New Portland, Oregon Pay-Ratio Surtax Seeks to Alleviate Income Inequality

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Tax Policy

Bloomberg BNA regularly spotlights the insights of state and local tax attorneys at KPMG LLP. In this installment, Sarah McGahan discusses the new Portland, Oregon CEO surtax.

Sarah McGahan

By Sarah McGahan

Sarah is a director in the State and Local Tax group of KPMG LLP's Washington National Tax practice. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

On Dec. 7, 2016, the Portland City Council approved a local business license tax surcharge that will apply to companies whose CEOs earn more than 100 times the amount of the typical worker. The city of Portland's business license tax is imposed on a taxpayer's “net income” at a 2.2 percent rate. Beginning in 2017, a relatively new SEC rule requires public companies to disclose the ratio of compensation of the company's CEO to the median compensation of all of its employees. The new pay-ratio surtax, which is effective for tax years beginning on or after Jan. 1, 2017, applies to publicly traded companies subject to the SEC pay ratio reporting requirements. The rate of the surtax is dependent on the company's reported ratio. If the reported ratio is at least 100:1, but less than 250:1, the surtax is 10 percent of a company's base tax liability. If the company's reported ratio is 250:1 or greater, the surtax rate is 25 percent. A company that pays a median worker $50,000 per year would be subject to the surtax if the CEO is paid $5 million or more per year. The city's Revenue Division estimates that the surtax will increase the city's general fund revenue by $2.5 million to $3.5 million annually. Most of the revenue will be allocated to fund services for the homeless.

The ordinance contains certain findings that address its provenance. Per the findings, income inequality has “exploded during the past four decades” and the “explosion of chief executive officer pay is a major contributor” to this phenomenon. Citing data from the Economic Policy Institute, the ordinance notes that CEOs in the nation's largest firms made an average of $15.5 million in compensation in 2015, or 276 times the annual pay of the typical worker. Other studies report that income inequality has been a major factor in Portland's current housing crisis, as an influx of higher-income people has created a situation in which lower-wage earners have been driven out of the city's housing market.

The city of Portland is not the first jurisdiction to consider pay inequality when formulating tax policy. In 2014, the California Legislature considered a bill (S.B. 1372) that, per the bill's analysis, would have provided corporations an incentive to reduce the gross disparities between workers and the CEO. If it had been enacted, the bill would have revised the corporate income tax rate for publicly held corporations so that the rate applied to a particular taxpayer would have been based on the so-called compensation ratio of the corporation. The numerator of the “compensation ratio” would have equaled the greater of the compensation paid to the taxpayer's chief operating officer or the taxpayer's highest-paid employee for the calendar year preceding beginning of the taxable year. The denominator would have equaled the median compensation of all the taxpayer's U.S. employees for the calendar year preceding the tax year at issue. Corporate taxpayers with a compensation ratio over 400 would have been subject to tax at the highest 13 percent tax rate. The California bill did not advance in 2014, but it remains to be seen if other jurisdictions will consider similar proposals.

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