First-in-Nation CEO Tax Passes in Portland, Oregon

Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...

By Paul Shukovsky

Dec. 8 — The Portland, Ore., City Council passed a first-of-its-kind tax on companies that pay their chief executive officer at least 100 times more than its median worker, proclaiming stark income disparity “bad for the economy and bad for democracy.”

The goal is to start a tax revolution in which other cities and states join in passing laws to punish companies contributing to “the spectacular concentration of income and wealth among the top 1 percent and 0.1 percent,” according to the bill’s language and its sponsor, Commissioner Steve Novick.

“Today, Portland, Oregon, became the first jurisdiction in the United States to use the tax code to address the phenomenon of outrageous CEO pay,” Novick said in a news release.

The law, passed by a 3-1 vote Dec. 7, creates a surtax on the city Business License Tax for those companies that are subject to a new Securities and Exchange Commission rule requiring publicly traded companies to report the ratio of CEO pay to its median pay beginning in 2017.

It is estimated that the measure will ultimately raise about $2.5 million annually from some 550 companies that pay Portland’s Business License Tax.

Forcing Corporate Change

“The point of this is more to try to force a change in corporate behavior than to raise money for the city,” Novick told Bloomberg BNA Dec. 7.

“Inequality itself is a bad thing, and we can use the tax code to discourage it,” Novick said just before the council session.

“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,” the ordinance said.

“We’ve seen, in the past few years, progressive ideas being introduced first at the municipal level, then rolling on from the municipalities to states,” Novick said, referencing Seattle’s role in jump-starting the national movement for a $15 minimum wage.

‘Apples to Oranges.’

Portland’s Business License Tax is 2.2 percent of adjusted net income. For tax years beginning on or after Jan. 1, 2017, a surtax of 10 percent of base tax liability will be imposed if a company reports a pay ratio of at least 100-to-1 but less than 250-to-1, and a surtax of 25 percent if the ratio is 250-to-1 or greater.

Opposition to the legislation came from the Portland Business Alliance, greater Portland’s chamber of commerce, whose president, Sandra McDonough, sent a letter Sept. 13 to Novick saying: “Large companies, like those that would be subject to this proposed surcharge, generally pay their workers at a higher rate than smaller companies. Punishment and public shaming of these businesses that employ thousands of workers in high paid jobs is no way to address income inequality.”

The SEC will be collecting information in calculating median employee pay that includes non-U.S. workers, resulting in what the business alliance letter called “an apples to oranges comparison.”

‘More Than Chump Change.’

An impact statement accompanying the bill makes clear the municipal ordinance’s ambition of altering tax policy across the nation. The statement said: “The SEC’s new rule offers local and state government, as well as Congress, the opportunity to develop policies to address the growing gap between the very rich and the middle class. The City of Portland surtax proposed by this ordinance is, on its own, unlikely to cause companies to reconsider their pay structures. If other governments adopt policies based on the SEC’s publicly reported ratio, companies may consider changes.”

Novick said that if numerous other jurisdictions start adopting similar proposals, the money raised “will be more than chump change and shareholders will actually realize that they will have less after tax profits to divvy up if they continue to pay their CEOs outrageous sums.”

To contact the reporter on this story: Paul Shukovsky in Seattle at PShukovsky@bna.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bna.com

For More Information

Text of the ordinance is at http://www.portlandoregon.gov/auditor/article/596300.Text of SEC’s pay disclosure rule is at https://www.sec.gov/news/pressrelease/2015-160.html.Text of the Portland Business Alliance letter is at http://src.bna.com/kBQ.

Copyright © 2016 Tax Management Inc. All Rights Reserved.

Request Weekly State Tax Report