterprises face a level choice when selecting conversion, spin-off and start-up structures. The second step is to differentiate between “predatory ESOPs” as opposed to “enlightened ESOPS.”. The latter is defined as those ESOPS with single class stock for all worker owners, independently verified fair and transparent market valuations, investors who cash out based on company performance over time, high impact democratic workplace participation, a workforce that ends up owning the majority of company stock, and anti-demutualization and outsourcing/offshoring provisions. The campaign will demonstrate how such democratically structured models help to build a more sustainable economy, with the results being more opportunity and mobility for workers, a stronger middle class and greater personal financial security.
The principal reasons for the relative prevalence of ESOPs as compared to worker cooperatives are namely the legal framework and extensive tax breaks offered to a business and especially a business that is an S-Corp. This preferential legal and regulatory framework includes three examples:
- The 1042 Rollover – The 1042 Rollover refers to the ability of an owner to defer or eliminate the capital gains tax on the proceeds from a sale of their business to the employees, as long as the owner sells at least 30% of the company’s stock to the ESOP. This tax break is also currently available with sales to a worker cooperative; however cooperative law in most states require that 100% of the company be sold in the first transaction; in other words, you can’t be a 30% cooperative business. (Note: Ohio cooperative law allows for a staged sale to a cooperative and is, as far as we know, the only state to allow this). The cold hard reality is that it is very difficult for any business or business owner to finance a 100% sale of any asset, let alone a business, so transitioning to a worker owned cooperative becomes more difficult when compared to an ESOP. This status quo is patently unfair to worker owners. Therefore, we need a national cooperative statute that allows for staged transitions to worker cooperatives.
- Lower cost of borrowing – When private citizens go in debt to purchase a house, the IRS allows us to deduct the interest payments on that loan from our total income at the end of the year, thus reducing our tax burden and reducing our cost of home ownership. The reasons for allowing this are clear – encouraging home ownership is considered a public good. The law allows business to do the same on the purchase of assets. ESOP law goes a step further; business that use a leveraged transaction to set up their ESOP (which includes virtually 100% of all ESOPs) are able to deduct both the interest AND principal payments from their income thus further lowering the cost of the ESOP. This option is not yet available to worker cooperatives. Therefore, we need changes to the tax code to allow worker cooperatives to deduct both the interest and principal payments if a loan is used to set up the worker cooperative.
- S Corp ESOPs – S Corps are taxed at the shareholder level and are known as a “pass through entity.” An ESOP is a tax exempt trust. Therefore, a company that is 50% owned by the employees through an ESOP is 50% exempt from income taxes; a 100% S Corp ESOP is 100% exempt from income taxes. This is a tremendous advantage for companies as they compete in the marketplace, and has resulted in more ESOP companies choosing S Corp status, as well as increasing the percentage of the company that is owned by the employees. Therefore, we need changes to the tax code to allow worker cooperatives (which by definition are 100% worker-employee owned) the same tax advantaged status as S Corp ESOPs. We need S Corp Worker Coops.
These three examples and proposals are based on a simple principle: employee and worker ownership is an idea that benefits all of us. America’s rising and diversified working class communities need a framework that encourages the growth of worker and union cooperatives starting with “parity ownership benefits” as a foundational cornerstone. Currently, there are significant economic tax policy class privileges granted to entrepreneurial owners, employee owners, and worker owners in descending order resulting in pervasive and vested structural inequalities. This descending scale needs to be leveled.
“Holy Grail” economic populism can be “free” market-based and can avoid “Big Government,” after-the-fact redistributive policies in exchange for a level playing field organically supporting worker-owned and managed enterprises. As the unfolding USDA, US SBA, and National Credit Union Administration regulatory breakthroughs demonstrate, today’s miracles are yesterday’s pipe dreams and tomorrow’s inequality-banishing tipping points.