Carl Levin

Mr. LEVIN

Mr. LEVIN. Mr. President, we mark today the first anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This law was Congress's earnest attempt to answer a vital question: How do we avoid a repeat of the financial catastrophe from which we are still struggling to recover? I would like to describe the findings of our Permanent Subcommittee on Investigations report on the origins of the financial crisis, and how those findings informed my thinking and that of some of our colleagues about how to address Wall Street reform and design effective legislation. Then I would like to talk about a specific provision in the Dodd-Frank Act that my colleague, Jeff Merkley, and I--as well as Senator Reed and others--fought hard to include in Dodd-Frank, and why I believe that provision has the potential to remedy key failings of our financial system that helped contribute to the financial crisis. And then a few minutes on how, at the law's 1 year anniversary, we are fighting a second battle, just as important as the first, on how to implement Dodd-Frank. Many of my colleagues, and particularly Republican colleagues subscribe to the view that banks and the market know best. It is the same view espoused by those who told us in the 1990s that we should deregulate finance, give free rein to so-called financial innovation, and place our trust in the belief that the market was ``self- correcting.'' It was a big mistake, and it led us to the brink of economic disaster, when only a massive taxpayer bailout of large banks prevented a second Great Depression. I can't imagine how one could look at those events and come to the conclusion that we need relaxed regulations. Our subcommittee reviewed literally tens of millions of documents, interviewed hundreds of witnesses, and held four lengthy hearings. We found that the financial crisis was the result of unchecked greed and conflict of interest up and down the line. Financial institutions that were too big to be allowed to fail engaged in reckless risk-taking in pursuit of massive, but short-term, profits. Government regulators and credit rating agencies, who were supposed to be the cops and independent referees to keep those reckless impulses in check, instead allowed or even encouraged them, in part because of their own conflicts of interest, which gave them incentive to go along. Our investigation started upstream, with mortgage lending. We looked specifically at Washington Mutual Bank, which was the Nation's largest thrift when it began a campaign of aggressive subprime mortgage lending, even though the bank's top executives recognized there was an unsustainable bubble in housing prices. We found massive evidence of fraud in WaMu's lending, fraud that people inside and outside the bank recognized. But bank executives ignored the red flags, allowing WaMu to make its fraudulent and high-risk loans, package those loans, flooding the financial system with toxic mortgages, and led their bank to the largest bank failure in our history. WaMu's primary regulator, the Office of Thrift Supervision, utterly failed to stop WaMu's reckless lending, despite identifying and logging nearly 500 serious deficiencies at the bank that they were supposed to regulate over 5 years, doing nothing about it. The OTS director-- perhaps out of deference to the fact that fees from WaMu were the biggest single source of OTS's budget--referred to WaMu as a ``constituent,'' which surely would come as a surprise to his agency's real constituents, the American people, who counted on OTS to walk a beat--and not to toe the WaMu line. WaMu and other banks were aided and abetted in their pollution of the financial system with toxic securities by credit rating agencies that failed to accurately and objectively assess risks. Our investigation examined ratings failures at Moody's and Standard & Poor's. The testimony of employees of the two firms, corroborated by internal documents, show that the rating agencies were more focused on growing market share for themselves and increasing revenues than in improving rating accuracy. In other words, their ratings failed in part because they relied for their revenue on the same banks whose products they were supposed to impartially assess, a conflict of interest that led to AAA ratings being given to shoddy securities. Wall Street firms facilitated this whole chain of shoddy securities. They were hungry for mortgages, even poor quality mortgages, to package and sell, taking in large fees to underwrite these toxic financial assets. Some reaped huge returns by trading those assets for their own profit. The subcommittee found that some investment banks, such as Goldman Sachs, were engaged in conflicts of interest. Goldman misled its clients. It packaged mortgage-backed securities in an attempt to rid their own inventory of assets the firm's employees called ``junk,'' ``crap'' and worse. Goldman Sachs bet secretly against their own products, bet that they were failed, and not only sold these products to unsuspecting clients, but misrepresented their own interest in the transaction. The four hearings we held in the spring of last year laid out this evidence in damning detail. Those hearings took place as the Senate was considering the legislation whose 1 year anniversary we are marking today. We saw the impact of our hearings on the law. For instance, Dodd- Frank did away with the Office of Thrift Supervision, which failed so completely in the years leading up to the crisis. Dodd-Frank included important reforms in how credit rating agencies operate and attempted to resolve some of the conflicts of interest that tainted their work by taking steps to keep financial firms from shopping for high ratings. Dodd-Frank tackled abusive mortgage lending in many ways. We banned the ``liar loans'' that WaMu and others issued so recklessly to borrowers who provided little or no documentation of their ability to pay. We required banks to keep some of the mortgage-backed securities they issue on their books rather than making bad loans and selling 100 percent of them and the risk they carried. We prohibited banks from paying their employees more when they persuade home buyers to take out high-risk loans. We established a consumer protection agency with authority to police abusive lending. Throughout the debate, I focused in particular on an issue I see as the connecting thread tat ran through our hearings and our report: rampant, unchecked conflict of interest. The subcommittee's work showed how time and again, institutions within the financial and regulatory system chose their own short-term interests over the interests of their clients. We found a particularly vivid example in a $2 billion deal called Hudson Mezzanine issued by Goldman Sachs. Hudson was a collateralized debt obligation--that's a security that references or is backed by a pool of loans and other assets, in this case mortgage loans. In marketing Hudson to its clients, Goldman told clients that its interests were ``aligned'' with the buyers of the CDO, and that the CDO's assets had been ``sourced from the Street,'' in other words outside of Goldman. In fact, most of the assets backing Hudson were from Goldman's own inventory, assets the bank knew were risky and wanted to unload. And far from being ``aligned'' with its clients, Goldman's position was opposed to its own clients, because it held the entire short side of the CDO, making a $2 billion bet that Hudson would plunge in value. When it did, Goldman effectively took $2 billion out of its clients' pockets and made a handsome profit. And injecting those junk securities into the financial system did real damage to that system. The question of accountability is important here. I have said before, it is up to the appropriate authorities, and not to us in the Senate, to decide whether those responsible for transactions such as Hudson should be punished. But what I can say is I think it is vitally important that those authorities address and resolve that question. That is why our subcommittee forwarded our report to law enforcement authorities. They have the job of providing the Nation with the accountability that so far has been lacking. The congressional role is legislative. The amendment that Senator Merkley and I offered on the Senate floor, known as Merkley-Levin, codified the so-called Volcker rule, former Fed Chairman Paul Volcker's recommendation that we rein in proprietary trading by banks. Firms such as Lehman Brothers and Bear Stearns collapsed in part because their pursuit of short-term profit led them to risky trades that blew up in their faces. Merkley-Levin says that if you are a commercial bank protected by taxpayer-funded Federal deposit insurance, you can't engage in high-risk proprietary trading. Even if you are not a traditional bank, but because of your size, your collapse would damage the stability of the U.S. financial system. You are now required to adhere to certain capital requirements and other limitations. Merkley-Levin also breaks new ground in the area of conflict of interest. It explicitly bans the kinds of conflict of interest we saw so vividly in Goldman's Hudson transaction. It prohibits firms from assembling an asset-backed security and selling it to clients while betting against that same security, acting not as a market-maker, but as an investor for its own profit. You are either for your client or you are for yourself. We had to fight hard for Merkley-Levin's passage. When the Senate passed its version of Dodd-Frank, Republicans engaged in complicated maneuvers on the floor to block the Senate from even considering our amendment. But we succeeded in getting it included in the bill produced by the House-Senate conference committee, and despite intense lobbying by banks against Merkley-Levin, it is now law. But the battle is far from over. Since passage, regulatory agencies have been working to turn the provisions of Dodd-Frank into detailed regulations and have been subjected to the same barrage of bank lobbying that accompanied our debate in Congress. Banks have spent more than $50 million so far this year lobbying to weaken Dodd-Frank. Consumers and the American economy won an important victory one year ago today. But that victory will not be secure until Dodd-Frank has teeth--tough rules backed by conscientious enforcement. Some are pulling every trick in the book to slow these regulations and weaken their impact. But the success we had in passing Dodd-Frank shows that the powerful interests don't always win. Supporters of reform made their voices heard a year ago, and today, they are working to ensure that Dodd-Frank is implemented forcefully. They are telling regulators--many of whom once subscribed to the notion that banks know best--that the American people will not allow a return to policies that so recently did so much harm. Just like we need a cop on the street to enforce the traffic laws, we need a cop on the beat on Wall Street. Anything less threatens a repeat of disaster. Anything less will also damage confidence in our financial system, and we will not have a market that holds the confidence of investors and potential investors. That should be everybody's goal. The free market is incredibly important. We all depend on it for economic growth. But that market must be honest. That is in the interest of everyone. Whether you have invested in the market or thinking about investing in the market, that is in the interest of the American people. We are not talking about weakening the market--we are talking about strengthening it. And that is just what the Dodd-Frank Act can accomplish, if we implement it as Congress intended.

