California (Re)Introduces Pay Ratio Corporate Tax Bill with Unique Calculation

April 13, 2018

Public companies doing business in the state of California would be subject to an upward-scaling corporate income tax rate based on the company's pay ratio under a new legislative proposal introduced in the state Senate.  California Senate Bill 1398, introduced by Democrat State Senator Nancy Skinner, would increase corporate taxes for public companies from the base rate of 8.84 percent to a high of 13 percent for companies with pay ratios exceeding 300.  Significantly, the tax rate would increase by an additional 50 percent if a company reduces its U.S. full-time workforce by 10 percent or more during the tax previous year.  Under California SB 1398, the brackets are as follows:

Pay Ratio

Tax Rate

Zero to 50

8.84%

50 to 100

10%

100 to 200

11%

200 to 300

12%

Over 300

13%



Unlike the majority of state pay ratio tax bills, which rely on the SEC’s pay ratio calculation, the California legislation includes its own calculation method, which does not rely exclusively on CEO pay.  Instead, the compensation ratio is based on a comparison of the pay of the "chief operating officer or the highest paid employee" compared to the median compensation of "all employees…including all contracted employees under contract."  Also of note, while CA SB 1398 does apply to all public companies, it excludes banks and financial institutions which are treated differently under the California tax code.  The bill has yet to see any action in the Democrat-controlled California state government.  This is not the first time a bill that increases the tax rate for companies with higher pay ratios has been introduced in California.  In anticipation of the first year of pay ratio disclosures, several states, including Massachusetts, Illinois, and Connecticut, introduced legislation which imposed fees or differing tax treatment for companies based on their pay ratio.  Apart from a new law in the City of Portland, Oregon, none of the other bills moved last year.  So far for 2018, it appears that no other such bills have been introduced.