Proposal Could Impose Higher Taxes on Companies With Large CEO-Worker Pay Gaps

The California state capitol building, in Sacramento.

The California state capitol building, in Sacramento. Shutterstock


Connecting state and local government leaders

A California Senate committee approved a bill meant to address big pay disparities between corporate executives and employees.

Large companies with big gaps between what they pay executives and workers would face higher state taxes under a proposal that a California lawmaker is pushing.

State Sen. Nancy Skinner, a Bay Area Democrat, says the goal of her legislation is to help shrink growing income inequality by providing companies with an incentive to “pay a fair share to their employees.” Critics say her plan would contribute to a regulatory climate in California that is increasingly unwelcoming towards businesses.

The bill passed out of the Senate Governance and Finance Committee on Wednesday on a party-line 4-2 vote, with Republicans opposed.

“The gap between rich and poor, between wealthy CEOs and the average worker, or the average employee, keeps widening,” Skinner said in testimony to the committee.

Skinner said that over the past 40 years or so CEO pay skyrocketed, while worker pay stagnated. This has contributed to a situation, she said, where executives at some companies now earn 100 times, 300 times, or in some cases even 1,000 times, more than their employees.

“SB 37 is designed to address this disparity,” she said, referencing the legislation’s bill number. 

The bill would apply to both publicly-traded and privately-held firms with yearly net income of $10 million or more. State figures show about 2,000 corporations in that group in 2017. Those companies paid about two-thirds, nearly $6 billion, of the state’s corporate income tax.

Under current law, the state tax rate on business income for many companies is 8.84%. Skinner’s proposal is to replace this rate with a tiered system that rises as the pay differential grows between a company's highest-paid executives and its median worker pay level. 

If this ratio is between zero and 50-to-1, the tax rate would be 10.84%. From there it would increase in four more steps until hitting 14.84% for companies where the ratio is over 300-to-1.

There would be slightly higher rates for banks, in line with the state’s current tax code. 

Skinner explained that part of the reason she wrote the bill to increase the rate even for companies with smaller disparities between executive and worker pay is because the 2017 federal tax cuts have provided a windfall to those firms in the form of tax relief.

An analysis of the legislation says that, as written, it would increase state revenues by about $1 billion in the 2019-2020 fiscal year and by $3.5 billion in the following budget cycle.

Robert Lapsley, president of the California Business Roundtable, testified in opposition to the bill, but said he was not doing so to defend CEO pay levels.

He noted that the new bill follows a minimum wage increase California lawmakers approved in 2016, (which he said the Roundtable did not oppose). In addition, a new state law just took effect setting stricter standards for when employers can treat workers as independent contractors, Lapsley said.

“It couldn't send a worse signal,” he said of SB 37. That message, he said, is that “the legislature is intending to be able to regulate every aspect of free enterprise in this state.”

As an alternative, Lapsley voiced support for a broader update of the state’s tax structure aimed at achieving similar goals.

The California Chamber of Commerce and a wide range of other business groups are also against the bill.

Unions and labor groups that represent public employees and other workers are among those that are supporting it.

Back in 2014, the same committee that approved Skinner’s bill voted for a similar measure that later failed to win passage in the full Senate.

The bill analysis points out that Portland, Oregon in 2016 moved to impose new tax surcharges on companies that pay their CEOs 100 times or more than what their median worker pay level is. 

Last February, The Oregonian identified companies like Intel, Walmart and Nike as among those with compensation figures within that range. But the news outlet also reported that, at least at that time, there was no evidence the city’s policy had restrained executive pay.

Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.

NEXT STORY: Property Taxes Sink Farmland Owners