California Bill Would Increase Taxes on Companies With High Pay Ratios, as Coordinated Reports Are Launched on Inequality and Tax Deductibility

April 25, 2014

This week, in a 5 to 2 party line vote, a Senate Committee in California approved legislation to increase state taxes by as much as 48 percent on corporations with high pay ratios, with one sponsor stating the bill "represents a doable, practical solution that creates incentives for responsible corporate behavior."  The bill, SB 1372, sponsored by Senators Mark DeSaulnier (D-Concord) and Loni Hancock (D-Berkeley), would increase corporate taxes based on the level of the ratio of the highest paid employee to the median compensation of all employees, including temporary employees and employees of contractors.  The taxes would increase from 8.8 percent for companies with pay ratios of 100 to 13% for companies with ratios over 400.  Even though the bill uses the median employee to measure the ratio, it does not note whether the definition is the same as under the Dodd-Frank pay ratio disclosure.  The bill is not likely to move this year, but its long-term prospects are significant.  Meanwhile, two groups launched coordinated reports on compensation practices in the restaurant industry in an effort to silence the industry's opposition to a minimum wage increase.  Demos, a liberal advocacy group, launched a report on the pay ratios of restaurant industry CEOs, "Fast Food Failure: How CEO-to-Worker Pay Disparity Undermines the Industry and the Overall Economy," stating the industry "will need to address their imbalanced pay practices in order to mitigate the damaging effects of income inequality."  Meanwhile, the Institute for Policy Studies released a report on the tax deductibility of executive compensation for the 20 largest members of the National Restaurant Association, reiterating the Institute's longstanding argument that being able to deduct executive compensation  as permitted by the tax code "is a massive subsidy for excessive executive compensation."  As our Center On Executive Compensation has explained, executive compensation is a business expense and should be treated consistently with other business expenses.  However, Section 162(m), which was put in place by the Clinton Administration to reduce executive compensation, has had the opposite effect.