When President-elect Donald Trump named ExxonMobil CEO Rex Tillerson as his pick for secretary of state Tuesday, he added yet another member to his cabinet of millionaires and billionaires who will be able to take advantage of an obscure tax provision that will likely save them millions of dollars by joining the new administration.
While leaving the private sector for the world of public service is often seen as an act of financial sacrifice, the government has adjusted its rules in recent decades to entice the wealthy. Congress tightened conflict of interest laws for administration officials in 1989. It also put in place, at the urging of President George H.W. Bush, a provision to “minimize the burden” for the wealthy taking a government position. But far from a burden, public service has become profitable.
The rule allows members of the executive branch to sell off assets tax-free and then reinvest that money in low-risk assets like government bonds and mutual funds. Administration officials will have to pay the 15 percent capital gains tax whenever they sell their low-risk assets — the tax is only deferred — but the benefit comes from turning high-risk assets into low-risk assets, tax-free.
“The ability to defer paying tax on capital gains is a huge tax benefit,” said Lily Batchelder, a tax law professor at NYU and the former deputy director of the White House National Economic Council. “It’s like the government is giving you an interest-free loan equal to the amount of tax you would have otherwise owed when selling the asset.”
With such large tax benefits available to the incoming administration, three Democratic Senators introduced a bill last week that would cap the use of the capital gains provision to $1 million. “The ultrawealthy do not need a financial incentive to enter public service,” said Sen. Sheldon Whitehouse in a statement about putting forward the legislation.
“It’s similar to the benefit we give contributions to 401(k)s,” added Batchelder. “Like 401(k)s, it means you don’t have to pay tax on income when you receive it, but only when you withdraw the funds from the new investment, potentially decades in the future. But unlike 401(k)s, there is no limit on how much capital gains can be deferred in this case.”
With Republicans in the majority and time short, however, the bill’s chance of passing both houses of Congress before confirmation hearings appears to be slim.
The Office of Government Ethics (OGE) scours the financials of nominees and finds where the powers of the administration post overlap with any financial position. If someone owns stock in a bank, then he can’t make regulatory decisions affecting it without previously coming to an agreement with the OGE.
Nominees’ options include recusing themselves from matters where they have a financial interest, obtaining a rare waiver about those conflicts, turning over all their wealth to a blind trust, or selling off assets that pose a conflict of interest. Most nominees choose the last option, in part because Congress has made the move financially lucrative.
In past administrations, officials of varying levels of wealth have used this option to their benefit, including George W. Bush’s Deputy Chief of Staff Karl Rove and Defense Secretary Donald Rumsfeld and Clinton Treasury Secretary Robert Rubin. But in 2006 Hank Paulson, then the CEO of Goldman Sachs, showed how beneficial the provision could be when he deferred capital gains tax on nearly $500 million worth of Goldman stock before becoming Treasury secretary.
Trump’s cabinet — by far the wealthiest since the 1989 reform — is poised to divert unprecedented sums through the tax rule. Wilbur Ross, the nominee for secretary of commerce, is an investor with a fortune estimated at $2.9 billion by Forbes. Ross’ proposed deputy, Todd Ricketts, is the co-owner of the Chicago Cubs and the son of TD Ameritrade’s founder, with a family worth of $1.8 billion.
Betsy DeVos, the nominee for secretary of education, is the a political megadonor and the daughter-in-law of Amway’s co-founder whose family’s worth is estimated at $5.1 billion. Former Goldman Sachs partner and hedge fund manager Steve Mnunchin’s total wealth is unknown, but he owns an estimated $97 million in CIT Group stock and he — along with all the other nominees — will have to file a financial disclosure form in order to become secretary of the Treasury. His fortune will be in the millions and potentially billions of dollars.
Then there’s Tillerson who owns $151 million worth of ExxonMobil stock according to the Wall Street Journal, the value of which could be directly impacted by decisions of his office. Tillerson’s stock options do not mature for several more years so it’s still uncertain whether he can use this provision but if he can, it would likely be worth millions.
Administration officials outside the immediate cabinet are also likely to take advantage of this provision as they comply with the conflict of interest laws. Mirroring his cabinet, Trump’s choices have large fortunes.
Small Business Administration nominee Linda McMahon owns $84 million of World Wrestling Entertainment stock (she co-founded the company) and shares a net worth of at least $1.35 billion with husband Vince McMahon. And Trump’s pick for director of the Economic Policy Council is Goldman Sachs President Gary Cohn, whose total wealth is unknown but at least stands in the tens of millions.
Some tax experts and former OGE officials, however, defend the provision. Steven Rosenthal, a senior fellow at the Urban-Brookings Tax Policy Center, explained that the law “eases the anxiety from selling their stocks by allowing them to reinvest in much safer assets.” Because business executives are giving up private sector compensation while in the government, he says, he doubts “many people would join the government to achieve this advantage.”
Stuart Gilman, a former senior official at OGE and now a senior partner at the Global Integrity Group, agreed that the tax provision “is a very reasonable way for the president to get the nominees he wants.”
Trump’s wealthy picks also shed light on the populist billionaire’s approach to “draining the swamp,” as he called it during the campaign. Some political observers expected Trump to pick anti-establishment firebrands to shake up D.C.. During the campaign, Trump had railed against Wall Street and featured Goldman Sachs’ CEO in his closing campaign ad as a symbol of the “corrupt machine” selling out the American people.
But Trump also said he would bring in the “greatest people” from business to replace the “hacks” in Washington. His picks so far suggest that Trump is entrusting the business establishment to take on the political establishment. It’s still unclear whether that strategy will bring fresh reform to D.C. or just more alligators into the swamp.