Mr. LEVIN

Mr. LEVIN. Mr. President, as Congress continues to debate ways to reduce our national deficit, some Members of Congress are taking the time to reflect on the state of the Federal tax system and consider how we can simplify it and make it more efficient and fair. Today, as part of that effort, I along with my colleague Senator Begich are introducing legislation aimed at simplifying and modernizing the existing system for filing Federal tax liens, a key tool used by the Treasury to collect unpaid taxes. The bill has been endorsed by Citizens for Tax Justice, Tax Justice Network, Public Citizen, US Public Interest Research Group, and the FACT Coalition, an organization of public interest and business groups concerned with tax fairness. It has been 45 years since Congress has made any significant changes to the laws regulating how the Internal Revenue Service, IRS, files Federal tax liens. Right now, outdated laws are forcing the IRS to waste taxpayer dollars on an old-fashioned, inefficient, and burdensome paper-based filing system spread out over 4,000 locations that should be replaced by a modernized electronic filing system capable of operating at a fraction of the cost. It is time to bring the Federal tax lien system into the 21st century. The Tax Lien Simplification Act, which we are introducing today, will simplify the process of recording tax liens at an estimated ten-year cost savings of $150 million, while at the same time improving taxpayer service by making it easier to verify lien information and speed up the release of liens after taxes are paid. Tax liens are a principal way to collect payment from persons who are delinquent in paying their taxes. By law, Federal tax liens arise automatically ten days after a taxpayer's failure to pay an assessed tax. The lien automatically attaches to the taxpayer's real and personal property and remains in effect until the tax is paid. However, the tax lien is not effective against other creditors owed money by the same taxpayer, until a notice of the Federal tax lien is publicly recorded. Generally, between competing creditors, the first to file notice has priority, so the filing of tax lien notices is very important to the Government and to the taxpaying public if taxes are to be collected from persons owing taxes. Current law requires the IRS to file public notices of Federal tax liens on paper in State, county, or city recording offices around the country, to ensure other creditors receive notice of the government's claim. There are currently more than 4,100 of these recording offices, many of which have developed specific rules regulating how such liens must be formatted and filed in their jurisdictions. This patchwork system developed more by default than by plan, as different offices developed procedures for filing a variety of legal documents affecting title to real and personal property. In 1966, to help the IRS comply with a proliferating set of filing rules for Federal tax liens, Congress passed the Tax Lien Act to standardize certain practices. This act provided, for example, that liens against real estate had to be filed where the property was located, and required each State to designate a single place to file Federal tax liens applicable to personal property. Most States subsequently adopted a version of the Uniform Tax Lien Filing Act, enabling the IRS to file a notice of tax lien in each locality where the taxpayer's real estate is located, and a single notice where the taxpayer resides to reach any personal property. For corporations, States typically require the IRS to file a notice to attach real estate in each locality where the real estate is located, and a separate notice, usually at the State level, to attach other types of property. There are often additional rules for trusts and partnerships. The end result of the law was to reduce some but not all of the multiple sets of rules regulating the filing of Federal tax liens. The bottom line today is that, in most cases, tax liens have to be physically filed in one of over 4,000 recording offices. In most cases, that filing is accomplished by mail, using paper documents. Some jurisdictions also allow electronic filings, but those jurisdictions are few and far between. The same is true if a lien has to be corrected, or a related certificate of discharge, subordination, or nonattachment needs to be filed, or when a tax liability has been resolved and the IRS wants to release a lien. Each action usually requires a paper filing in one or more recording offices and requires the additional involvement of third parties. If a paper filing is lost or misplaced, the IRS often has to send an employee in person to deal with the problem, adding travel costs to other administrative expenses. The paper filing system imposes similar burdens on other persons dealing with the tax lien system. Any person who is the subject of a tax lien, for example, or who is a creditor trying to locate a tax lien, is required to make a physical trip to one or more recording offices, which may not even be in the same State as the taxpayer, to search the documents, see if a lien has been filed, and verify or examine the information. Currently, there is no single database of tax liens that can be accessed by any taxpayer that is the subject of a federal tax lien, by any creditor, or by any member of the public. Not even IRS personnel have access to such a tax lien database. It does not exist. The result is an inefficient, costly, and burdensome paper filing system that can and should be completely revamped. Businesses across the country learned long ago that electronic filing systems outperform paper; they save personnel costs, material costs, time, and aggravation. Government agencies have learned the same thing as they have moved to electronic databases and recordkeeping, including systems made available to the public on the Internet. Among the many examples of government-sponsored, Internet-based systems currently in operation are the contractor registry operated by the General Services Administration to allow persons to register to bid on federal contracts, the license registry operated by the Federal Communications Commission to allow the public to search radio licenses, and the registry operated by the U.S. Patent and Trademark Office to allow the public to search currently registered patents and trademarks. Each of these systems has saved taxpayer money, while improving service to the public. Just as government agencies gave up the horse and buggy for the automobile, it is time for the IRS to move from a decentralized, paper- based tax lien filing system to an electronic national tax lien registry. But the IRS' hands are tied, until Congress changes the laws holding back modernization of the federal tax lien filing system. The bill we are introducing today would make the changes necessary to enable the IRS to take immediate steps to simplify and modernize the federal tax lien filing system. The operative provisions would require the establishment of a national registry for the filing of tax lien notices as an electronic database that is Internet accessible and searchable by the public at no cost. It would mandate the use of this system in place of the existing system of paper filings. It would establish the priority of federal tax liens according to the date and time that the relevant notice was filed in the national registry, in the same way that priorities are currently established from the date and time of a paper filing. The bill would also shorten the time allowed to release a tax lien, after the related tax liability has been resolved, from 30 days to 20 days. To establish this new electronic filing system, the bill would give the Treasury Secretary express authority to issue regulations or other guidance governing the establishment and maintenance of the registry. Among other obligations, Treasury would be required to ensure that the registry was secure and prevent data tampering. Treasury would also be required to work with industry and other potential users of the registry to develop accurate search criteria to identify persons who are the subject of a tax lien. In addition, prior to the implementation of the national registry, the Treasury Secretary would be required to review the information currently included in public tax lien filings to determine whether any of that information should be excluded from disclosure on the Internet. For example, the Treasury Secretary would end disclosure of social security numbers that are currently included in some tax lien filings. While such identifying information could continue to be included in a tax lien filing to ensure that the filing is directed toward the correct person, the registry could be constructed to prevent such information from being disclosed publicly and instead provide such information only upon request from appropriate persons involved in the enforcement of the tax lien or collection of the tax debt. By requiring this information review prior to implementing the national tax lien registry, the bill would provide greater privacy protections for taxpayer information than occurs in current tax lien filings. To ensure a successful transition to the new system, the bill would require the Treasury Secretary to establish one or more pilot projects to be carried out within 2 years of enactment of the bill, and require a successful nationwide test of the tax lien registry before it can be made operational. The bill would also allow the IRS to continue to use the existing paper-based tax lien filing system, in parallel with the new system, for an appropriate period to ensure a smooth transition. Moving to an electronic tax lien filing system using an Internet- based national registry of tax liens, would accomplish at least three objectives. It would save taxpayer dollars, streamline the process for filing, correcting, and releasing tax liens, and improve taxpayer and public access to tax lien information. The IRS estimates that moving from a paper-based tax lien system to an Internet-based, Federal tax lien registry would save about $150 million over 10 years. These savings would come from the elimination of State filing fees, paper and mailing costs, IRS administrative and travel costs related to paper filing problems, and the cost of lost taxes whenever the IRS makes an error or a tax lien filing is misplaced or delayed. Filing fees, for example, vary widely from State to State, but typically cost at least $10 per filing, and in some States cost as much as $150. If a taxpayer has real estate in multiple jurisdictions, those costs multiply. A Federal tax lien system would standardize costs for all taxpayers, and require only one filing across all jurisdictions. In addition, right now, an IRS service center is currently charged with filing tax liens nationwide and complying with the myriad filing rules in effect in the 4,100 recording offices across the country. Eliminating the paper filing system would free virtually that entire service center for other taxpayer services and enforcement work. Electronic filing would not only save money, it would improve taxpayer service. Taxpayers who are the subject of a tax lien filing, for example, would benefit from an electronic registry in several ways. First, taxpayers would be able to review their liens as soon as they are filed online, without having to make a physical trip to one or more recording offices. Second, taxpayers would have an easy way to look up their liens on multiple occasions, identify problems, and correct any errors. A single tax lien registry would be particularly useful for taxpayers who move during the ten years that a tax lien can be in effect and have to look up liens in jurisdictions where they no longer live. Third, once the underlying tax liability is resolved, the IRS would be required to release the tax lien in 20 days, instead of the 30 days allowed under current law. The longer 30-day period is necessitated by the current complexities associated with filing a paper lien in one or more offices across the country, requiring the action of multiple parties in different jurisdictions. These complexities would be eliminated by the establishment of an electronic registry. The registry would also enable taxpayers, after they pay their taxes, to make sure their liens have been lifted. Creditors who need to research Federal tax liens would also benefit from a single electronic registry. Lenders, security holders and others, for example, would be able to use a simplified search process that could take place online and would not require procedures that, ultimately, require physical trips to multiple locations. A single tax lien registry would make it easier to locate tax liens for persons who have moved from the jurisdictions where the liens were first filed. Simplifying the search process would also provide greater certainty that all tax liens were found. The ability to research Federal tax liens remotely and instantaneously should be of particular benefit to larger lenders and to creditors of taxpayers with assets in more than one county or State. Tax liens are not a topic that normally excites the public's interest. But sound tax administration requires attention to efficient, effective and low-cost filing systems. Saving taxpayer dollars is more important than ever as Congress looks for ways to tackle the deficit. Federal law is currently impeding development of a more efficient, cost effective tax lien filing system. Amending the law as indicated in the Tax Lien Simplification Act to streamline the tax lien filing system, moving it from a paper-based to an electronic-based system, would not only advance the more efficient, effective tax system we all want, it would also save taxpayer money. At the same time, it would make the system work better for individual taxpayers by reducing the possibility for mistakes and speeding up the release of liens for taxpayers who have paid. Modernizing our tax lien filing system makes sense in every way. I urge our colleagues to join us in enacting this bill into law this year.

Mr. LEVIN

Mr. LEVIN. Mr. President, as Congress continues to debate ways to reduce our national deficit, some Members of Congress are taking the time to reflect on the state of the Federal tax system and consider how we can simplify it and make it more efficient and fair. Today, as part of that effort, I along with my colleague Senator Begich are introducing legislation aimed at simplifying and modernizing the existing system for filing Federal tax liens, a key tool used by the Treasury to collect unpaid taxes. The bill has been endorsed by Citizens for Tax Justice, Tax Justice Network, Public Citizen, US Public Interest Research Group, and the FACT Coalition, an organization of public interest and business groups concerned with tax fairness. It has been 45 years since Congress has made any significant changes to the laws regulating how the Internal Revenue Service, IRS, files Federal tax liens. Right now, outdated laws are forcing the IRS to waste taxpayer dollars on an old-fashioned, inefficient, and burdensome paper-based filing system spread out over 4,000 locations that should be replaced by a modernized electronic filing system capable of operating at a fraction of the cost. It is time to bring the Federal tax lien system into the 21st century. The Tax Lien Simplification Act, which we are introducing today, will simplify the process of recording tax liens at an estimated ten-year cost savings of $150 million, while at the same time improving taxpayer service by making it easier to verify lien information and speed up the release of liens after taxes are paid. Tax liens are a principal way to collect payment from persons who are delinquent in paying their taxes. By law, Federal tax liens arise automatically ten days after a taxpayer's failure to pay an assessed tax. The lien automatically attaches to the taxpayer's real and personal property and remains in effect until the tax is paid. However, the tax lien is not effective against other creditors owed money by the same taxpayer, until a notice of the Federal tax lien is publicly recorded. Generally, between competing creditors, the first to file notice has priority, so the filing of tax lien notices is very important to the Government and to the taxpaying public if taxes are to be collected from persons owing taxes. Current law requires the IRS to file public notices of Federal tax liens on paper in State, county, or city recording offices around the country, to ensure other creditors receive notice of the government's claim. There are currently more than 4,100 of these recording offices, many of which have developed specific rules regulating how such liens must be formatted and filed in their jurisdictions. This patchwork system developed more by default than by plan, as different offices developed procedures for filing a variety of legal documents affecting title to real and personal property. In 1966, to help the IRS comply with a proliferating set of filing rules for Federal tax liens, Congress passed the Tax Lien Act to standardize certain practices. This act provided, for example, that liens against real estate had to be filed where the property was located, and required each State to designate a single place to file Federal tax liens applicable to personal property. Most States subsequently adopted a version of the Uniform Tax Lien Filing Act, enabling the IRS to file a notice of tax lien in each locality where the taxpayer's real estate is located, and a single notice where the taxpayer resides to reach any personal property. For corporations, States typically require the IRS to file a notice to attach real estate in each locality where the real estate is located, and a separate notice, usually at the State level, to attach other types of property. There are often additional rules for trusts and partnerships. The end result of the law was to reduce some but not all of the multiple sets of rules regulating the filing of Federal tax liens. The bottom line today is that, in most cases, tax liens have to be physically filed in one of over 4,000 recording offices. In most cases, that filing is accomplished by mail, using paper documents. Some jurisdictions also allow electronic filings, but those jurisdictions are few and far between. The same is true if a lien has to be corrected, or a related certificate of discharge, subordination, or nonattachment needs to be filed, or when a tax liability has been resolved and the IRS wants to release a lien. Each action usually requires a paper filing in one or more recording offices and requires the additional involvement of third parties. If a paper filing is lost or misplaced, the IRS often has to send an employee in person to deal with the problem, adding travel costs to other administrative expenses. The paper filing system imposes similar burdens on other persons dealing with the tax lien system. Any person who is the subject of a tax lien, for example, or who is a creditor trying to locate a tax lien, is required to make a physical trip to one or more recording offices, which may not even be in the same State as the taxpayer, to search the documents, see if a lien has been filed, and verify or examine the information. Currently, there is no single database of tax liens that can be accessed by any taxpayer that is the subject of a federal tax lien, by any creditor, or by any member of the public. Not even IRS personnel have access to such a tax lien database. It does not exist. The result is an inefficient, costly, and burdensome paper filing system that can and should be completely revamped. Businesses across the country learned long ago that electronic filing systems outperform paper; they save personnel costs, material costs, time, and aggravation. Government agencies have learned the same thing as they have moved to electronic databases and recordkeeping, including systems made available to the public on the Internet. Among the many examples of government-sponsored, Internet-based systems currently in operation are the contractor registry operated by the General Services Administration to allow persons to register to bid on federal contracts, the license registry operated by the Federal Communications Commission to allow the public to search radio licenses, and the registry operated by the U.S. Patent and Trademark Office to allow the public to search currently registered patents and trademarks. Each of these systems has saved taxpayer money, while improving service to the public. Just as government agencies gave up the horse and buggy for the automobile, it is time for the IRS to move from a decentralized, paper- based tax lien filing system to an electronic national tax lien registry. But the IRS' hands are tied, until Congress changes the laws holding back modernization of the federal tax lien filing system. The bill we are introducing today would make the changes necessary to enable the IRS to take immediate steps to simplify and modernize the federal tax lien filing system. The operative provisions would require the establishment of a national registry for the filing of tax lien notices as an electronic database that is Internet accessible and searchable by the public at no cost. It would mandate the use of this system in place of the existing system of paper filings. It would establish the priority of federal tax liens according to the date and time that the relevant notice was filed in the national registry, in the same way that priorities are currently established from the date and time of a paper filing. The bill would also shorten the time allowed to release a tax lien, after the related tax liability has been resolved, from 30 days to 20 days. To establish this new electronic filing system, the bill would give the Treasury Secretary express authority to issue regulations or other guidance governing the establishment and maintenance of the registry. Among other obligations, Treasury would be required to ensure that the registry was secure and prevent data tampering. Treasury would also be required to work with industry and other potential users of the registry to develop accurate search criteria to identify persons who are the subject of a tax lien. In addition, prior to the implementation of the national registry, the Treasury Secretary would be required to review the information currently included in public tax lien filings to determine whether any of that information should be excluded from disclosure on the Internet. For example, the Treasury Secretary would end disclosure of social security numbers that are currently included in some tax lien filings. While such identifying information could continue to be included in a tax lien filing to ensure that the filing is directed toward the correct person, the registry could be constructed to prevent such information from being disclosed publicly and instead provide such information only upon request from appropriate persons involved in the enforcement of the tax lien or collection of the tax debt. By requiring this information review prior to implementing the national tax lien registry, the bill would provide greater privacy protections for taxpayer information than occurs in current tax lien filings. To ensure a successful transition to the new system, the bill would require the Treasury Secretary to establish one or more pilot projects to be carried out within 2 years of enactment of the bill, and require a successful nationwide test of the tax lien registry before it can be made operational. The bill would also allow the IRS to continue to use the existing paper-based tax lien filing system, in parallel with the new system, for an appropriate period to ensure a smooth transition. Moving to an electronic tax lien filing system using an Internet- based national registry of tax liens, would accomplish at least three objectives. It would save taxpayer dollars, streamline the process for filing, correcting, and releasing tax liens, and improve taxpayer and public access to tax lien information. The IRS estimates that moving from a paper-based tax lien system to an Internet-based, Federal tax lien registry would save about $150 million over 10 years. These savings would come from the elimination of State filing fees, paper and mailing costs, IRS administrative and travel costs related to paper filing problems, and the cost of lost taxes whenever the IRS makes an error or a tax lien filing is misplaced or delayed. Filing fees, for example, vary widely from State to State, but typically cost at least $10 per filing, and in some States cost as much as $150. If a taxpayer has real estate in multiple jurisdictions, those costs multiply. A Federal tax lien system would standardize costs for all taxpayers, and require only one filing across all jurisdictions. In addition, right now, an IRS service center is currently charged with filing tax liens nationwide and complying with the myriad filing rules in effect in the 4,100 recording offices across the country. Eliminating the paper filing system would free virtually that entire service center for other taxpayer services and enforcement work. Electronic filing would not only save money, it would improve taxpayer service. Taxpayers who are the subject of a tax lien filing, for example, would benefit from an electronic registry in several ways. First, taxpayers would be able to review their liens as soon as they are filed online, without having to make a physical trip to one or more recording offices. Second, taxpayers would have an easy way to look up their liens on multiple occasions, identify problems, and correct any errors. A single tax lien registry would be particularly useful for taxpayers who move during the ten years that a tax lien can be in effect and have to look up liens in jurisdictions where they no longer live. Third, once the underlying tax liability is resolved, the IRS would be required to release the tax lien in 20 days, instead of the 30 days allowed under current law. The longer 30-day period is necessitated by the current complexities associated with filing a paper lien in one or more offices across the country, requiring the action of multiple parties in different jurisdictions. These complexities would be eliminated by the establishment of an electronic registry. The registry would also enable taxpayers, after they pay their taxes, to make sure their liens have been lifted. Creditors who need to research Federal tax liens would also benefit from a single electronic registry. Lenders, security holders and others, for example, would be able to use a simplified search process that could take place online and would not require procedures that, ultimately, require physical trips to multiple locations. A single tax lien registry would make it easier to locate tax liens for persons who have moved from the jurisdictions where the liens were first filed. Simplifying the search process would also provide greater certainty that all tax liens were found. The ability to research Federal tax liens remotely and instantaneously should be of particular benefit to larger lenders and to creditors of taxpayers with assets in more than one county or State. Tax liens are not a topic that normally excites the public's interest. But sound tax administration requires attention to efficient, effective and low-cost filing systems. Saving taxpayer dollars is more important than ever as Congress looks for ways to tackle the deficit. Federal law is currently impeding development of a more efficient, cost effective tax lien filing system. Amending the law as indicated in the Tax Lien Simplification Act to streamline the tax lien filing system, moving it from a paper-based to an electronic-based system, would not only advance the more efficient, effective tax system we all want, it would also save taxpayer money. At the same time, it would make the system work better for individual taxpayers by reducing the possibility for mistakes and speeding up the release of liens for taxpayers who have paid. Modernizing our tax lien filing system makes sense in every way. I urge our colleagues to join us in enacting this bill into law this year.

