The new IRS tax would discourage participation in Employee Stock Purchase Plans (ESPPs) which promote productivity, enhance morale and give workers a stake in the success of their companies.

The IRS has announced that the "spread" – the discount at which employees buy company stock under qualified plans, usually 15% – would be subject to payroll taxes, including Social Security, Medicare and unemployment insurance tax starting in January 2003.

The proposed rule would reverse accepted tax treatment of qualified stock options for the past 30 years.

Most employees who participate in ESPPs earn less than the FICA wage base ($84,900 in 2002) and would be subject to the 7.65% FICA tax. The new tax would therefore fall hardest on less highly compensated employees.

The new tax would be create compliance costs which would be especially onerous on smaller companies, one of the most innovative forces in commerce, particularly in the high tech sector.

In some situations, employees might be forced to sell stock to pay the tax due. This defeats the incentive nature of these programs.

Because of the additional cost and complexities of compliance, some employers will be unable to offer these important programs to employees.