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CEO Pay Ratio Taxes: More States Get on the Bandwagon

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June 05, 2018 | Barbara Baksa

CEO Pay Ratio Taxes: More States Get on the Bandwagon

Back in 2014, I blogged about a failed proposal in the California senate to tax companies based on their CEO pay ratio. I pondered whether the state senate’s failure was the end or just the beginning of CEO pay ratio taxes.

Turns out, it was just the beginning. In 2016, Jenn Namazi blogged about the first CEO pay ratio tax to be enacted—in Portland, Oregon—as well as states considering similar taxes. Now that the first CEO pay ratios have been disclosed, activity in this area is ramping up. There are now at least six states with pending proposals related to CEO pay ratios. A memo by law firm Andrews Kurth summarizes them.

California Still at It

Chief among them is California, where the state senate is considering a new proposal that would increase the corporate tax rate when a company’s CEO pay ratio exceeds 50, as follows:

  • Ratio between 50 & 100: 10%
  • Ratio between 100 & 200: 11%
  • Ratio between 200 & 300: 12%
  • Ratio over 300: 13%

(The current corporate tax rate is 8.84%, which is the rate that would apply to companies with a ratio between 0 and 50.)

Given that California is now the world’s fifth largest economy (we just passed the UK—go CA!), this tax would likely have a bigger impact on a lot more companies than the Portland tax. But it’s hard to enact new taxes in California; passage requires a two-thirds majority in both the state senate and assembly. Democrats are currently one seat short of the votes necessary in both branches of the legislature (the bill is sponsored by a Senator Skinner, a Democrat), so they would need at least two Republicans to vote for it. And the governor also has to sign the bill.

Other Jurisdictions

Other cities and states considering similar proposals include:

  • Minnesota and Rhode Island have proposals similar to Portland’s law.
  • Connecticut is considering a bill the would base tax rates on the ratio of the highest paid employee (not necessarily the CEO) to the median employee.
  • Illinois is considering imposing an annual fee on companies whose ratio exceeds certain levels.
  • Massachusetts is considering a 2% additional corporate income tax on companies where the ratio of the highest paid employee to the median exceeds 100:1.

- Barbara

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