Mr. LEVIN

Mr. LEVIN. Mr. President, it is with great pride that I pay tribute to a dedicated public servant from my home state of Michigan. Gerry Chase has devoted his professional life to helping others and improving the quality of public health in northern lower Michigan for nearly four decades, and I am pleased to recognize his life's work as he retires from public service this month. Through his many initiatives as the Public Health Officer for Northwest Michigan, Gerry has impacted many by working tirelessly to better the lives of the residents of Antrim, Charlevoix, Emmet, and Otsego Counties. Gerry accepted the position of public health officer in 1974 at the urging of his mentor Roy R. Manty. Shortly after earning his bachelor of arts and a master's in public health from the University of Michigan, Gerry embarked on what he initially thought would be a short- term assignment, but would become his life's work. Thirty-seven years later, Gerry can look back with pride on a fulfilling and impressive record of accomplishment. Charged with the responsibility of promoting wellness, preventing disease, and providing quality healthcare, Gerry has been at the forefront of some of the more complex and daunting public health issues, leading an agency that has grown from 17 in the mid-1970s to more than 200 employees today. Among Gerry's countless accomplishments as public health officer is an initiative to provide dental care to over 20,000 low-income residents, an effort to increase the number of poor women eligible for cost-free breast and cervical cancer screenings, and the establishment of a multicounty workplace smoking ban. Through these accomplishments and many more like them, residents of these counties are living healthier and better. In 2007, Gerry was awarded the Roy R. Manty Distinguished Service Award, Michigan's top public health award. This honor, which bears the name of his mentor, is given to a person that embodies the ``values, dedication and spirit Manty brought to public health,'' which is a fitting tribute for a man that has dedicated his life to the public good. Gerry is also a loving and devoted husband to his wife of 45 years, Kay, and an outstanding role model for his children, Gerald, Harold, and John, and for his grandchild, Taylor. In fact, I am reminded every day of his efforts in this regard through the work of his son, Harold, a member of my staff for the last 15 years. Gerry has been an active member of his community as well, helping to develop the Northwest Academy, a charter school in Charlevoix County, leading a troop of Boy Scouts, and serving as a Big Brother. Gerry has set a high standard and has left a lasting footprint which will endure for many years to come. I know my colleagues will join me in congratulating Gerry on his many impressive accomplishments over the last thirty-seven years. I wish him the best as he begins a new chapter in life.

Mr. LEVIN

Mr. LEVIN. Mr. President, today I am introducing a bill with my colleague, Senator Sherrod Brown, to eliminate the federal tax break that gives special tax treatment to corporations that pay their executives with stock options. The bill is called the Ending Excessive Corporate Deductions for Stock Options Act, and it has been endorsed by the AFL-CIO, Citizens for Tax Justice, Consumer Federation of America, OMB Watch, and Tax Justice Network-USA. According to the Joint Committee on Taxation, eliminating this corporate tax break would bring in almost $25 billion over 10 years. The existing special treatment of corporate stock options forces ordinary taxpayers to subsidize the salaries of corporate executives. The subsidy is a consequence of the current mismatch between U.S. accounting rules and tax rules for stock options, which have developed along divergent paths and are now out of kilter. Today, U.S. accounting rules require corporations to report stock option expenses on their books when those stock options are granted, while federal tax rules provide that they use another method to claim a different--and typically much higher--deduction on their tax returns when the stock options are exercised. The result is that corporations can claim larger tax deductions for stock options on their tax returns than the actual expense they show on their books, creating a tax windfall for those corporations. Stock options are the only type of compensation where the tax code lets a corporation deduct more than the expense shown on their books. For all other types of compensation--cash, stock, bonuses, and more-- the tax return deduction equals the book expense. In fact, if corporations took tax deductions for compensation in excess of what their books showed, it could constitute tax fraud. The sole exception to that rule is stock options. It is an exception we can no longer afford. When corporate compensation committees learn that stock options can generate tax deductions that are many times larger than their book expense, it creates a huge temptation for corporations to pay their executives with stock options instead of cash. Why? Because compensating executives with stock options instead of cash can produce a huge tax windfall for the corporation. By taking advantage of federal tax laws that have not been updated for four decades, corporations can claim tax deductions at rates that are often 2 to 10 times higher than the stock option expense shown on their books. Stock options are paid to virtually every chief executive officer, CEO, in America and are a major contributor to sky-high executive pay. Stock options give the recipients the right to buy company stock at a set price for a specified period of time, typically 10 years. Since the 1980s, CEO pay has increased at a torrid pace. In 2010, according to Forbes magazine, executives at the 500 largest U.S. companies received pay totaling $4.5 billion, averaging $9 million per CEO. Thirty percent of that pay was comprised of exercised stock options which were cashed in for an average gain of about $2.7 million, bringing total pay to its highest level since before the recession. The highest paid executive in 2010 was the CEO of United Health Group, who received $102 million in total pay. Of that pay, almost all of it--$98 million--came from exercising stock options. During the recession from 2007 to 2009, while many stock prices dropped in value, 90 percent of corporations awarded stock options to their executives. Because of the depressed stock prices at the time, most of those stock options were recorded on the corporations' books as a relatively small expense. Fast forward to 2010, and even in this struggling economy, as stock prices have begun to increase, those same stock options are seeing major jumps in their value, far above their book expense. For example, in a recent study conducted by the Wall Street Journal, the CEO of Oracle Corporation was granted stock options in July 2009, with an estimated value of $62 million. Two years later, those options are estimated to be worth over $97 million, a gain of $35 million in just two years. Other corporate executives have experienced similar increases in their stock option holdings. For example, according to the Wall Street Journal analysis, the CEOs of Abercrombie and Fitch Inc., Nabors Industries, Ltd., and Starbucks Corporation all saw jumps in the value of stock options awarded during the financial crisis of more than $60 million each. The former CEO of Occidental Petroleum, Ray R. Irani, received a compensation package valued at $76.1 million, including stock option awards valued at $40.3 million. These huge increases in the dollar value of the stock option awards mean skyrocketing tax deductions for corporations doing so well that their stock prices have climbed. The deductions will reduce the taxes being paid by these successful companies, depriving the U.S. treasury of needed revenues. The average worker, by the way, has not experienced any increase in pay. From 2009 to 2010 alone, CEOs at the 500 biggest U.S. corporations saw a 12 percent increase in compensation, but median income has been stagnant. According to the Bureau of Labor Statistics, only 8 percent of workers in private industry received stock options as part of their compensation package. For CEOs, however, more than 90 percent of those in the S&P 500 received stock options in the 12 months starting October 1, 2008. The financial tycoon J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. But since 1990, CEO pay has increased to a level that is now nearly 300 times greater than the average worker's salary. The single biggest factor fueling that massive pay gap is stock options which are, in turn, generating huge tax deductions for the corporations that doled them out. This bill would end the loophole that allows a corporation to deduct on its taxes more than the stock option expense shown on its books. Over a 5 year period, from 2005 to 2009, the latest year for which data is available, IRS tax return data shows that corporate stock option tax deductions have exceeded corporate book expenses by billions of dollars every year, with the size of the excess tax deductions varying from $12 billion to $61 billion per year. These excessive deductions mean billions of dollars in reduced taxes for corporations wealthy enough to provide substantial stock option compensation to their executives, all at the expense of ordinary taxpayers. We cannot afford to continue this multi-billion dollar loss to the U.S. Treasury, and tax fairness means ordinary taxpayers should not continue to be asked to subsidize corporate executive salaries. That is why the bill I am introducing today would change the tax code so that corporations can deduct only the stock option expense actually shown on their books. To get a better understanding of why this bill is needed, it helps to have a clear understanding of how stock option accounting and tax rules fell out of sync over time. Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board, or 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, or GAAP, which are issued by FASB which is, in turn, overseen by the 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 huge amounts of executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they were granted to an employee, using mathematical valuation tools. FASB proposed further that companies include that amount as a compensation expense on their financial statements. A 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, or 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. 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, end stock option compensation, depress stock prices, and stifle innovation. But none of that happened. 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 wrong. Stock option expensing has been fully implemented without any detrimental impact to the markets. 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 four 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 options to an executive 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 could take a tax deduction for $20 million. The two main problems with this approach are, first, that the deduction amount is out of sync--and usually significantly greater than--the expense shown on the corporate books years earlier and, second, the $20 million in ordinary income obtained by the executive did not come from the corporation itself. In fact, rather than pay the executive the $20 million, the corporation actually received money from the executive who paid to exercise the option and purchase the related stock. In most cases, the $20 million was actually paid by unrelated parties on the stock market who bought the stock from the executive. Yet the tax code currently allows the corporation to declare the $20 million paid by third parties as its own business expense and take it as a tax deduction. The reasoning behind this approach has been that the exercise date value was the only way to get certainty regarding the value of the stock options for tax deduction purposes. That reasoning lost its persuasive character, however, once consensus was reached on how to calculate the value of stock option compensation on the date the stock options are granted. So U.S. stock option accounting and tax rules are now at odds with each other. Accounting rules require companies to expense stock options on their books on the grant date. Tax rules require companies to deduct stock option expenses on the exercise date. Companies report the grant date expense to investors on their financial statements, and the exercise date expense on their tax returns. The financial statements report on the stock options granted during the year, while the tax returns report on the stock options exercised during the year. In short, company financial statements and tax returns use different valuation methods and value, resulting in widely divergent stock option expenses for the same year. To examine the nature and consequences of that stock option book-tax difference, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing in June 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. The Subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with. At the hearing, we disclosed the resulting stock option data for those companies, including three companies that testified. The data provided by the companies showed that, under then existing rules, eight of the nine 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 ninth company, Occidental Petroleum, had begun voluntarily expensing its stock options in 2005, but also reported significantly 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 FAS 123R had been in effect, all nine calculated book expenses that remained dramatically lower than their tax deductions. Altogether, the nine companies calculated that they would have claimed about $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 and excess tax deductions of about $1 billion. KB Home, for example, is a company that builds residential homes. Its stock price had more than quadrupled over the 10 years leading up to 2006. Over the same time period, it had repeatedly granted stock options to its then CEO. Company records show that, over 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. That company's stock price had also skyrocketed, 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 a 5-year period, 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 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 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 nine companies took stock option tax deductions totaling about $1.2 billion, a figure nearly 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 tax windfall for these companies simply because they issued lots of stock options to their CEOs. Tax rules that produce huge tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue massive stock option grants, because they know it is highly likely the stock options will produce a relatively small hit to the profits shown on their books, and are likely to produce a much larger tax deduction that can dramatically lower their taxes. The data we gathered for just nine companies found excess stock option tax deductions of $1 billion. 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 what, back then, was newly available stock option data. The data is taken from tax Schedule M-3, which corporations were required to file for the first time in 2004, 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 M-3 data showed that, for corporate tax returns filed from July 1, 2004 to June 30, 2005, the first full year in which it was available, companies' stock option tax deductions totaled about $43 billion more than their stock options expenses on their books. Similar data over the next 5 years, with the latest available data from tax returns filed from July 1, 2008 to June 30, 2009, showed that corporate stock option tax deductions as a whole exceeded their book expenses every year by billions of dollars, with the size of the excess tax deductions varying from $12 billion to $61 billion per year. These excessive deductions meant billions of dollars in reduced taxes for the relevant corporations each year. In addition, the IRS data showed that the bulk of the stock option deductions were taken by a relatively small number of corporations nationwide. For example, in 2005, 56 percent of the excess tax deductions were taken by only 100 corporations, while 76 percent were taken by 250 corporations. In fact, over the 5 years of data, just 250 corporations took two thirds to three quarters of all of the stock option deductions claimed in those years. That is just 250 corporations out of the more than 5 million corporations that filed tax returns each year. In other words, the IRS data proves that the corporate stock option tax loophole actually benefits a very small number of corporations. Claiming massive stock option tax deductions enabled those corporations, as a whole, to legally reduce payment of their taxes by billions of dollars each year. Moreover, under current tax rules, if a stock option deduction is not useful in the year it is first available, the corporation is allowed to add the deduction to its net operating losses and use the deduction to reduce its taxes for up to the next 20 years, an unbelievable windfall. It is a corporate loophole that just keeps going. There were other surprises in the stock option 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 held about 8 million options that, due to a stock price drop, would 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 have been able to claim a tax deduction for this expense since the options would never have been 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 current accounting rules, 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 with 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. Another set of issues brought to light by the stock option 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's because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options. Our bill would require that, when the company gives away something of value, it reflects that expense on its books and claims that same expense in the same year on its tax return. The company, and the government, would not have to wait to see if and when the stock options given to executives were exercised. As with any other form of compensation, the company would use the FASB accounting rules to determine the value of what it is giving away, and take the equivalent tax deduction in the year the compensation was provided. 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 did not know if or when its former CEO would exercise the remaining 7 million options, and so could not calculate when or how much of a tax deduction it would be able to claim for this compensation expense. If the rules for stock option tax deductions were changed as provided for in our bill, companies would typically take the deduction years earlier than they do now, without waiting to see if and when particular options are 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 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 being introduced today would cure those 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 reflect the stock option expenses as shown on the corporate books each year. 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 as 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 receive stock options as part of their compensation. Those individuals would still report their compensation in the year they exercise 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 an individual after exercising a stock option will likely be greater than the stock option expense booked and deducted by the corporation which employed that individual. That's in part because the individual's gain often comes years after the original stock option grant, during which time the underlying stock will usually have gained in value. In addition, the individual will typically exercise the option and immediately sell the stock and therefore receive income, not just from the corporation that supplied the stock options years earlier, but also from the third parties purchasing the resulting shares. Consider the same example discussed earlier of an executive who exercised options to buy 1 million shares of stock at $10 per share, obtained the shares from the corporation, and then immediately sold them on the open market for $30 per share, making a total profit of $20 million. The individual's corporation didn't supply that $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--often a former employee--obtained from unrelated parties in the marketplace. The executive who exercised the stock options must still treat any resulting profit as ordinary income for the reasons given earlier: the executive received the shares at a below market cost, solely because of work that the executive performed for the corporation in return for the stock option compensation. The bill we are introducing today would put an end to the current approach of allowing a corporation to take a mirror deduction equal to the ordinary income declared by its executive. It would break that old artificial illogical symmetry and replace it with a new logical symmetry--one in which the corporation's stock option tax deduction would match its book expense. I call the current approach a case of artificial symmetry, because it uses a construct in the tax code that, when first implemented 40 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 corporations to claim a deductible expense for money that comes not from company coffers, but from third parties in the stock market. Now that an accounting consensus determines how to calculate 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. 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 Section 422 of the tax code. Under that section, 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. The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. In 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so that other taxpayers wouldn't be forced to subsidize corporate executive pay. That cap was not applied to stock options, however, instead allowing companies to deduct any amount of stock option compensation from their tax obligations, without limit. By not applying the $1 million cap to stock option compensation, the tax code created a significant tax incentive for corporations to pay their executives with stock options. Indeed, it is common for executives to have salaries of $1 million, while simultaneously receiving millions of dollars more in stock options. History has subsequently shown that the $1 million cap--established to stop ordinary taxpayers from being forced to subsidize enormous paychecks for corporate executives--is effectively meaningless without including stock options. Further, while corporate directors may be comfortable diluting their shareholders' interests while doling out massive amounts of stock options, that still does not mean that ordinary taxpayers should be forced to subsidize the large amounts of stock option compensation involved. The bill would eliminate this unwarranted, 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). It is also worth noting that, if the cap were applied to stock options, it would not prevent stock option pay from exceeding $1 million--it would simply ensure that those stock option awards were not made at the expense of ordinary taxpayers. 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 in unusual circumstances, such as when a parent corporation issues options on its shares to the employee of a subsidiary or another corporation in a consolidated group, or when one corporation issues options on its shares to employees of a joint venture. 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. Essentially, this transition rule would ensure that stock options issued prior to the enactment date of the legislation would remain tax deductible and ensure all corporations can start deducting stock option expenses on a yearly schedule. The transition rule has three parts. First, it would allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of the new stock option accounting rule, 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 those options, the bill would allow corporations to take an immediate tax deduction--in the first year that the bill is 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). This transition rule is a generous one, but even with it, the Joint Committee on Taxation has estimated that closing the corporate stock option tax deduction loophole would produce $24.6 billion in corporate tax revenues over 10 years. Over the last 5 years, the stock option book-tax gap has ranged from $12 billion to $61 billion per year, generating deductions far in excess of corporate expenses. Corporations have avoided paying their fair share to Uncle Sam by simply giving their executives the right to tap huge sums of money from the stock market. It is a tax policy that forces ordinary taxpayers to subsidize outsized executive compensation and that favors corporations doling out stock options over paying their executives in cash. Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their book expense. In these times of financial distress, we cannot afford this multi-billion dollar loss to the Treasury, not only because of the need to reduce the deficit, but also because the stock option tax deduction contributes to the anger and social disruption caused by the ever deepening chasm between the pay of executives and the pay of average workers. The Obama administration has pledged itself to closing unfair corporate tax loopholes and to returning sanity to executive pay. It should start with supporting an end to excessive stock option corporate deductions. I urge my colleagues to include this legislation in any deficit reduction package this year, or to pass it separately.

