California Floats Proposal to Tie Corporate Tax Rate to CEO Pay

April 24, 2014

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%
Over 400 13%

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.

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[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.]

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