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The surcharge will apply to businesses where top executives earn more than 100 times the median pay level for a company’s employees in the city.
San Francisco companies with big pay gaps between top executives and other employees will face higher taxes under a local ballot measure that voters approved last week.
Proposition L, dubbed the “overpaid executive tax” by its backers, was on track to pass with about 65% of the vote, according to the latest tally. San Francisco’s Board of Supervisors voted 11-0 back in July to place the measure on the ballot. Supporters say it is aimed at helping to address income inequality in the city.
“The CEO tax is a modest attempt to make sure that the wealth that is generated in this city reaches more of our workers and residents,” Supervisor Matt Haney said in a statement. "If these huge corporations want to avoid this small surcharge they can just pay their CEO less, or even better they can pay their employees more,” he added.
The new tax targets businesses in San Francisco where the highest-paid executive employee earns more than 100 times the median pay level for the company’s employees in the city.
Affected businesses will see this tax surcharge tacked onto either their gross receipts tax, or what’s known as the administrative office tax.
The city now collects a gross receipts tax from some businesses at a rate that ranges from 0.16% to 0.65% annually.
For companies that pay this tax, the new tax surcharge would be set at a rate between 0.1% and 0.6% of a business’ San Francisco gross receipts, with the rate rising in steps as a company’s pay gap grows beyond the 100-times-median-pay threshold.
Businesses with over $1 billion in gross receipts, 1,000 employees nationwide and administrative offices in San Francisco pay the administrative office tax. It is 1.4% of their payroll. The new tax adds between 0.4% and 2.4% of San Francisco payroll costs to that rate.
City Controller Ben Rosenfield has estimated that the tax will generate $60 million to $140 million in additional city revenue annually.
But Rosenfield also cautioned that revenue from the tax would be “highly volatile” and could rise or fall significantly in future years due to the narrow base of expected payers, shifts in executive pay and possible business relocations.
The tax proposal drew support from the San Francisco Democratic Party, as well as labor unions.
It was opposed by the San Francisco Taxpayers Association, which derided it as a “blatant attempt at redistribution of wealth” and said it would drive businesses from the city.
The California Taxpayers Association, meanwhile, raised concerns about how the executive-to-employee pay ratio used to set the tax rate for companies would be calculated and has argued that levying any more taxes on San Francisco businesses will cause them to flee.
Supporters of the new tax say that it is written so that it will not affect small businesses.
Large banks, along with companies like Comcast, Chipotle and Gap Inc. are the types of businesses that could be subject to the tax, the San Francisco Chronicle has previously reported. Portland, Oregon has a similar tax in place it began collecting with taxes paid for 2017.
Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.
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