Mr. LEVIN

Mr. LEVIN. Mr. President, today I am introducing a bill with my colleague, Senator Sherrod Brown, to eliminate the federal tax break that gives special tax treatment to corporations that pay their executives with stock options. The bill is called the Ending Excessive Corporate Deductions for Stock Options Act, and it has been endorsed by the AFL-CIO, Citizens for Tax Justice, Consumer Federation of America, OMB Watch, and Tax Justice Network-USA. According to the Joint Committee on Taxation, eliminating this corporate tax break would bring in almost $25 billion over 10 years. The existing special treatment of corporate stock options forces ordinary taxpayers to subsidize the salaries of corporate executives. The subsidy is a consequence of the current mismatch between U.S. accounting rules and tax rules for stock options, which have developed along divergent paths and are now out of kilter. Today, U.S. accounting rules require corporations to report stock option expenses on their books when those stock options are granted, while federal tax rules provide that they use another method to claim a different--and typically much higher--deduction on their tax returns when the stock options are exercised. The result is that corporations can claim larger tax deductions for stock options on their tax returns than the actual expense they show on their books, creating a tax windfall for those corporations. Stock options are the only type of compensation where the tax code lets a corporation deduct more than the expense shown on their books. For all other types of compensation--cash, stock, bonuses, and more-- the tax return deduction equals the book expense. In fact, if corporations took tax deductions for compensation in excess of what their books showed, it could constitute tax fraud. The sole exception to that rule is stock options. It is an exception we can no longer afford. When corporate compensation committees learn that stock options can generate tax deductions that are many times larger than their book expense, it creates a huge temptation for corporations to pay their executives with stock options instead of cash. Why? Because compensating executives with stock options instead of cash can produce a huge tax windfall for the corporation. By taking advantage of federal tax laws that have not been updated for four decades, corporations can claim tax deductions at rates that are often 2 to 10 times higher than the stock option expense shown on their books. Stock options are paid to virtually every chief executive officer, CEO, in America and are a major contributor to sky-high executive pay. Stock options give the recipients the right to buy company stock at a set price for a specified period of time, typically 10 years. Since the 1980s, CEO pay has increased at a torrid pace. In 2010, according to Forbes magazine, executives at the 500 largest U.S. companies received pay totaling $4.5 billion, averaging $9 million per CEO. Thirty percent of that pay was comprised of exercised stock options which were cashed in for an average gain of about $2.7 million, bringing total pay to its highest level since before the recession. The highest paid executive in 2010 was the CEO of United Health Group, who received $102 million in total pay. Of that pay, almost all of it--$98 million--came from exercising stock options. During the recession from 2007 to 2009, while many stock prices dropped in value, 90 percent of corporations awarded stock options to their executives. Because of the depressed stock prices at the time, most of those stock options were recorded on the corporations' books as a relatively small expense. Fast forward to 2010, and even in this struggling economy, as stock prices have begun to increase, those same stock options are seeing major jumps in their value, far above their book expense. For example, in a recent study conducted by the Wall Street Journal, the CEO of Oracle Corporation was granted stock options in July 2009, with an estimated value of $62 million. Two years later, those options are estimated to be worth over $97 million, a gain of $35 million in just two years. Other corporate executives have experienced similar increases in their stock option holdings. For example, according to the Wall Street Journal analysis, the CEOs of Abercrombie and Fitch Inc., Nabors Industries, Ltd., and Starbucks Corporation all saw jumps in the value of stock options awarded during the financial crisis of more than $60 million each. The former CEO of Occidental Petroleum, Ray R. Irani, received a compensation package valued at $76.1 million, including stock option awards valued at $40.3 million. These huge increases in the dollar value of the stock option awards mean skyrocketing tax deductions for corporations doing so well that their stock prices have climbed. The deductions will reduce the taxes being paid by these successful companies, depriving the U.S. treasury of needed revenues. The average worker, by the way, has not experienced any increase in pay. From 2009 to 2010 alone, CEOs at the 500 biggest U.S. corporations saw a 12 percent increase in compensation, but median income has been stagnant. According to the Bureau of Labor Statistics, only 8 percent of workers in private industry received stock options as part of their compensation package. For CEOs, however, more than 90 percent of those in the S&P 500 received stock options in the 12 months starting October 1, 2008. The financial tycoon J.P. Morgan once said that executive pay should not exceed 20 times average worker pay. But since 1990, CEO pay has increased to a level that is now nearly 300 times greater than the average worker's salary. The single biggest factor fueling that massive pay gap is stock options which are, in turn, generating huge tax deductions for the corporations that doled them out. This bill would end the loophole that allows a corporation to deduct on its taxes more than the stock option expense shown on its books. Over a 5 year period, from 2005 to 2009, the latest year for which data is available, IRS tax return data shows that corporate stock option tax deductions have exceeded corporate book expenses by billions of dollars every year, with the size of the excess tax deductions varying from $12 billion to $61 billion per year. These excessive deductions mean billions of dollars in reduced taxes for corporations wealthy enough to provide substantial stock option compensation to their executives, all at the expense of ordinary taxpayers. We cannot afford to continue this multi-billion dollar loss to the U.S. Treasury, and tax fairness means ordinary taxpayers should not continue to be asked to subsidize corporate executive salaries. That is why the bill I am introducing today would change the tax code so that corporations can deduct only the stock option expense actually shown on their books. To get a better understanding of why this bill is needed, it helps to have a clear understanding of how stock option accounting and tax rules fell out of sync over time. Calculating the cost of stock options may sound straightforward, but for years, companies and their accountants engaged the Financial Accounting Standards Board, or 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, or GAAP, which are issued by FASB which is, in turn, overseen by the 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 huge amounts of executive pay provoked deep disagreements within the accounting community. In 1993, FASB proposed assigning a ``fair value'' to stock options on the date they were granted to an employee, using mathematical valuation tools. FASB proposed further that companies include that amount as a compensation expense on their financial statements. A 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, or 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. 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, end stock option compensation, depress stock prices, and stifle innovation. But none of that happened. 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 wrong. Stock option expensing has been fully implemented without any detrimental impact to the markets. 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 four 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 options to an executive 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 could take a tax deduction for $20 million. The two main problems with this approach are, first, that the deduction amount is out of sync--and usually significantly greater than--the expense shown on the corporate books years earlier and, second, the $20 million in ordinary income obtained by the executive did not come from the corporation itself. In fact, rather than pay the executive the $20 million, the corporation actually received money from the executive who paid to exercise the option and purchase the related stock. In most cases, the $20 million was actually paid by unrelated parties on the stock market who bought the stock from the executive. Yet the tax code currently allows the corporation to declare the $20 million paid by third parties as its own business expense and take it as a tax deduction. The reasoning behind this approach has been that the exercise date value was the only way to get certainty regarding the value of the stock options for tax deduction purposes. That reasoning lost its persuasive character, however, once consensus was reached on how to calculate the value of stock option compensation on the date the stock options are granted. So U.S. stock option accounting and tax rules are now at odds with each other. Accounting rules require companies to expense stock options on their books on the grant date. Tax rules require companies to deduct stock option expenses on the exercise date. Companies report the grant date expense to investors on their financial statements, and the exercise date expense on their tax returns. The financial statements report on the stock options granted during the year, while the tax returns report on the stock options exercised during the year. In short, company financial statements and tax returns use different valuation methods and value, resulting in widely divergent stock option expenses for the same year. To examine the nature and consequences of that stock option book-tax difference, the Permanent Subcommittee on Investigations, which I chair, initiated an investigation and held a hearing in June 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. The Subcommittee very much appreciated the cooperation and assistance provided by the nine companies we worked with. At the hearing, we disclosed the resulting stock option data for those companies, including three companies that testified. The data provided by the companies showed that, under then existing rules, eight of the nine 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 ninth company, Occidental Petroleum, had begun voluntarily expensing its stock options in 2005, but also reported significantly 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 FAS 123R had been in effect, all nine calculated book expenses that remained dramatically lower than their tax deductions. Altogether, the nine companies calculated that they would have claimed about $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 and excess tax deductions of about $1 billion. KB Home, for example, is a company that builds residential homes. Its stock price had more than quadrupled over the 10 years leading up to 2006. Over the same time period, it had repeatedly granted stock options to its then CEO. Company records show that, over 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. That company's stock price had also skyrocketed, 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 a 5-year period, 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 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 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 nine companies took stock option tax deductions totaling about $1.2 billion, a figure nearly 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 tax windfall for these companies simply because they issued lots of stock options to their CEOs. Tax rules that produce huge tax deductions that are many times larger than the related stock option book expenses give companies an incentive to issue massive stock option grants, because they know it is highly likely the stock options will produce a relatively small hit to the profits shown on their books, and are likely to produce a much larger tax deduction that can dramatically lower their taxes. The data we gathered for just nine companies found excess stock option tax deductions of $1 billion. 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 what, back then, was newly available stock option data. The data is taken from tax Schedule M-3, which corporations were required to file for the first time in 2004, 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 M-3 data showed that, for corporate tax returns filed from July 1, 2004 to June 30, 2005, the first full year in which it was available, companies' stock option tax deductions totaled about $43 billion more than their stock options expenses on their books. Similar data over the next 5 years, with the latest available data from tax returns filed from July 1, 2008 to June 30, 2009, showed that corporate stock option tax deductions as a whole exceeded their book expenses every year by billions of dollars, with the size of the excess tax deductions varying from $12 billion to $61 billion per year. These excessive deductions meant billions of dollars in reduced taxes for the relevant corporations each year. In addition, the IRS data showed that the bulk of the stock option deductions were taken by a relatively small number of corporations nationwide. For example, in 2005, 56 percent of the excess tax deductions were taken by only 100 corporations, while 76 percent were taken by 250 corporations. In fact, over the 5 years of data, just 250 corporations took two thirds to three quarters of all of the stock option deductions claimed in those years. That is just 250 corporations out of the more than 5 million corporations that filed tax returns each year. In other words, the IRS data proves that the corporate stock option tax loophole actually benefits a very small number of corporations. Claiming massive stock option tax deductions enabled those corporations, as a whole, to legally reduce payment of their taxes by billions of dollars each year. Moreover, under current tax rules, if a stock option deduction is not useful in the year it is first available, the corporation is allowed to add the deduction to its net operating losses and use the deduction to reduce its taxes for up to the next 20 years, an unbelievable windfall. It is a corporate loophole that just keeps going. There were other surprises in the stock option 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 held about 8 million options that, due to a stock price drop, would 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 have been able to claim a tax deduction for this expense since the options would never have been 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 current accounting rules, 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 with 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. Another set of issues brought to light by the stock option 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's because the corporate tax deduction is wholly dependent upon when an individual corporate executive decides to exercise his or her stock options. Our bill would require that, when the company gives away something of value, it reflects that expense on its books and claims that same expense in the same year on its tax return. The company, and the government, would not have to wait to see if and when the stock options given to executives were exercised. As with any other form of compensation, the company would use the FASB accounting rules to determine the value of what it is giving away, and take the equivalent tax deduction in the year the compensation was provided. 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 did not know if or when its former CEO would exercise the remaining 7 million options, and so could not calculate when or how much of a tax deduction it would be able to claim for this compensation expense. If the rules for stock option tax deductions were changed as provided for in our bill, companies would typically take the deduction years earlier than they do now, without waiting to see if and when particular options are 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 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 being introduced today would cure those 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 reflect the stock option expenses as shown on the corporate books each year. 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 as 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 receive stock options as part of their compensation. Those individuals would still report their compensation in the year they exercise 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 an individual after exercising a stock option will likely be greater than the stock option expense booked and deducted by the corporation which employed that individual. That's in part because the individual's gain often comes years after the original stock option grant, during which time the underlying stock will usually have gained in value. In addition, the individual will typically exercise the option and immediately sell the stock and therefore receive income, not just from the corporation that supplied the stock options years earlier, but also from the third parties purchasing the resulting shares. Consider the same example discussed earlier of an executive who exercised options to buy 1 million shares of stock at $10 per share, obtained the shares from the corporation, and then immediately sold them on the open market for $30 per share, making a total profit of $20 million. The individual's corporation didn't supply that $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--often a former employee--obtained from unrelated parties in the marketplace. The executive who exercised the stock options must still treat any resulting profit as ordinary income for the reasons given earlier: the executive received the shares at a below market cost, solely because of work that the executive performed for the corporation in return for the stock option compensation. The bill we are introducing today would put an end to the current approach of allowing a corporation to take a mirror deduction equal to the ordinary income declared by its executive. It would break that old artificial illogical symmetry and replace it with a new logical symmetry--one in which the corporation's stock option tax deduction would match its book expense. I call the current approach a case of artificial symmetry, because it uses a construct in the tax code that, when first implemented 40 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 corporations to claim a deductible expense for money that comes not from company coffers, but from third parties in the stock market. Now that an accounting consensus determines how to calculate 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. 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 Section 422 of the tax code. Under that section, 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. The bill would make one other important change to the tax code as it relates to corporate stock option tax deductions. In 1993, Congress enacted a $1 million cap on the compensation that a corporation can deduct from its taxes, so that other taxpayers wouldn't be forced to subsidize corporate executive pay. That cap was not applied to stock options, however, instead allowing companies to deduct any amount of stock option compensation from their tax obligations, without limit. By not applying the $1 million cap to stock option compensation, the tax code created a significant tax incentive for corporations to pay their executives with stock options. Indeed, it is common for executives to have salaries of $1 million, while simultaneously receiving millions of dollars more in stock options. History has subsequently shown that the $1 million cap--established to stop ordinary taxpayers from being forced to subsidize enormous paychecks for corporate executives--is effectively meaningless without including stock options. Further, while corporate directors may be comfortable diluting their shareholders' interests while doling out massive amounts of stock options, that still does not mean that ordinary taxpayers should be forced to subsidize the large amounts of stock option compensation involved. The bill would eliminate this unwarranted, 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). It is also worth noting that, if the cap were applied to stock options, it would not prevent stock option pay from exceeding $1 million--it would simply ensure that those stock option awards were not made at the expense of ordinary taxpayers. 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 in unusual circumstances, such as when a parent corporation issues options on its shares to the employee of a subsidiary or another corporation in a consolidated group, or when one corporation issues options on its shares to employees of a joint venture. 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. Essentially, this transition rule would ensure that stock options issued prior to the enactment date of the legislation would remain tax deductible and ensure all corporations can start deducting stock option expenses on a yearly schedule. The transition rule has three parts. First, it would allow the old Section 83 deduction rules to apply to any option which was vested prior to the effective date of the new stock option accounting rule, 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 those options, the bill would allow corporations to take an immediate tax deduction--in the first year that the bill is 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). This transition rule is a generous one, but even with it, the Joint Committee on Taxation has estimated that closing the corporate stock option tax deduction loophole would produce $24.6 billion in corporate tax revenues over 10 years. Over the last 5 years, the stock option book-tax gap has ranged from $12 billion to $61 billion per year, generating deductions far in excess of corporate expenses. Corporations have avoided paying their fair share to Uncle Sam by simply giving their executives the right to tap huge sums of money from the stock market. It is a tax policy that forces ordinary taxpayers to subsidize outsized executive compensation and that favors corporations doling out stock options over paying their executives in cash. Right now, stock options are the only compensation expense where the tax code allows companies to deduct more than their book expense. In these times of financial distress, we cannot afford this multi-billion dollar loss to the Treasury, not only because of the need to reduce the deficit, but also because the stock option tax deduction contributes to the anger and social disruption caused by the ever deepening chasm between the pay of executives and the pay of average workers. The Obama administration has pledged itself to closing unfair corporate tax loopholes and to returning sanity to executive pay. It should start with supporting an end to excessive stock option corporate deductions. I urge my colleagues to include this legislation in any deficit reduction package this year, or to pass it separately.

