By Michael Carroll
Portland, Ore., last week became the first city in the nation to pass a surtax on corporations with CEO pay the city considers outrageous and an affront to average workers.
In a 3-1 vote, the City Council approved a policy requiring publicly traded corporations to pay a surcharge on their existing business license tax if the ratio of pay between chief executive officers and median workers is more than 100-to-1.
Lawmakers from other locations have expressed interest in the policy, suggesting that the surcharge, like recent minimum wage hikes, could spread across the nation, according to executive compensation analyst and surcharge supporter Sarah Anderson of the Institute for Policy Studies in Washington, D.C.
“If there’s a lesson in the living wage campaigns that are spreading like wildfire, it is that reversing our nation’s extreme inequality will require bold action from the base,” Anderson told AMI Newswire. “Change needs to begin somewhere, and effective federal action on CEO pay has been sorely lacking.”
The Portland surcharge, which is expected to take effect in 2018, comes as a result of a provision in the Dodd-Frank financial reform law passed in the opening years of the Obama administration. The law and a subsequent Securities and Exchange Commission rule will require publicly traded companies to begin reporting the ratio between CEO pay and median worker pay beginning next year.
The Portland policy will apply to an estimated 500 publicly traded companies that do business in the city. Under the plan approved last week, the current business license tax that companies operating in the city pay -- which amounts to 2.2 percent of their net income -- would go up for businesses that have excessive CEO pay. Those businesses’ tax rates could increase by 10 to 25 percent, depending on how high the pay ratio is.
Complicating the roll-out of the Portland ordinance, however, is the future of the Dodd-Frank Act. Both President-elect Donald Trump and many congressional Republicans want to overhaul the law in a bid to cut regulations on business and prime the economy.
And neither business groups nor some tax policy analysts see much advantage for cities to pass surcharges on businesses that are geared to CEO pay. The Portland Business Alliance opposed the City Council surtax, saying that a minor local tax on major corporations that do business in the city won’t really address income inequality and that the SEC reporting rule itself contains ambiguities.
“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,” Jared Walczak, a policy analyst with the Tax Foundation, said in a post on the organization’s website.
And even if a corporation were to revamp its CEO pay based on Portland’s surcharge, the savings in CEO pay would likely be redirected to shareholders or simply reinvested in the company, so rank-and-file employees wouldn’t likely benefit, Walczak said.
Meanwhile, the surtax plan would lead to inconsistent tax collections and fluctuate dramatically due to changing economic conditions, according to a city analysis. The tax could potentially raise between $2.5 million and $3.5 million for city social services, Portland’s Revenue Division said.
Measures similar to the Portland surtax have gone down to defeat over the last two years. The Rhode Island Senate approved a bill in 2014 designed to encourage the awarding of state contracts to companies whose CEOs don’t earn more than 32 times the salary of their lowest--paid employee. The bill never came up for a vote in the state’s House of Representatives, however.
And a California Senate bill two years ago sought to adjust the state’s corporate income tax for businesses based on their CEO pay ratios. Firms with a lower CEO-to-median-employee pay ratio would have seen a reduced tax rate, while those with a higher ratio would have faced a steeper income tax. The measure failed to receive a two-thirds majority vote, which is required for passage of tax-related measures in the state.
The author of the new Portland tax policy, Commissioner Steve Novick, acknowledges that such reforms would not bridge the economic divide in the nation, but he said the Portland vote would send a message against extreme inequality.
“Extreme economic inequality is – next to global warming – the biggest problem we have in our society,” Novick said in a prepared statement. “The top 1 percent, and especially the top one-tenth of 1 percent, have a far larger share of wealth and income than they did 40 years ago.”
In addition, research from the employment website Glassdoor and CtW Investment Group shows that firms with high estimated CEO-to-worker earnings ratios suffer from lower worker morale and lower returns for shareholders.
The Portland surtax would help to address both employees’ resentments about high CEO pay and general concerns about inequality in the economy, according to Anderson. Workers who know the CEO is getting a salary that’s a hundred times what they are receiving tend to feel their contributions to the company are not valued, leading to lower morale, she said.
“Throughout corporate America, executives are incentivized to slash jobs, cut R&D spending, pollute, and take other actions that might boost their short-term profits and inflate the CEO’s stock-based pay, but be harmful in the long run,” said Anderson.
That the surcharge only applies to publicly traded companies and not private companies should not be a big concern, she said. That’s because the average annual executive salary in Oregon is only $167,900, so few private firms pay extremely high CEO salaries, according to Anderson.
“Furthermore, large, publicly held corporations set the standards for other workplaces and have an enormous impact on the health of our economy,” she said. “Encouraging them to do the right thing and narrow their pay gaps will have positive ripple effects.”