An overwhelming majority of Americans favor banning members of Congress from trading stocks, but efforts to turn that public sentiment into law have long sputtered.
That’s because the lawmakers who would have to approve any overhaul of congressional investing stand to suffer considerable financial impacts — not least of which are potentially hefty tax liabilities if they are forced to sell off long-held stocks.
Now the issue is coming to a head with a new House bill that has a strange-bedfellows coalition of hardcore conservatives and good-government liberals behind it, and they are hoping they can convince their more skeptical colleagues to accept some new financial realities.
Under proposed language, lawmakers would be able to take advantage of a rare perk generally not available to the public, which would allow them to defer taxes on the sale of prohibited securities. On the flip side, they would face hefty penalties if they fail to sell off their holdings.
If passed, the bill would permanently change the financial calculations of any member or would-be lawmaker. The tax arrangement, for instance, could prove immensely useful to wealthy people who want to diversify their assets. But it could dissuade investors who have no interest in abandoning lucrative stakes for workaday mutual funds.
Proponents of the new bill say taking historic steps towards eliminating conflicts of interest for lawmakers who hold stocks is worth the upheaval. A 2023 University of Maryland poll found 86 percent of registered voters support a ban on member trading.
“Eliminating corruption, eliminating conflicts of interest, is the North Star that we have set out to accomplish,” said Rep. Seth Magaziner (D-R.I.), the lead sponsor of the legislation, said in an interview Thursday.
“In order for that to work, you have to deal with the tax implications,” he added. “Otherwise, not only existing members, but anyone who wants to run for Congress could face a big tax bill upon being elected.”
According to the bill, which is co-led by Rep. Chip Roy (R-Texas), current members would have 180 days to divest from individual stocks, while incoming members would have 90 days to do so. It’s a more aggressive approach than other proposals that would allow for blind trusts, where a member or candidate keeps their stock holdings but relinquishes control of investing decisions.
Selling stocks typically triggers at least a 15 percent tax on all the capital gains accumulated since the individual bought the stock. For wealthy Americans with longstanding holdings, that could mean forking over huge sums that could otherwise sit in their portfolios and continue to appreciate.
But under the Magaziner-Roy bill, lawmakers could apply for a certificate that would allow them to reinvest the proceeds from those sales into mutual funds or Treasuries without having to pay any taxes until they are ultimately sold.
It’s a process that is currently available to executive branch employees to blunt the tax impact of having to divest due to conflict-of-interest requirements. It was first enacted 1989 at the behest of former President George W. Bush, who had tapped a slew of Wall Street executives to serve in his administration who would have otherwise faced big tax bills.
Rep. Don Beyer (D-Va,), a member of the tax-writing Ways and Means Committee and one of the wealthiest members of Congress, said he knows the tax consequences of divesting first-hand. He’d spoken to a wealthy former House colleague, Dean Phillips, about his experience setting up a blind trust.
“Oh my god, it was so complicated and so expensive that my wife and I just made the decision: We’re just going to sell it all and put it in mutual funds,” said Beyer in a Wednesday interview.
“I got hit with a big tax bill, which was not fun,” he added. “It was a couple hundred thousand dollars. It was way more than I wanted because of the appreciation.”
Proponents of the new trading ban legislation argue that the tax deferral arrangement is preferable to allowing blind trusts from a conflict-of-interest perspective.
Even if a blind trust precludes active management of stocks, lawmakers could still make decisions based on the stocks that they know went into their trust, according to Emma Lydon, managing director of progressive government relations group P Street.
And the bill’s backers say there’s no way to pass a bill ordering members to sell stocks without including the tax break. Said Magaziner, “I would characterize it as a mechanism to help members comply with what would be the toughest ethics reform to be passed in Congress in a generation.”
Rep. Anna Paulina Luna (R-Fla.), who is spearheading an effort to compel a House vote on separate stock trading ban legislation from Rep. Tim Burchett (R-Tenn.), said members are “not getting any special preferential treatment” and she wants “massive penalties” on her colleagues who engage in insider trading.
“We’re trying to incentivize members who currently engage in stock trades … to actually vote for it, because we need this to pass,” she said.
The penalties for failing to divest vary across several proposed bills. Burchett’s bill would impose a maximum fine of $100,000 per violation, while Magaziner’s consensus bill would impose a fine of 10 percent of the value of the prohibited investment and require any profits from it to be disgorged.
It’s just one part of the bite from the legislation that is making many lawmakers privately balk. Skeptics include House Small Business Chair Roger Williams (R-Texas), a wealthy car dealer who said he has “to think about it because … we give up a lot to come up here.”
Other skeptical members include Rep. Mike Kelly (R-Pa.), whom the House Ethics Committee charged in July with violating the House’s code of conduct. Kelly’s wife bought shares of a steel company around the time her husband was briefed on a trade investigation affecting it, though the committee found no evidence he knowingly caused his wife to act on inside information.
Kelly argued his family had many preexisting connections to the steel company, which owns a facility in their hometown, and that lawmakers should continue to be able to trade individual stocks as they please.
He suggested a stock-trading overhaul would not have much effect on public impressions of Congress, citing a conversation he’d had years ago with the late Rep. Don Young (R-Alaska).
“He says people used to complain because we had ice delivered to our offices every day, so if we [do] away with that, maybe our ratings will go up,” Kelly recalled. “So we got rid of it, and our ratings went down.”
Read the full article here