Mr. LEVIN

Mr. LEVIN. Mr. President, I am introducing today with my colleagues Senators Conrad, Bill Nelson, Sanders, Shaheen, and Whitehouse, the Stop Tax Haven Abuse Act, legislation which is geared to stop the $100 billion yearly drain on the U.S. treasury caused by offshore tax abuses. Offshore tax abuses are not only undermining public confidence in our tax system, but widening the deficit and increasing the tax burden on middle America. People are sick and tired of tax dodgers using offshore trickery and abusive tax shelters to avoid paying their fair share. This bill offers powerful new tools to combat those offshore and tax shelter abuses, raise revenues, and eliminate incentives to send U.S. profits and jobs offshore. Its provisions will hopefully be part of any deficit reduction package this year, but should be adopted in any event. The bill is supported by a wide array of small business, labor, and public interest groups, including the Financial Accountability and Corporate Transparency, FACT, Coalition, American Sustainable Business Council, Business for Shared Prosperity, Main Street Alliance, AFL-CIO, SEIU, Citizens for Tax Justice, Tax Justice Network-USA, U.S. Public Interest Research Group, Global Financial Integrity, Global Witness, Jubilee USA, and Public Citizen. Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce, has explained small business support for the bill this way: Small businesses are the lifeblood of local economies. We pay our fair share of taxes and generate most of the new jobs. Why should we be subsidizing U.S. multinationals that use offshore tax havens to avoid paying taxes? Big corporations benefit immensely from all the advantages of being headquartered in our country. It is time to end tax haven abuse and level the playing field. The Stop Tax Haven Abuse Act is a product of the investigative work of the Permanent Subcommittee on Investigations which I chair. For more than 10 years, the Subcommittee has conducted inquiries into offshore abuses, including the use of offshore corporations and trusts to hide assets, the use of tax haven banks to set up secret accounts, and the use of U.S. bankers, lawyers, accountants and other professionals to devise and conduct abusive tax shelters. Over the years, we have learned a lot of the offshore tricks and have designed this bill to fight back by closing obnoxious offshore tax loopholes and strengthening offshore tax enforcement. The 112th Congress is the fifth Congress in which I have introduced a comprehensive bill to combat offshore and tax shelter abuses. A number of provisions from past bills have made it into law, such as measures to curb abusive foreign trusts, close offshore dividend tax loopholes, and strengthen penalties on tax shelter promoters, but much more needs to be done. The last Congress made significant progress in the offshore battle. We finally enacted into law the economic substance doctrine which authorizes courts to strike down phony business deals with no economic purpose other than to avoid the payment of tax. My past bills supported the economic substance doctrine, and its enactment into law is a victory many years in the making. Last year also saw enactment of the Baucus-Rangel Foreign Account Tax Compliance Act or FATCA, which is a tough new law designed to flush out hidden offshore bank accounts. Foreign banks are currently engaged in a massive lobbying effort to weaken its disclosure requirements, but U.S. banks have had it with foreign banks using secrecy to attract U.S. clients and want those banks to have to meet the same disclosure requirements U.S. banks do. The Administration is so far resisting calls to water down the provisions. President Obama, who when in the Senate cosponsored my bills in 2005 and 2007 to end tax haven abuses, is a longtime opponent of offshore tax evasion. He knows how fed up Americans are with tax dodgers who hide their money offshore, use complex tax shelters to thumb their nose at Uncle Sam, and offload their tax burden onto the backs of honest Americans. The bottom line is that each of us has a legal and civil obligation to pay taxes, and most Americans fulfill that obligation. It is time to force the tax scofflaws, the tax dodgers, and the tax cheats to do the same, and end their misuse of offshore tax havens. The bill I am introducing today is a stronger version of the Stop Tax Haven Abuse Act introduced in the last Congress. In addition to preserving the provisions from last year that have not yet been enacted into law, it contains several new measures to stop tax dodgers from taking advantage of middle Americans who play by the rules. Among the bill's provisions are special measures to combat persons who impede U.S. tax enforcement; establishment of legal presumptions to overcome secrecy barriers; the treatment of offshore corporations as domestic corporations for tax purposes when controlled by U.S. persons; closing a tax loophole benefiting credit default swaps that send money offshore; closing another loophole that allows corporate deposits of foreign funds in U.S. accounts to be treated as nontaxable, unrepatriated foreign income; disclosure requirements for basic information on country-by-country tax payments by multinationals; and stronger penalties against tax shelter promoters and aiders and abettors of tax evasion. Probably the biggest change in the bill from the last Congress is that it would no longer require Treasury to develop a list of offshore secrecy jurisdictions and then impose tougher requirements on U.S. taxpayers who use those jurisdictions. Instead, the bill would build on the Foreign Account Tax Compliance Act of 2010, by creating tougher disclosure, evidentiary, and enforcement consequences for U.S. persons who do business with foreign financial institutions that reject FATCA's call for disclosing accounts used by U.S. persons. By focusing on non- FATCA financial institutions instead of offshore secrecy jurisdictions, the bill relieves Treasury of a difficult task, while providing additional incentives for foreign banks to adopt FATCA's disclosure requirements. Mr. President, I ask unanimous consent that a section by section analysis and a bill summary be printed in the Record.

