The city council in Portland, Ore., is set to consider a measure that would tax a company more if the CEO’s pay is deemed too high compared to employees’ salaries.
It is a measure that may be too far-out right now even for famously liberal Portland, but it represents a way to use new CEO pay disclosure rules that advocates hope, and opponents fear, could be taken up by other cities or states.
The law would establish a business surtax of 10 percent on any publicly traded company doing business in Portland at which the ratio of CEO pay to median worker pay is more than 100. That surtax would rise to 25 percent for companies with ratios over 250.
Those ratios will be publicly known starting next year, thanks to a rule from the Securities and Exchange Commission required by the 2010 Dodd-Frank financial reform law.
The tax effectively would punish companies with CEO-to-pay ratios that are common today. The average CEO earned over 300 times the media worker pay in 2014, according to the Economic Policy Institute, a liberal think tank. That ratio has crept steadily upward in recent decades, last averaging under 100 in the 1980s.
The surtax would raise about $3 million annually, to be used for homeless services. But revenue would be only one of its purposes. Steve Novick, the lame-duck city commissioner who introduced the measure, said in an explanation of his bill that the tax would send a “powerful message that our community is ready to take a stand against the extreme inequality that harms all of us.”
Detractors are quick to point out potential flaws, especially that the policy would incentivize companies to leave Portland. “It’s really easy to cross the Columbia River and do business in Washington state,” said John Charles, the president and CEO of the Cascade Policy Institute, a free-market Oregon think tank.
Novick did not respond to a request for comment from the Washington Examiner, but he has said to local media that he welcomes attention for his measure, even if critical, because it means that the idea will spread to other lawmakers across the country.
Corporate pay ratios will be available to anyone willing to look them up. The SEC did not contemplate local taxes as a reason for writing the rule, said Stephen Quinlivan, a lawyer at the law firm Stinson Leonard Street who tracks implementation of the Dodd-Frank law.
Congress did not provide a reason for requiring the disclosure when it wrote the law, although the SEC concluded it was to provide investors a metric to consider in gauging executive compensation.
“The pay-ratio rules, as written, are too blunt of an instrument to impose a tax,” Quinlivan said, noting that companies can take shortcuts in calculating the ratios, and that they can be shaped by factors such as the size of the international workforce. A company with a large share of its low-skill workers outside of the country, for example, would have an inflated ratio.
Nevertheless, Republican-appointed commissioners at the SEC feared when the rule was implemented that it would be used for that and other purposes besides setting executive compensation.
Commissioner Michael Piwowar noted at the August 2015 vote on the rule that legislation had been advanced in California to tie corporate tax rates to pay ratios. In Rhode Island, a bill had been introduced to give preference in state contracts to companies with low pay ratios. Neither measure became law, but Piwowar warned that similar efforts could.
He warned that a future U.S. president could issue an executive order to tie federal contracts to firms’ pay ratios.
Democracy Labs is a weekly feature covering state-level policy experiments that could filter up to Washington. Send suggestions to [email protected]
