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Monday, June 23, 2014

Corporate Close-Up: Should CEO Compensation Determine Corporate Income Tax Rates?

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California senators are reconsidering a bill (S.B. 1372) which would set corporate income tax rates according to the ratio between CEO salaries and median worker pay. Right now, California corporations are subject to a flat 8.84% rate, with banks paying 2% more, but the bill’s new corporate income tax system would be a sliding scale, as follows:

CEO to Median Worker Compensation Ratio

Corporate Income Tax Rate

Over zero but not over 25

7%

Over 25 but not over 50

7.5%

Over 50 but not over 100

8%

Over 100 but not over 150

9%

Over 150 but not over 200

9.5%

Over 200 but not over 250

10%

Over 250 but not over 300

11%

Over 300 but not over 400

12%

Over 400

13%

The bill doesn’t just penalize companies that disproportionately compensate their CEOs. It also contains provisions that would increase tax rates for companies that lay off or outsource large numbers of workers. Under the bill, corporations that reduce employment in the U.S. by more than 10% or increase employment overseas could be required to pay up to 50% more.

The bill’s suggested corporate income tax system is the first of its kind in the United States. Besides addressing growing concern over extravagant CEO salaries and bonuses, the sliding scale eerily reflects the requirements of the Dodd-Frank Act, which also requires companies to determine the median compensation for employees and then report the ratio of employee pay to CEO pay.

Some of the bill’s unintended consequences include the possible exodus of publicly traded companies and financial institutions from California, and the disproportionate effect on retail companies with a large number of entry-level sales personnel.

While S.B. 1372 was initially defeated in the senate, there is still time for revival before the end of the legislative session. As a tax levy requiring a two-thirds vote, the bill is not subject to normal legislative deadlines.

By Melissa Fernley

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn.

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library.

Follow Melissa on Twitter: @mafernley

Follow BBNA on Twitter: @BBNAtax

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