Mr. LEVIN

Mr. LEVIN. Mr. President, I am introducing today with my colleagues Senators Conrad, Bill Nelson, Sanders, Shaheen, and Whitehouse, the Stop Tax Haven Abuse Act, legislation which is geared to stop the $100 billion yearly drain on the U.S. treasury caused by offshore tax abuses. Offshore tax abuses are not only undermining public confidence in our tax system, but widening the deficit and increasing the tax burden on middle America. People are sick and tired of tax dodgers using offshore trickery and abusive tax shelters to avoid paying their fair share. This bill offers powerful new tools to combat those offshore and tax shelter abuses, raise revenues, and eliminate incentives to send U.S. profits and jobs offshore. Its provisions will hopefully be part of any deficit reduction package this year, but should be adopted in any event. The bill is supported by a wide array of small business, labor, and public interest groups, including the Financial Accountability and Corporate Transparency, FACT, Coalition, American Sustainable Business Council, Business for Shared Prosperity, Main Street Alliance, AFL-CIO, SEIU, Citizens for Tax Justice, Tax Justice Network-USA, U.S. Public Interest Research Group, Global Financial Integrity, Global Witness, Jubilee USA, and Public Citizen. Frank Knapp, president and CEO of the South Carolina Small Business Chamber of Commerce, has explained small business support for the bill this way: Small businesses are the lifeblood of local economies. We pay our fair share of taxes and generate most of the new jobs. Why should we be subsidizing U.S. multinationals that use offshore tax havens to avoid paying taxes? Big corporations benefit immensely from all the advantages of being headquartered in our country. It is time to end tax haven abuse and level the playing field. The Stop Tax Haven Abuse Act is a product of the investigative work of the Permanent Subcommittee on Investigations which I chair. For more than 10 years, the Subcommittee has conducted inquiries into offshore abuses, including the use of offshore corporations and trusts to hide assets, the use of tax haven banks to set up secret accounts, and the use of U.S. bankers, lawyers, accountants and other professionals to devise and conduct abusive tax shelters. Over the years, we have learned a lot of the offshore tricks and have designed this bill to fight back by closing obnoxious offshore tax loopholes and strengthening offshore tax enforcement. The 112th Congress is the fifth Congress in which I have introduced a comprehensive bill to combat offshore and tax shelter abuses. A number of provisions from past bills have made it into law, such as measures to curb abusive foreign trusts, close offshore dividend tax loopholes, and strengthen penalties on tax shelter promoters, but much more needs to be done. The last Congress made significant progress in the offshore battle. We finally enacted into law the economic substance doctrine which authorizes courts to strike down phony business deals with no economic purpose other than to avoid the payment of tax. My past bills supported the economic substance doctrine, and its enactment into law is a victory many years in the making. Last year also saw enactment of the Baucus-Rangel Foreign Account Tax Compliance Act or FATCA, which is a tough new law designed to flush out hidden offshore bank accounts. Foreign banks are currently engaged in a massive lobbying effort to weaken its disclosure requirements, but U.S. banks have had it with foreign banks using secrecy to attract U.S. clients and want those banks to have to meet the same disclosure requirements U.S. banks do. The Administration is so far resisting calls to water down the provisions. President Obama, who when in the Senate cosponsored my bills in 2005 and 2007 to end tax haven abuses, is a longtime opponent of offshore tax evasion. He knows how fed up Americans are with tax dodgers who hide their money offshore, use complex tax shelters to thumb their nose at Uncle Sam, and offload their tax burden onto the backs of honest Americans. The bottom line is that each of us has a legal and civil obligation to pay taxes, and most Americans fulfill that obligation. It is time to force the tax scofflaws, the tax dodgers, and the tax cheats to do the same, and end their misuse of offshore tax havens. The bill I am introducing today is a stronger version of the Stop Tax Haven Abuse Act introduced in the last Congress. In addition to preserving the provisions from last year that have not yet been enacted into law, it contains several new measures to stop tax dodgers from taking advantage of middle Americans who play by the rules. Among the bill's provisions are special measures to combat persons who impede U.S. tax enforcement; establishment of legal presumptions to overcome secrecy barriers; the treatment of offshore corporations as domestic corporations for tax purposes when controlled by U.S. persons; closing a tax loophole benefiting credit default swaps that send money offshore; closing another loophole that allows corporate deposits of foreign funds in U.S. accounts to be treated as nontaxable, unrepatriated foreign income; disclosure requirements for basic information on country-by-country tax payments by multinationals; and stronger penalties against tax shelter promoters and aiders and abettors of tax evasion. Probably the biggest change in the bill from the last Congress is that it would no longer require Treasury to develop a list of offshore secrecy jurisdictions and then impose tougher requirements on U.S. taxpayers who use those jurisdictions. Instead, the bill would build on the Foreign Account Tax Compliance Act of 2010, by creating tougher disclosure, evidentiary, and enforcement consequences for U.S. persons who do business with foreign financial institutions that reject FATCA's call for disclosing accounts used by U.S. persons. By focusing on non- FATCA financial institutions instead of offshore secrecy jurisdictions, the bill relieves Treasury of a difficult task, while providing additional incentives for foreign banks to adopt FATCA's disclosure requirements. Mr. President, I ask unanimous consent that a section by section analysis and a bill summary be printed in the Record.

Mr. LEVIN

Mr. LEVIN. Madam President, it is with pride that I recognize the 29th Annual Metro Detroit Youth Day, which will take place tomorrow on Belle Isle in Detroit. This engaging and family-oriented event is a herculean undertaking, bringing together more than 1,600 volunteers to welcome more than 37,000 young people within the Greater Detroit community. This day-long event, which is sponsored by a multitude of businesses and more than 320 community and youth organizations across Michigan, provides a wonderful platform to bring the community together to award scholarships and recognize outstanding community service for and by young people. From sports clinics to motivational talks to entertainment, this event has grown to become the largest youth event in Michigan, with a mission of promoting community service and the need for physical education and fitness. This event also seeks to inspire young people to strive to better themselves through education, good deeds and other positive means. Through the years, Youth Day has been recognized by many on the State and national level. In 1991, Metro Youth Day was recognized by President George H.W. Bush as the 477th Point of Light, and in 1999, the Governor's Council on Physical Fitness, Health and Sports named Metro Youth Day the top youth event in Michigan. These honors are the direct result of the hard work and dedication of the many individuals, organizations and businesses that team up to make sure this event is rewarding and memorable for the many youth across the Detroit metro area that participate. Inspiring young people to better themselves and fostering stronger community bonds are noble pursuits that reap rewards far into the future. I salute all those who have played a role in making this year's Metro Detroit Youth Day a tremendous success. This event has become a tradition in southeast Michigan over the last 28 years, and I look forward to hearing about this exciting celebration for many years to come.

Mr. LEVIN

Mr. LEVIN. Mr. President, as we discuss the need to bring down the deficit, we should acknowledge a few basics. First is cannot achieve the deficit reduction we need with spending cuts to nondefense discretionary programs alone. They simply aren't large enough to make the difference we need, and the damage we would do to American families from drastic cuts in those programs is simply too great. Second is that in light of those facts and in the interest of basic fairness, a balanced solution to deficit spending must include revenues as well as spending cuts. If we ask college students relying on Federal aid, workers in need of Federal job training, seniors in need of health care to sacrifice in the name of deficit reduction, so, too, should those who benefit from loopholes and handouts in the Tax Code, including loopholes that often benefit only highly profitable corporations, one of those huge loopholes that benefits corporations that dole out large stock option pay to their executives. Current law provides an unwarranted tax subsidy to executive stock option compensation thereby increasing the tax burden on working families and increasing our deficit. According to the Joint Committee on Taxation, closing this loophole would reduce the deficit by about $25 billion. Today, under tax rules for reporting stock options, corporations report stock option expenses on their books when those stock options are granted but use another method to claim a different and a typically much higher expense on their tax returns when the stock options are exercised. The result is, corporations can claim larger tax deductions for options on their tax returns than the actual expense they show on their books for those same options. Stock options are the only type of compensation where the Tax Code allows a corporation to deduct more than the expense shown on their books. For all other types of compensation--cash, stock, bonuses, and others--the tax return deduction equals the book expense. In fact, if corporations deducted on their tax returns more than their books showed as compensation, it could constitute tax fraud. The sole exception to that rule is stock options. It is an exception we can no longer afford. The Permanent Subcommittee on Investigations, which I chair, held a hearing in June of 2007, when we examined the stock option tax gap in detail at nine companies. We found that those nine companies claimed tax deductions that were a combined $1 billion greater than the expenses shown on their books. Let me repeat, just nine companies, $1 billion in excess tax deductions. We were shocked by that finding, and we asked the IRS to calculate the stock option tax gap for the country as a whole. Using actual data from tax returns, the IRS found that for the first full year in which data was available, U.S. companies claimed an excess of $61 billion in stock option tax deductions compared to their book expenses. Since then, IRS data shows that the stock option tax gap has persisted for 5 years. They looked at 2005 to 2009, which was the latest year for which data was available, with the size of the excess tax deductions varying from $11 billion to $52 billion per year. These excessive deductions mean billions of dollars in reduced taxes for corporations wealthy enough to provide substantial stock option compensation to their already well-paid executives and all at the expense of ordinary taxpayers and an increase in the deficit. It is a tax loophole that is fueling excessive executive pay, increasing the pay gap between millionaires and the middle class, and enabling profitable corporations to avoid paying their fair share to reduce the deficit. I will soon be reintroducing the same legislation I have introduced in past years to end this misalignment of the Tax Code. The bill would cure the problem simply by requiring the corporate stock option tax deduction to equal the stock option expense shown on the corporate books. It would not affect the taxes paid by individuals who receive the stock options. It would not affect so-called incentive stock options which receive favored tax treatment under section 422 of the Tax Code and are often used by startup companies. In addition, the bill would make stock options pay subject to the same $1 million cap on corporate tax deductions that applies to other forms of executive pay. Congress established that $1 million cap so that taxpayers would not have to subsidize enormous paychecks for executives. But the cap can't end that tax subsidy without including stock options. Even if included under the cap, stock options could still be awarded in excess of $1 million, but not at the expense of ordinary taxpayers. I do not know of any Senator who does not want to reduce the budget deficit. I do not know of any Senator who believes it is wise to subsidize executive paychecks at the expense of working families. But as it now stands, the excessive corporate tax deduction for stock option pay widens the deficit while increasing the tax burden on ordinary taxpayers. By closing this tax gap, by ending the illogical treatment of corporate stock options in current law, we can reduce the budget deficit and bring much-needed fairness to the Tax Code. Mr. President, I ask unanimous consent that I be allowed to proceed as in morning business for 8 minutes.

Mr. LEVIN. Mr. President, the Department of Justice announced earlier this week that Ahmed Abdulkadir Warsame, an accused member of the terrorist group Al-Shabaab, has been indicted on charges of providing material support to Al-Shabaab and al-Qaida in the Arabian Peninsula, conspiring to teach and demonstrate the making of explosives, possessing firearms and explosives in furtherance of crimes of violence, and other violations of Federal law. He will be tried for these offenses in Federal court in New York. Warsame is a Somali national who was captured in the gulf region in late April and taken to a U.S. Navy vessel for detention and interrogation. The Department of Defense has stated that the interrogation was conducted by an interagency team comprised of U.S. military personnel, with assistance from the High-Value Detainee Interrogation Group. After the completion of this interrogation and a hiatus of several days, Warsame was turned over to a team of FBI officials for law enforcement questioning, and in that he waived his Miranda rights and continued to talk. This case appears to be an example of our national security and law enforcement teams working together in the manner we would hope they would toward the twin objectives of collecting critical intelligence information and ensuring a successful criminal prosecution of the detainee. Published reports indicate that Warsame was captured by American military forces on a boat in international waters between Yemen and Somalia after the United States acquired intelligence indicating that a significant terrorist figure was on board the vessel. Under these circumstances, it was appropriate for the military to detain and interrogate Warsame to obtain actionable intelligence. The United States is currently engaged in military operations pursuant to the 2001 Authorization for Use of Military Force. As the Supreme Court held 7 years ago in the case of Hamdi v. Rumsfeld, the capture and detention of both lawful and unlawful combatants is a ``fundamental and accepted . . . incident to war.'' I understand these interrogations were conducted in a manner fully consistent with the interrogation techniques authorized under the Army Field Manual on interrogations. Once our national security team determined that the collection of actionable intelligence had been completed, a separate decision was made, on the basis of the specific facts of this case, as to the best forum in which to prosecute Warsame for his alleged crimes. The indictment sets forth evidence that Warsame violated a number of Federal statutes, including sections of the Criminal Code prohibiting trafficking in explosives, use of dangerous weapons, acts of international terrorism, providing material support to foreign terrorist organizations, and receiving military-type training from foreign terrorist organizations--making him a candidate for prosecution in a Federal court with jurisdiction over such violations. Warsame also appears to have engaged in acts of terrorism and material support to terrorism, both of which are crimes under the Military Commissions Act, if they are committed ``in the context of and associated with hostilities'' against the United States. What has not been resolved is whether Warsame meets the jurisdictional threshold in the Military Commissions Act of having acted in the context of hostilities against the United States and having engaged in or materially supported such hostilities. The administration's national security team unanimously agreed that prosecution in Federal court was the better option and the one most likely to lead to a conviction under the facts of this case. Our Federal prosecutors and Federal courts have a proven track record in prosecuting terrorists. Two years ago, the Justice Department informed us that there were 208 inmates in Federal prisons who had been sentenced for crimes related to international terrorism and an additional 139 inmates who had been sentenced for crimes related to domestic terrorism. By contrast, prosecution of the Warsame case before a military commission would have raised a difficult jurisdictional issue that could have resulted in dismissal or even acquittal. Critics of the decision to try Warsame in Federal court apparently would prefer that he be tried before a military commission, even though he might be less likely to be convicted there due to the jurisdictional issue. I disagree with that position. In my view, the most appropriate forum for trial should be determined, as it was here, on the basis of the nature of the offense, the nature of the evidence, and the likelihood of successful prosecution. The executive branch officials who made the determination in this case are in a much better position to weigh those factors and make that judgment than is the Congress. By the way, the approach taken by the administration in this case is consistent with the bipartisan detainee provisions included in the National Defense Authorization Act, as reported by the Senate Armed Services Committee last month. Those provisions would authorize military detention for enemy belligerents captured in the course of hostilities authorized by the 2001 Authorization for Use of Military Force. That authority appropriately encompasses the detention of an individual like Warsame, who is suspected of participation in such hostilities, until such time as the military has been able to interrogate the detainee and make an appropriate status determination. While we may not have enough evidence to prove beyond a reasonable doubt that Warsame participated in hostilities against the United States, we undoubtedly had sufficient evidence to hold him for the time required to interrogate him and obtain the intelligence that our military needs. The provisions in the Senate Armed Services Committee-reported bill would also expressly authorize the transfer of such a detainee ``for trial by an alternative court or competent tribunal having lawful jurisdiction.'' Indeed, an amendment to delete this authority was defeated in committee by a bipartisan vote of 7 to 19. We decided, in other words, to leave it up to executive branch officials to determine on a case-by-case basis, as they did here, the most appropriate forum for prosecution, whether it be a Federal court or a military commission. By contrast, the House version of the defense authorization bill includes a provision that would expressly prohibit the trial in Federal court of any alleged foreign terrorist who might be subject to trial by a military commission--even if he is arrested inside the United States. This provision may well be unconstitutional, given that article III of the U.S. Constitution expressly states that: The judicial power shall extend to all Cases, in Law and Equity, arising under this Constitution, the Laws of the United States, and Treaties made, or which shall be made, under their Authority. Under the plain language of this provision, Congress would appear to lack the authority to exclude the prosecution of violations of the laws of the United States in the Federal courts. The effort to direct all terrorist cases to military commissions could also be highly counterproductive, providing jurisdictional arguments that defendants could use to seek the dismissal of charges against them. If the House language were adopted, a case in Federal court on a terrorism charge would be at risk of being dismissed on the grounds that it could only have been brought before a military commission, while at the same time, because of the limited jurisdiction of military commissions, the military commission might not have jurisdiction either. In such a case, it would be impossible to prosecute an alleged terrorist in any forum. The critics of the Department of Justice decision should end their effort to score political points here. The stakes are too high, and if the critics get their way, we might not be able to try some terrorists at all--anywhere. Some may contend that holding alleged terrorists in the United States for trial could needlessly subject Americans to retaliatory attacks by terrorist organizations. There is no basis for that argument. We have tried hundreds of alleged terrorists in our Federal courts over the last decade. We are currently holding many more--including the Christmas Day bomber, who is being held in my hometown of Detroit. So far as I know, none of these cases have led to retaliatory attacks by terrorist organizations. In any event, we know that al-Qaida and its allies are already seeking avenues to attack us on American soil and would do so if they could. Moving the location of a trial to Guantanamo or some other foreign location is unlikely to deter such an attack. Last month, ADM William McRaven--the President's nominee to be commander of U.S. Special Operations Command--testified before our Armed Services Committee that a suspected enemy belligerent detained outside the war zones in Afghanistan and Iraq would likely be put on a naval vessel until ``we can prosecute that individual in a U.S. court or we can return him to a third party country.'' Admiral McRaven made it clear later in his testimony that such an individual could also be transferred for trial by a military commission. In other words, we have a choice. We should preserve that choice. In summary, the Warsame case demonstrates that we do have the capacity to detain and interrogate suspected terrorists in military custody for the purpose of obtaining actionable intelligence, and then to transfer them to an appropriate forum for trial--whether it be a Federal court or a military commission. This case demonstrates that we do not have to sacrifice actionable intelligence for law enforcement purposes, and that we do not have to sacrifice criminal prosecution in order to collect intelligence information. And it demonstrates that we can pursue both of these objectives without being pushed to what Admiral McRaven described as the ``unenviable option'' of having to release the detainee. The only ``unenviable'' outcome is the one that the critics of the Department of Justice decision would lead us to--prohibiting the criminal trial of suspected foreign terrorists in Federal court and requiring them to be tried by military commissions, even in cases like the Warsame case, where a jurisdictional problem might lead a military commission to dismiss the case. The action of the administration in the Warsame case is sound. The prosecutorial discretion they exercised as to the best forum for the trial should be preserved and should not be interfered with by the Congress. I yield the floor.

