As the tax reform debate begins to heat up, businesses and investors are beginning to pay closer attention to the House GOP Tax Reform Blueprint, a tax plan released last June by Speaker Paul Ryan and House Ways and...
- The Tax Policy Blog
- California Floats Proposal to Tie Corporate Tax Rate to C...
California Floats Proposal to Tie Corporate Tax Rate to CEO Pay
The California Senate is considering SB 1372, which would tie the corporate income tax rate in the state to the ratio of pay of a company’s CEO compared to its median worker. While proposals to cap CEO pay are not entirely novel, this is the first such proposal I know of to attempt to do so through the tax code.
Proponents of the bill argue the measure would push “companies to put less money into the hands of their CEOs and more into the hands of average employees.” But I’m not convinced the outcomes would be as proponents intend.
The bill would create a sliding scale detailed here:
|If the CEO to median worker compensation ratio is||The applicable corporate income tax rate is|
|Over zero but not over 25||7%|
|Over 25 but not over 50||7.5%|
|Over 50 but not over 100||8%|
|Over 100 but not over 150||9%|
|Over 150 but not over 200||9.5%|
|Over 200 but not over 250||10%|
|Over 250 but not over 300||11%|
|Over 300 but not over 400||12%|
NOTE: This special formulation would only apply to publicly-traded corporations, and CEO compensation would be calculated based on SEC definitions.
Currently California taxes corporate income at a top rate of 8.84 percent, the 10th highest rate in the country. If enacted, this proposal would raise the top corporate rate to 13 percent, which would be the highest in the country. When added to the 35 percent federal corporate income tax rate (already the highest in the world!), companies would face a top marginal rate of 48 percent, which doesn’t really pass the laugh test for competing in a global market.
Secondly, this proposal would disproportionately affect retail companies where much of the workforce is comprised of sales associates in entry-level positions. Using median worker compensation as the denominator for corporate tax liability hurts business models that are primarily composed of large numbers of customer service representatives (JC Penny, Abercrombie and Fitch, Starbucks, and other popular employers). These businesses would be less competitive at attracting capable CEOs if they were forced by tax law to cut executive wages in half.
In a broader perspective, state corporate income taxes are seriously flawed, mostly because policymakers ask them to accomplish far more goals than they possibly could. States use special provisions to try to incentivize job creation, spur research and development, boost investment, preference American manufacturing, change business geographical location, the list goes on. This proposal, if nothing else, adds “promote wage equality” to that list of tasks for the corporate tax code.
Taxes at their best should have one purpose: raise revenue for government services. This proposal steps in the opposite direction and tries to use the tax code to change behavior.
More on California.
Follow Scott on Twitter.
[Update: You shouldn’t expect this bill to get far. The bill has seen hefty formal opposition from no less than 19 entities, and formal support from only the California Labor Federation.]
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.
Related State Articles
- Lunch Links: Mnuchin Promises Tax Reform within First 90 Days of Trump Administration; Chopping Itemized Deductions Not Panacea in Trump Tax Plan; Massachusetts Latest State to Consider Soda Tax
- Lunch Links: Not So Sweet Soda Taxes Have Multi-City Appeal; Trump Includes Tax Reform in Efforts to Keep Carrier from Bolting; Christie Cites 'Blood Money' Tax Revenue in Shunning Marijuana Legalization for N.J.
- Lunch links: Mileage Vs. Gas Tax Experiment Begins in Colorado; Recounts Coming in Maine on Marijuana and Income Tax; Rhode Island Considers Catching Up with Neighbor States on Marijuana Legalization
- 1 of 111
- next ›