SEC Changes Threaten Local Taxes Targeting High CEO Pay

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 Che Odom

Changes coming to the Securities and Exchange Commission threaten a state and local trend of trying to tax companies that pay high CEO salaries.

So far, only Portland, Ore., has enacted a tax on companies that pay their chief executives hundreds of times more than their median workers. However, officials in San Francisco and Rhode Island are working on similar taxes.

The laws face an inadvertent challenge from President Donald Trump’s SEC appointees, who are expected to tweak the agency’s rule that provides the information essential to enforcing such taxes. The five-member commission currently only has two members, so Trump’s picks have an opportunity to greatly influence decision-making.

A new SEC is likely to alter or kill its pay-ratio rule, which requires public companies to disclose how their CEO pay compares with that of their median worker, said Mike Melbinger, a partner in Winston & Strawn LLP’s employee benefits and executive compensation practice.

“Everyone recognized this as a political disclosure that will not have benefit for stockholders,” Melbinger told Bloomberg BNA. “Only a few true believers support it.”

The SEC adopted its pay-ratio rule in August 2015 as called for in the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act. Under the rule, public companies must begin making disclosures based on their first fiscal year beginning on or after Jan. 1, 2017.

In February, acting SEC Chairman Michael Piwowar took steps to delay the rule. Piwowar, an Obama appointee whose term ends in 2018, is asking companies to submit letters detailing unexpected challenges they’ve faced in developing their ratios.

The rule was championed by labor unions and decried by business groups including the U.S. Chamber of Commerce.

If the rule is scrapped, tax laws such as Portland’s will be “meaningless,” Melbinger said. “Of course, the locals could revise the statutes, but that will require some effort and impose a very technical, complicated calculation on companies.”

Proposals in Works

In Rhode Island, Rep. Aaron Regunberg (D) introduced H. 5141, which would tax companies that pay their CEO “outrageous” compensation, he said. The bill is modeled after Portland’s ordinance, passed in December.

Portland charges a 10 percent surtax on companies that pay their CEOs compensation that is 100 times more than that of the rank-and-file worker. Rhode Island would levy a 25 percent tax for executive pay that is 250 times greater than its median worker.

“A CEO, nobody, needs to receive more than what their employee would earn in a century,” Regunberg told Bloomberg BNA.

The bill must be approved by the state House Finance Committee before getting a floor vote, then it must pass the Senate. Regunberg thinks the measure’s chances of passing are good.

A similar law is being developed by San Francisco’s city attorney at the behest of city Supervisor Jane Kim. The proposal has been in the works since late January but is still in the “drafting stage,” a city official told Bloomberg BNA.

Hawaii’s attempt to pass a Portland-style tax drowned in the Legislature last month. Two bills that would have taxed companies that pay disparate wages to employees failed to get out of committee by the mid-February deadline.

Pay Disparity

The recent moves by local governments are designed to address pay disparity, which doesn’t get enough attention at the federal level, Regunberg said.

The Economic Policy Institute, a liberal-leaning Washington think tank, estimates that the CEOs of the largest 350 U.S. companies made 303.4 times the average worker’s pay last year. At S&P 500 companies, the ratio is 373-to-1, according to the AFL-CIO.

If such companies don’t want to pay these taxes, “they can just lower their CEO compensation or increase employee salaries,” he said.

Influential?

Daniel J. Ryterband, CEO of Frederic W. Cook & Co., which advises companies on compensation issues, has a different take on the proposals.

Such laws serve as “either a tax on profits or an impediment to executing the strategic plan, both of which could make a particular geography less attractive than others where such issues do not exist,” he told Bloomberg BNA.

The taxes could have some “minimal” influence in the crafting of compensation packages, Brett Herand, vice president of compensation consultants Pearl Meyer & Partners LLC, told Bloomberg BNA in an email.

“Every rational, tax-paying entity, whether an individual or a company, looks to minimize tax exposure but it’s not the primary driver of decision-making,” he said.

Companies try to ensure that executive pay qualifies for deductibility, but it is not a “primary driver of exec comp plan design,” he said. “Companies make decisions in the best interests of shareholders and other key stakeholders. For some, this may mean paying a CEO pay-related surcharge.”

To contact the reporter on this story: Che Odom in Washington at COdom@bna.com

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

For More Information

Text of the Rhode Island bill is at http://src.bna.com/mJq.

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