Mr. LEVIN

Mr. LEVIN. Mr. President, we must raise the debt ceiling, period. This is not an opinion, it is a fact. The consequences of failing to act are simply too catastrophic to consider any other course. Negotiations are underway now to seek an agreement to raise the debt ceiling as part of a larger agreement on deficit reduction. But there is a major obstacle to agreement: a refusal on the part of the Republican leadership to compromise, a refusal to understand that sacrifice must be shared. The sacrifice, they say, must come from middle America--those struggling to pay for a college education or for health care for their kids or for long-term care for their parents. The Republican leader demands that this sacrifice be made by the middle class in order to protect the Bush tax cuts and other tax breaks for the wealthiest among us--despite the huge and growing gap in the distribution of income in our country between the wealthy and the middle class. One example of the kind of tax breaks and tax loopholes that we Democrats seek to change is the unconscionable tax break given to hedge fund managers. Hedge fund managers generally make their money by charging their clients two fees. First, the manager receives a management fee, typically equal to 2 percent of the assets invested. Second, the manager typically receives 20 percent of the income from those investments above a certain level. This 20-percent share of the investment returns from hedge funds is known as ``carried interest.'' Under current law, most hedge fund managers claim that this carried interest qualifies as a long-term capital gain, currently subject to a maximum tax rate of 15 percent, rather than being taxed as ordinary income, currently subject to a maximum tax rate of 35 percent. But a moment's analysis shows that this money is ordinary income by any fair definition and should be treated that way. The 20-percent fee is not capital gains, because it applies not to capital that the hedge fund manager has invested, but to the payment he receives for investing capital that other people provide. Pretending that the 20-percent fee is capital gains when, in fact, it is payment for a service is an ``Alice in Wonderland'' argument that elevates fiction over fact. We Democrats seek to end this fiction. We are ready to call carried interest what it is--ordinary taxable income. Recognizing carried interest for what it is would increase tax fairness for working Americans who pay their fair share of taxes. They have the right to expect that the wealthy do the same. It would reduce the deficit--if we did this--by an estimated $21 billion over the next 10 years. Republicans seek to protect this loophole. They say the income of investment managers is at risk from year to year and, therefore, deserving of a lower tax rate. Well, ask the factory worker, who just saw his or her job move overseas; ask the store clerk, who saw his employer close because of the damage from the financial crisis; ask the part-time worker, whose hours and earnings go up and down from week to week--ask all of them just how much risk working Americans face right now. Republicans say taxing this income as ordinary income would discourage investment in job creation, and that is absurd. The people who are actually risking their capital--investors in these funds--will continue to see their profits taxed at the lower capital gains rate. The issue in this case is income that these managers receive for serving their clients. If you are a hedge fund manager, your job is to manage a hedge fund. The income you receive for that job is no different than the income a waitress receives for waiting tables, or a janitor receives for scrubbing floors. The idea that the income of millionaire fund managers should be taxed at a lower rate than that of their staff or other workers is an absurdity. This nonsensical loophole is deeply unfair at a time when working families are struggling, while the wealthiest among us continue to prosper greatly. Recent decades have seen a massive and growing prosperity gap between ordinary Americans and the wealthy. How wide has that gap become? In 1980, the top 1 percent of American earners took home about 10 percent of our Nation's total income. A few decades later, that figure had increased to 24 percent of our Nation's total income. That is just the wealthiest 1 percent that now have over 20 percent of our total income. It is hard to argue that properly taxing their income will impose great hardship on investment fund managers, who have done awfully well in recent years. How well have those investment fund managers done? According to a survey by a magazine covering the hedge fund industry, the top 25 hedge fund managers earned $22.7 billion last year. The two managers who topped the list earned $80 billion each--that is billion with a ``B.'' The typical American household earned perhaps $60,000 or $62,000 in 2008. Those hedge fund managers earned in about 4 minutes what it took a typical working family a year to earn. Yet they paid drastically lower rates on those massive incomes than the low-wage worker who cleaned their office. The Republicans would protect these unconscionable tax breaks while, at the same time, wanting to cut programs that provide an education for our kids and provide health care for our seniors. It gets worse. Adding insult to injury, Republicans are protecting another tax loophole--one that many of these hedge fund managers, by the way, use to avoid taxes entirely. This loophole allows corporations and wealthy individuals to take income earned here in the United States and shift it to overseas tax havens, dodging U.S. taxes that they rightly owe. I have long sought to end this abuse, because these offshore tax havens increase the tax burden on those who pay the taxes they owe. In the last Congress, I introduced the Stop Tax Haven Abuse Act, which would seek to recover tax revenue now lost to offshore tax dodging. Ending this loophole is significant if we seek to properly tax the income of hedge fund managers. At one hearing of the Permanent Subcommittee on Investigations, which I chair, three well-known hedge funds that claim to be based in the Cayman Islands admitted under questioning that they did not have a single employee in the Cayman Islands. Closing the offshore loophole would make our effort to equitably tax carried interest all the more effective, by shutting off a major avenue that hedge funds and other investment funds use to dodge taxes. Democrats have rightly proposed addressing the carried interest loophole and offshore tax havens and other unfair tax loopholes as part of a balanced deficit reduction strategy. We believe it is grossly unfair to cut programs that help young Americans get a college education or help train working Americans for new jobs in order to protect tax loopholes that benefit the wealthiest Americans. The Republican response? To walk out of negotiations and say they will not accept any deficit reduction package if it includes revenue measures. Mr. President, what is the time situation?

Mr. LEVIN. If there is no other Senator waiting, I ask unanimous consent to be permitted to continue for 3 additional minutes.

Mr. LEVIN. I thank the Presiding Officer. What the Republicans have done is to walk out of negotiations and say they will not accept any deficit reduction package if it includes revenue measures. So let's call this what it is. If Republicans refuse to consider compromise solutions, they are threatening all of us, the whole country, with economic catastrophe in order to protect the sky- high income of millionaire hedge fund managers and offshore tax avoiders. Those are two of the loopholes--two of many loopholes--we have identified that should be closed that Republicans refuse to consider closing. So what they are doing--and we should make no mistake about this--is holding the well-being of all Americans hostage to the tax breaks of a wealthy few. We all agree we must act to reduce the deficit. We have acknowledged, as Democrats, the need for spending cuts, even painful cuts to programs we support. That is why I am so troubled by the utter refusal of the Republicans to consider even modest compromises in the direction of new revenue. There is an overwhelming consensus among budget experts that we cannot achieve serious deficit reduction with spending cuts alone. There is an overwhelming consensus among economists that drastic cuts in Federal outlays will threaten our economic recovery--just as such cuts have throttled recovery in other nations. And despite the fantasies of some in Congress, it is abundantly clear a failure to raise the debt ceiling would do incalculable harm to the recovery and to our standing in the world. Drawing lines in the sand, as the Republicans have done, and refusing to compromise by walking out, has no place in the situation we face. I urge the Republican leadership to abandon their uncompromising positions, to embrace solutions to the deficit and recognize that we all must sacrifice to address the deficit problem. The well-being of all of us, of all Americans, should not be held captive in the service of the most fortunate few. Mr. President, I suggest the absence of a quorum.

Mr. LEVIN

Mr. LEVIN. Mr. President, I would like to pay tribute to Henry G. Marsh, a tireless and dedicated community leader in Saginaw, MI, who passed away on May 11, 2011. Mr. Marsh was an important figure in the civil rights community in Saginaw, as well as in politics, for many years. He accomplished much throughout his professional life and has forged an impressive legacy that will surely inspire many for years to come. Henry G. Marsh was born on October 11, 1921, to Thomas and Saidye Marsh. Upon graduating from Greenwood High School, Mr. Marsh joined the Army. After his military service, Mr. Marsh earned a degree from Knoxville College in Knoxville, TN, and later a law degree from Wayne State University. In 1954, Mr. Marsh moved to Saginaw and quickly became actively involved in community affairs in the city. He would soon accept a position as legal counsel for the NAACP, and would eventually become chairman of the Human Relations Commission. Henry Marsh was committed to serving the needs of the Saginaw community and served in various positions and as chairman of many committees and boards throughout his adult life in Saginaw, MI. In 1961, Mr. Marsh became the first African American to be elected to the Saginaw City Council, and in 1967, became Saginaw's first Black mayor. Shortly after becoming mayor, he formed a 220-member Committee on Civil Rights, made up of homemakers, factory workers, ministers, business owners and members of civil rights organizations, that sought to bring the city together to solve the many issues the city faced at the time. Reflecting on his stint as mayor, he was quoted in the Saginaw News in a 2000 interview as saying that the commission was ``the most important thing I ever did. We discussed the legitimate concerns of this city.'' Henry Marsh was a devoted husband and family man. He was married to his wife Ruth for 63 years, and they were blessed with three children, Michael, Walter and Teresa. This is, indeed, a great loss to the many people who knew Henry Marsh and to the many more that have benefited from his life's work. I know my colleagues join me in paying tribute to the life and work of Henry G. Marsh. I am sure his family takes comfort in knowing that his accomplishments will be honored and remembered for years to come.

