Corporate Law News

Taxing CEO-Worker Pay Gap Catches on in San Francisco, Elsewhere

Oct. 28, 2019, 10:45 AM

Policymakers in San Francisco, Washington state, and at least five other states are proposing to locally tax the pay gap between corporate executives and rank-and-file workers.

A similar measure in San Francisco is slated for a vote on its November 2020 ballot. Legislators in Washington state could likewise vote in 2020 on a bill that would impose a tax surcharge on what it deems excessive CEO pay. Five other states have floated their own such proposals, according to the Institute for Policy Studies, a progressive think tank.

The proposals are modeled after a first-of-its-kind policy in Portland, Oregon, that adds a surcharge to a local business tax for companies where the chief executive officer makes at least 100 times as much as a typical worker.

Taxes like these are meant to add pressure on companies to help stem rising income inequality, though corporate critics question how they aim to achieve that goal. Companies have said the ratios that such taxes rely on embarrass executives without taking workforce differences into account.

The Securities and Exchange Commission requires publicly traded companies to disclose their CEO-to-worker pay ratio. CEOs at companies in the S&P 500 index make on average about 300 times more than their median workers, according to data compiled by Bloomberg.

“It’s kind of a tax on inequality itself,” said Steve Novick, who championed Portland’s 2016 adoption of the pay ratio surtax when he was a city council commissioner. Novick is now a special assistant attorney general for Oregon.

Sanders’ Plan

Portland collected about $3.5 million in the first year of its pay ratio surtax, according to its revenue division. A national version of this proposal, pitched by Sen. Bernie Sanders (I-Vt.) as part of his presidential run, could raise an estimated $150 billion over 10 years, according to his campaign.

“It’s going to have a much bigger impact if it’s done nationally than if it’s done in one city,” said Matt Haney, a member of the San Francisco Board of Supervisors who’s proposed an executive pay-based add-on to taxes paid for doing business in the city. “That said, we have some of the largest companies in the world here,” he said.

Local-level initiatives like the one in San Francisco could gain momentum from Sanders’ proposal, according to Sarah Anderson, who leads executive compensation analysis at the Institute for Policy Studies.

“The fact that Bernie came out with a plan will elevate it in a way that will get a lot of policymakers talking about this,” she said.

Tax Revenues

Nearly 550 companies filed tax returns in Portland for 2017, the most recent tax year for which its revenue division provided data. Companies with a CEO-to-worker pay ratio between 100-to-1 and 250-to-1 must pay a 10% surcharge on the city’s business license tax. Gaps of 250-to-1 or more trigger a 25% surcharge.

The revenues from Portland’s CEO pay tax go toward a general fund for city services such as police, fire fighting, and parks.

San Francisco’s proposed tax on corporate executives’ pay would generate funds for mental health and substance abuse programs. It’s been met with resistance by the Bay Area Council, a business group that represents locally based companies, including Wells Fargo & Co. and Salesforce.com Inc.

“San Francisco’s mental health issues are not unique to San Francisco,” said Rufus Jeffris, the council’s spokesman. “We’d like to see some structural reforms in how we are addressing these issues and challenges before we look at new tax on business.”

To contact the reporter on this story: Andrea Vittorio in Washington at avittorio@bloomberglaw.com

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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