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Portland Considers Tax on Companies with High CEO Pay

3 min readBy: Jared Walczak

“Like most other lefties, I bought [Thomas Piketty’s Capital in the Twenty-First Century], but haven’t read it all,” Portland City Commissioner Steve Novick told The Huffington Post. The book does make an appearance, though, in the first two findings of a Portland ordinance Novick drafted, which would penalize companies with high CEO compensation.

The ordinance, currently under consideration, would take advantage of a pending SEC pay ratio reporting requirement to impose a business surtaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on companies with high executive compensation. Novick characterizes the proposal as a “direct assault on extreme inequality,” though in practice, it may prove to be more of a symbolic blow.

The draft language of the ordinance proposes a business surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. of 10 percent on any publicly-traded company doing business in Portland where the ratio between CEO and median employee pay is at least 100 to 1, and a 25 surtax at 250 to 1 or above. The city’s Revenue Division estimates that about 545 publicly traded companies currently pay the city’s business license tax, and that they currently pay $17.9 million a year. An unknown number have CEO compensation above these thresholds ($5 million in CEO compensation, by way of example, for a company with median compensation of $50,000), though the city produced revenue estimates based on a study by the Economic Policy Institute (EPI).

There are limits to the projections of EPI or any other group, however. For instance, such estimates frequently count performance-linked compensation prospectively, without regard to whether the performance targets are met and the bonus is paid or options are exercised. When SEC filings begin including a ratio next year, these figures may fall far short of EPI (and other) estimates, which can be wildly disparate. Whereas EPI estimates a national ratio of 335:1 for Fortune 500 CEOs, PayScale estimates that the median compensation for the nation’s 168 highest-paid CEOs had a ratio of 71:1.

Whatever the ratios turn out to be, however, the Portland ordinance, if approved, might be little more than window dressing—more of a gesture than a policy prescription. Maybe CEO pay is too high and maybe it isn’t, but a Fortune 500 corporation is unlikely to renegotiate its chief executive’s compensation package to avoid an additional tax hit of a few thousand dollars in Portland, Oregon.

And even if somehow the tax did lead some company (perhaps a Portland-based business, with much higher liability in the city) to reconsider executive compensation packages, there is very little reason to believe that any of the savings would accrue to employees. Like it or not, businesses are not benevolent societies, and it would be curious if companies with allegedly inequitable compensation schemes would, having made a savings on executive compensation, simply gift that amount to employees in the form of pay raises. Rather, any savings would likely accrue to shareholders or perhaps be reinvested in the company.

Assuming there are any savings at all. Corporations presumably seek to avoid paying their CEO more than he or she is worth to the company. They may get this wrong—perhaps even frequently. If they thought that the company would do just as well with a lesser-compensated chief executive, though, they would likely go that route, and if their initial judgment was correct, a company that actually feels compelled, for tax purposes, to curtail executive compensation would see a decline in its fortunes, with attending losses for shareholders and wage earners alike.

The idea of using the tax code to penalize companies with high CEO pay ratios is a relatively new development, but Portland isn’t the first to consider it. In 2014, the California State Senate rejected legislation which would have bifurcated the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. , with higher rates for companies with high CEO pay, and the Rhode Island House of Representatives defeated a Senate bill that would have granted preference in state contracts to vendors with low pay ratios.

With “Keep Portland Weird” the city’s unofficial motto, Portland is not, perhaps, a bellwether of national trends. Such taxes, moreover, are unlikely to prove an effective way to address inequality. Nevertheless, with this proposal, Portland is simply building on a year of outside-the-box thinking on state and local tax policy.

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