Mr. LEVIN

Mr. LEVIN. Mr. President, I have long sought to bring attention to the dangerous gaps in U.S. gun laws, hoping the exposure would lead to the passage of commonsense firearm legislation. To those of us who feel that Congress can and should play a role in protecting American neighborhoods from the scourge of gun violence, enacting laws to ensure firearms stay out of the hands of dangerous people seems like a no- brainer. Unfortunately, the National Rifle Association, despite broad support for sensible gun safety laws among Americans across the political spectrum, has successfully blocked much-needed legislative changes. Recently a startling new voice joined the discussion highlighting the weaknesses in our gun laws, most notably how we administer firearm background checks. Consider the following quote describing the so- called gun show loophole: America is absolutely awash with easily obtainable firearms. You can go down to a gun show at the local convention center and come away with a fully automatic assault rifle without a background check and, most likely, without having to show an identification card. While this quote does not break any new ground regarding the dangers of the gun show loophole, it is noteworthy because of the person who said it. These were not the words of a Member of Congress, advocating for legislation, nor were they the words of a spokesperson of groups like Mayors Against Illegal Guns or the Brady Campaign. This quote is taken from an Internet video message recorded by Adam Gadahn, an American-born, confirmed al-Qaida operative. In the video, Gadahn speaks to al-Qaida followers and sympathizers, describing the ease with which a person can purchase a firearm from a private seller without a background check, often with no questions asked. In fact, this video is not merely a description of the loopholes in U.S. gun laws, it is an exhortation to would-be terrorists to exploit these loopholes and kill innocent Americans. To wit, the video ends with Gadahn asking his viewers, ``What are you waiting for?'' This video is a chilling reminder that dangerous loopholes exist in U.S. gun laws, weaknesses that terrorists are actively trying to exploit. While Gadahn is not entirely accurate--a person cannot purchase a ``fully automatic assault'' rifle at a gun show without government knowledge--he correctly describes just how simple it is for dangerous individuals to acquire deadly weapons in the United States, including semi-automatic assault rifles. I urge my colleagues to take up and pass two gun safety bills introduced by Senator Frank Lautenberg: the Gun Show Background Check Act, S. 35, which would close the loophole that makes it easy for criminals, terrorists and other prohibited buyers to evade background checks and buy guns from private citizens at gun shows; and the Denying Firearms and Explosives to Dangerous Terrorists Act, S. 34, which would close the loophole in Federal law that hinders the ability of law enforcement to keep firearms out of the hands of terrorists by authorizing the Attorney General to deny the sale of a firearm when a background check reveals that the prospective purchaser is a known or suspected terrorist. Congressional action should not require such stark evidence that al- Qaida and like-minded criminals are trying to use weak U.S. gun laws to carry out terrorist attacks against Americans. But the evidence--clear, explicit and terrifying--is here nonetheless. The time to act is long overdue.

Mr. LEVIN

Mr. LEVIN. 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. LEVIN

Mr. LEVIN. Mr. President, today Senator Blunt and I have introduced the Near East and South Central Asia Religious Freedom Act of 2011. The purpose of this legislation is to establish within the State Department a special envoy to promote freedom of worship for religious minorities in this important region of the world. It is a tragic fact that in many of the nations of the Near East and South Central Asia, this universal human right, the freedom to worship in keeping with one's conscience, is in doubt. I would point my colleagues to the State Department's most recent Report on International Religious Freedom, published late last year. The report concludes, among other things, that: in Iran, ``government respect for religious freedom in the country continued to deteriorate''; in Iraq, ``violence conducted by terrorists, extremists, and criminal gangs restricted the free exercise of religion and posed a significant threat to the country's vulnerable religious minorities''; in Afghanistan, respect for the rights of religious minorities deteriorated; in Pakistan organized violence against religious minorities had increased; and in Tajikistan the government passed new laws restricting religious practice. The legislation we introduce today seeks to combat such abuses by placing a high-level official within the State Department to focus the Nation's diplomatic efforts on promoting freedom of worship. The special envoy would be tasked with promoting religious freedom within the Near East and South Central Asia; monitoring and combating intolerance and incitements to violence against religious minorities within the region; and working with the region's governments to address laws and practices that infringe on religious freedom. It is in the interest of the United States to promote freedom of worship and the rights of religious minorities around the world, and especially in nations where those freedoms are under threat. Such violence is a threat to regional stability in a part of the world where U.S. interests are great. Moreover, our support for these universal human values affirms the principles upon which our own Nation was founded. I thank my colleague from Missouri for joining with me in introducing this important legislation. I urge my colleagues to support our efforts to protect the lives and freedoms of religious minorities, and to promote the universal values upon which our Nation is built.

Mr. LEVIN

Mr. LEVIN. Mr. President, today Senator Blunt and I have introduced the Near East and South Central Asia Religious Freedom Act of 2011. The purpose of this legislation is to establish within the State Department a special envoy to promote freedom of worship for religious minorities in this important region of the world. It is a tragic fact that in many of the nations of the Near East and South Central Asia, this universal human right, the freedom to worship in keeping with one's conscience, is in doubt. I would point my colleagues to the State Department's most recent Report on International Religious Freedom, published late last year. The report concludes, among other things, that: in Iran, ``government respect for religious freedom in the country continued to deteriorate''; in Iraq, ``violence conducted by terrorists, extremists, and criminal gangs restricted the free exercise of religion and posed a significant threat to the country's vulnerable religious minorities''; in Afghanistan, respect for the rights of religious minorities deteriorated; in Pakistan organized violence against religious minorities had increased; and in Tajikistan the government passed new laws restricting religious practice. The legislation we introduce today seeks to combat such abuses by placing a high-level official within the State Department to focus the Nation's diplomatic efforts on promoting freedom of worship. The special envoy would be tasked with promoting religious freedom within the Near East and South Central Asia; monitoring and combating intolerance and incitements to violence against religious minorities within the region; and working with the region's governments to address laws and practices that infringe on religious freedom. It is in the interest of the United States to promote freedom of worship and the rights of religious minorities around the world, and especially in nations where those freedoms are under threat. Such violence is a threat to regional stability in a part of the world where U.S. interests are great. Moreover, our support for these universal human values affirms the principles upon which our own Nation was founded. I thank my colleague from Missouri for joining with me in introducing this important legislation. I urge my colleagues to support our efforts to protect the lives and freedoms of religious minorities, and to promote the universal values upon which our Nation is built.

Mr. LEVIN

Mr. LEVIN. Mr. President, I understand there is a time agreement on this nomination; is that correct?

Mr. LEVIN. I thank the Presiding Officer, and I yield myself 10 minutes. Mr. President, the nomination of Leon Panetta to be Secretary of Defense is a wise and a solid nomination. Director Panetta has given decades of dedicated public service to this Nation, and we should all be grateful he is once again willing to answer the call and take the helm at the Department of Defense. We are also grateful to his wife Sylvia for her significant sacrifices over the last 50 years in supporting Leon Panetta's efforts in the public and private sectors. When Mr. Panetta appeared before the Armed Services Committee at his nomination hearing, all of our Members commented invariably in the same way--reflecting the view that we are grateful Mr. Panetta is willing to take on this position. He is going to bring a reassuring level of continuity and in-depth experience. He has been a critical member of President Obama's national security team during his tenure as Director of the Central Intelligence Agency. The Department of Defense will need Director Panetta's skill and his wisdom to navigate the extraordinarily complex set of challenges in the years ahead. Foremost among those demands are the demands on our Armed Forces, and these are exemplified by the ongoing wars in Afghanistan and Iraq. Between those two conflicts, we continue to have approximately 150,000 troops deployed. The U.S. military is also providing support to NATO operations to protect the Libyan people. In addition, even after the extraordinary raid that killed Osama bin Laden, we face potential terrorist threats against us and against our allies which emanate from Pakistan, Yemen, Somalia, and other places. The risk of a terrorist organization getting their hands on and detonating an improvised nuclear device or other weapon of mass destruction remains one of the gravest possible threats to the United States. To counter that threat, the Defense Department is working with the Departments of State, Energy, Homeland Security, and other U.S. Government agencies to prevent the proliferation of nuclear weapons, fissile materials, and dangerous technologies. As Secretary of Defense, Director Panetta's leadership in this area will be of vital importance. Here again, it is that experience as Director of the CIA which will be so invaluable. In the coming weeks, President Obama and his advisers will face a number of key national security decisions. While the drawdown of U.S. forces in Iraq remains on track, there have been recent signs of instability in that country. As a result, it is possible that Iraq's political leadership may ask for some kind of continuing U.S. military presence beyond the December 31 withdrawal deadline which was agreed to by President Bush and Prime Minister Maliki in the 2008 Security Agreement. Another key decision point is looming in Afghanistan regarding reductions in U.S. forces starting next month. President Obama said the other day: It's now time for us to recognize that we have accomplished a big chunk of our mission and that it's time for Afghans to take more responsibility. The President also said a few months ago that the reductions starting next month will be ``significant.'' Hopefully, they will be. Director Panetta, while not assigning a specific number, agreed they need to be significant. A significant reduction in our troop level this year would send a critical signal to Afghan leaders that we mean it when we say our commitment is not open-ended and that they need to be urgently focused on preparing Afghanistan's security forces to assume security responsibility for all of Afghanistan. The more that Afghan security forces do that, the better the chances of success because the Taliban's biggest nightmare is facing a large, effective Afghan Army--an army which is already respected by the Afghan people, but now, hopefully-- and soon--in control of Afghanistan's security. Another major issue facing the Department is the stress that 10 years of unbroken war has placed on our Armed Forces. Over the last decade, many of our service men and women have been away from their families and homes for multiple tours. Not only is our force stressed, so are our military families. We owe them our best efforts to reduce the number of deployments and increase the time between deployments. The next Secretary of Defense will have to struggle with the competing demands on our forces while Washington struggles with an extremely challenging fiscal environment. The Defense budget will not and should not be exempt from cuts. But Congress, working with the next Secretary of Defense, will need to scrub each Defense program and expenditure and make the tough choices and tradeoffs between our war fighters' requirements today and preparations for the threats of tomorrow. Last week, the Armed Services Committee marked up the fiscal year 2012 National Defense Authorization Act. The committee cut about $6 billion from the President's budget request. However, the President has decided to reduce the national security budgets for the next 12 years by $400 billion. What we don't know is how much of that $400 billion he will recommend to come from the Defense budget and how much from the intelligence and homeland security budgets or how much is recommended to be in the first of that 12-year period--fiscal year 2012. The Nation is fortunate that Director Panetta's compelling record of achievement and experience is well suited to the demands of the position of the Secretary of Defense. Mr. Panetta is the right person to help our military through the fiscal challenges that confront this Nation. His service as President Clinton's Director of the Office of Management and Budget is invaluable because he understands the budget process and because he shaped the decisions that helped achieve the budget surpluses of the late 1990s. Leon Panetta has repeatedly demonstrated an ability to reach across party lines and work in a bipartisan spirit since entering public service 45 years ago. He worked on the staff of the Republican whip in the Senate and headed the Office of Civil Rights in the Nixon administration. He later won election to the House of Representatives as a Democrat, where he served 16 years, earning the respect of his peers and becoming the chairman of the House Budget Committee. Throughout his time in public service, Leon Panetta has been guided by a clear moral compass. He has said: In politics there has to be a line beyond which you don't go--the line that marks the difference between right and wrong, what your conscience tells you is right. Too often people don't know where the line is. My family, how I was raised, my education, all reinforced my being able to see that line. Leon Panetta has been intimately involved in the most pressing national security issues of our time. During his tenure as Director of the Central Intelligence Agency, President Obama turned to Director Panetta to personally oversee the manhunt for Osama bin Laden and the awe-inspiring operation that brought an end to al-Qaida's murderous leader and provided a measure of relief to the families and friends who have suffered since September 11, 2001. The raid on the bin Laden compound epitomizes the way in which the CIA and the Defense Department are finally working together to support each other in counterterrorism operations, and Director Panetta deserves credit for this close coordination. Before concluding, I wish to pass along my gratitude and deep admiration for the man who is stepping down as head of the Department of Defense, Secretary Robert Gates. Secretary Gates has provided extraordinary service to this country, spanning the administrations of eight Presidents. Four and a half years ago, he left the comfort and rewards of private life, following a long career in government, to once again serve the critical post of President Bush's Secretary of Defense at one of the most difficult times in recent history. Throughout his tenure, across the Bush and Obama administrations, Secretary Gates' leadership, judgment, and candor have earned him the trust and respect of all who have worked with him. Secretary Gates has combined vision and thoughtfulness with toughness, clarity and courageous decisionmaking. Secretary Gates established a direct and open relationship with Congress and with our Senate Armed Services Committee in particular. As chairman of that committee, I will always be personally grateful for that. Secretary Gates' tenure as Secretary of Defense will be judged by history to have been truly exceptional. So our next Secretary of Defense will have enormous responsibilities but also big shoes to fill. I am confident Leon Panetta is the right person to take on that challenge, and I urge our colleagues to support this nomination. Mr. President, I yield the floor, I suggest the absence of a quorum, and I ask unanimous consent that any time consumed during the quorum call be equally divided.

Mr. LEVIN

Mr. LEVIN. We are prepared to yield back the remainder of our time and do so.

Mr. LEVIN. I ask for the yeas and nays.

Mr. LEVIN. Madam President, first, let me thank the Senator from South Carolina for his analysis on Afghanistan as well as his great support for Leon Panetta and his comments about Bob Gates, which I very much share and commented about this afternoon in a very similar way. I particularly wish to commend Senator Graham for his analysis of what has changed in Afghanistan in the last 17 or 18 months, so that the reductions which will be announced tomorrow are not based on getting tired but are being based, I am sure, on the conditions on the ground or in Afghanistan and on the critical changes which have taken place in Afghanistan. I very much agree with his assessment about the surge in the Afghan forces. I was listening to his comments from a monitor, and when I heard his analysis about 90,000 additional Afghan forces, he is exactly right. The surge has not just been 30,000 of our troops but three times as many in terms of Afghan troops. And the importance of that is not just the numbers, not just the training, and not just the literacy, which the Senator pointed out, but also the mentoring and the partnering in the field with coalition forces. We have tracked this very carefully, and there has been a significant increase in the number of Afghan units that consistently are in the field partnering with our troops and with other coalition members' troops, and that makes a huge difference too because when the Afghan people see Afghan troops in the lead instead of foreign nations' troops in the lead, they understand that, in fact, the Taliban's argument that they are being occupied is a false propaganda argument, and that weakens the Taliban tremendously as well.

Mr. LEVIN. Yes.