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Thursday, December 8, 2016

Portland Oregon enacts new surtax for high executive pay

This week, the City Council in Portland, Oregon modified the business license tax for publicly traded companies subject to SEC reporting. Basically, before the change, this tax is 2.2% of adjusted net income (City Code 7.02.500). The new language increasing this for either a 10% or 24% surtax, follows:

"E. Pay ratio surtax applicable to publicly traded companies subject to U.S. Securities and Exchange Commission pay ratio reporting requirements. The following surtax is imposed in addition to the 2.2 percent tax established in Subsection A. above. 

    1. For tax years beginning on or after January 1, 2017, a surtax of 10 percent of base tax liability is imposed if a company subject to this section reports a pay ratio of at least 100: 1 but less than 250: 1 on U.S. Securities and Exchange Commission disclosures. 

    2. For tax years beginning on or after January 1, 2017, a surtax of 25 percent of base tax liability is imposed if a company subject to this section reports a pay ratio of 250: 1 or greater on U.S. Securities and Exchange Commission disclosures." 

The rationale is to address inequality. Per the resolution (agenda item #1368) that made this change: "The explosion of chief executive officer pay is a major contributor to growing inequality. According to Piketty, the increase in inequality in the United States after 1980, “was largely the result of an unprecedented increase in wage inequality and in particular the emergence of extremely high remunerations at the summit of the wage hierarchy, particularly among managers of large firms.” "

In addition: "The spectacular concentration of income and wealth among the top 1 percent and 0.1% is bad for the economy and bad for democracy. If other jurisdictions follow Portland’s lead in enacting policies based on the Securities and Exchange Commission disclosure, shareholders may realize that extreme chief executive officer to median worker pay ratios reduce their profits and, with this result in mind, make changes to their pay structure."

Publicly-traded SEC reporting companies are singled out for the surtax because they need to start reporting this pay ratio information starting in 2017.

Also see 12/7/16 press release from Commissioner Steve Novick. He notes that the tax treats inequality as a negative externality similar to taxing carbon emissions (Novick refers to a quote on this from economist Branko Milanović)

Novick notes the following so far as revenue effect: "The surtax will also benefit the city by generating an estimated $2.5 million to $3.5 million per year. Portland’s Revenue Bureau has identified more than 500 publicly-traded firms that do business in the city and therefore will be subject to the tax if their CEO-worker pay ratios are above 100 to 1. The list includes major corporations known for sky-high CEO pay, including Wells Fargo, Walmart and General Electric."

This reminds me of a tax reform proposal in the 104th Congress (20 years ago!) - S. 1668, American Workers Economic Security Act, sponsored by Senator Kennedy. Among various changes, it would lower the corporate tax rate by 25% for if the company provided "employees with training and education benefits (through any approved training program), health care benefits (through insurance or otherwise), pension benefits, child care, among other benefits required by the Secretary."

I guess the Portland surtax reminds me of the Kennedy proposal because it is using the tax law to encourage or discourage certain activities rather than giving everyone a lower rate. Also, both raise issues of whether these are effective techniques. S. 1668 offers a subsidy to the corporation rather than a subsidy to the worker who, for example, incurs costs for education to further their work-related skills.

The Portland tax seems unlikely to modify the behavior of corporations so far as lowering executive pay or increasing worker pay. But, it seems that Portland wants other cities and states to take similar actions to make the pay spread more costly. I doubt we will see similar changes.

Does the Portland surtax follow principles of good tax policy? What policy supports this type of rate determination? Might it be economic growth and efficiency?  Perhaps. If worker pay were increased, it would be more likely to be spent than is all of the pay of the executive. But, that only occurs if the company changes the wage mix.

A recent report by SPUR on improving taxes and finances for the City of San Jose, they include the following principle of good tax policy - "The tax sends an appropriate signal to achieve socially desired behavior."  (page 44, Back in the Black, May 2016 - note, you'll see my name on that page although I did not suggest this particular tax principle).  I think the Portland City Council had this concept in mind in enacting the surtax.

What do you think?

1 comment:

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