CA Dems seek new corporate tax

May 6, 2014 - By James Poulos

De SaulnierA new bill would hike taxes on corporations with the biggest spread in paid wages.

The legislation, Senate Bill 1372, was recently introduced by state Sens. Mark DeSaulnier, D-Concord, and Loni Hancock, D-Oakland. It passed the Senate Governance and Finance Committee late last month.

Rather than raising state corporate taxes across the board, SB1372 exaggerates California’s targeted approach to business taxation. The state already taxes financial institutions at a special, higher rate — a 10.84 percent levy on income instead of the 8.84 percent applied to other corporations. Now, DeSaulnier and Hancock want to single out corporations that pay their CEOs the most relative to the median income paid to their employees.

Instead of the flat rates currently imposed by law, SB1372 would create a complex sliding scale. The legislative counsel’s digest sums up the proposed changes in the following chart. Numbers in the left column refer to the percentage that CEO pay exceeds pay for a corporation’s median employee:

If the compensation ratio is: The applicable tax rate is:
Over zero but not over 25 7% upon the basis of net income
Over 25 but not over 50 7.5% upon the basis of net income
Over 50 but not over 100 8% upon the basis of net income
Over 100 but not over 150 9% upon the basis of net income
Over 150 but not over 200 9.5% upon the basis of net income
Over 200 but not over 250 10% upon the basis of net income
Over 250 but not over 300 11% upon the basis of net income
Over 300 but not over 400 12% upon the basis of net income
Over 400 13% upon the basis of net income

In other words, SB1372 does two things. Not only does it penalize some corporations for their pay structure — it rewards others for their own.

Critics have argued that the bill’s approach is unwise because it’s bad for business. If California is going to use tax policy to modify behavior, they say, legislators should create incentives that create jobs. As the state continues to suffer high-profile job losses, pro-business advocates in California fear that higher rates and more complicated tax interventions will discourage new business formation and relocation.

A national battle

At the same time, broader concerns persist. California Democrats targeting CEO pay are pursuing an agenda that’s integrated with a national election-year strategy focused around the so-called income inequality issue. At the federal level, that involves a synchronized push for higher minimum wages. (One California Democrat, Rep. Barbara Lee, wants a $26 an hour minimum wage.)

Labor unions, meanwhile, are playing a significant role in the campaign. The AFL-CIO, for instance, recently focused on pay disparity in its annual “Executive Paywatch” report. One prominent talking point emphasized that, for S&P 500 companies, the average profit per employee topped $41,000. The report implied that high-end CEO pay unjustifiably spends company profits on executives, not workers.

The report, however, obscures one reason for pay disparity that SB1372 also does not take into account. Profit per employee may be an important new metric in business analysis, as the influential consulting giant McKinsey has pointed out. Understanding CEO pay scales, however, requires a detailed comparison between types of business models.

Profit per employee varies dramatically across industry sectors. Data collected in 2009, for instance, shows that finance, media and tech companies reap in excess of $150,000 per employee. In the food, airline and pet industry, by contrast, profit per employee falls far below $25,000.

The significance of these differences shows up in how much workers would stand to gain from redistributed CEO salaries. To take one example, Oracle CEO Larry Ellison’s chart-topping salary of $78.4 million would translate into just $930 a year in extra pre-tax income for each of Oracle’s employees. In industries with much narrower profits per employee, the cash value to employees of redistributed CEO pay can be vanishingly small.

As a result, the effect of SB1372 would be to penalize corporations without regard to their profit per employee. That’s at odds with its intended goal of using tax policy to pressure companies to improve their employees’ economic fortunes. Especially in industries with a low profit per employee, narrowing pay disparity will have no measurable effect.

For that reason, SB1372 is likely to meet stiff resistance, despite its support among high-profile national Democrats. Although Republicans are weak in California, nationwide opposition to wage legislation is powerful and well-organized.

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Comments(7)
  1. Rex the Wonder Dog! says:

    We need more TAXES revenue.

    It’s for the children :)

  2. Ulysses Uhaul says:

    We could do with less Poodles!

  3. sean says:

    “but this will makes me feel good and makes things fair….”

    more liberal pixy dust on everything bring us closer to utopia! To hell with growth!

    In addition to the large number of employees a CEO is responsible for, if you analyze industries, you realize our large corporations also create large “value-chains” around themselves, that employee hundreds of thousands of people as contractors, suppliers, outsourced service providers and small business owners.

  4. Dork says:

    This is Great, anything we can do to punish these greedy corporations that exploit their workers by paying high salaries and benefits , like Toyota did, deserves to be run out of the State. We have more than enough welfare to go around, and I heard the President say that EBT cards were good for the economy/.

  5. Tom in SoCal says:

    Is it me or is there a meme this election year? Seems all Dems have been rereading Das Kapital.

  6. Queeg says:

    There is no greater virtue than using other peoples’ money…OPM….GREED IS GOOD…….

    Banks and big box stores and slaver running service business do it, so why can’t government for the common good.

    Look around you in your communities…..many many poor people, sick people……have some compassion.

  7. Bill Gore says:

    Hasta la vista Google y Apple!

    If the klowns in SAC are serious they really need to raise minimum wages. This will decrease or eliminate the hidden corporate subsidies that allow them to pay rock bottom wages in the first place. These subsidies are paid by the state and take the form of WIC, SNAP, Medicare, cash assistance, etc etc.

    By raising fixed costs via the minimum wage they would also decrease the disparities that cause libs such anguish…..

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