April 25 (Bloomberg) -- California lawmakers are proposing higher tax rates on companies that pay their chief executive officers more than 100 times the wages of a typical worker, seeking to create an incentive to reduce income inequality.
The bill, which would likewise give tax breaks to companies with lower ratios, passed the Senate Governance and Finance Committee yesterday in a 5-2 vote, with Democrats in favor and Republicans opposed.
California would be the first state to penalize or reward publicly traded corporations for their compensation practices more than two years after the Occupy Wall Street movement focused attention on the widening gulf between rich and poor. The average multiple of CEO compensation to that of rank-and-file workers at companies in the Standard & Poor’s 500 Index is 204, according to data compiled by Bloomberg.
“With this legislation, we hope we’re starting a national conversation around this, rather than just hope corporations do the right thing,” said Steve Smith, a spokesman for the 2.1-million-member California Labor Federation, which backs the bill. “We see California as being on the forefront of progressive economic legislation.”
California’s corporate income tax rate is 8.84 percent for all but financial institutions, which pay 10.84 percent. Democratic state Senators Mark DeSaulnier of Concord and Loni Hancock of Oakland want to replace the flat rate with a range of 7 percent to 13 percent for most companies, and 9 percent to 15 percent for financial institutions, depending on the pay ratio.
Because the bill involves a tax increase, it needs approval by two-thirds majorities in both chambers of the Legislature. Democrats have a so-called supermajority in the Assembly, but are short in the Senate because three Democrats were suspended after being involved in corruption cases.
Corporate income taxes paid to the state, which are the only levies that would change under the proposal, account for 10 percent of state and local taxes on California businesses, the nonpartisan Legislative Analyst’s Office said in a March 12 letter to the Senate Budget Committee. The largest levies paid by businesses are property and sales taxes, according to the letter.
Corporate taxes are projected to yield $7.5 billion in the year beginning July 1, under Governor Jerry Brown’s budget. The CEO pay proposal would increase revenue by $100 million next year and more than $300 million in each of the following two years, according to a legislative analysis.
“To the extent that this would create an even more high-tax state, it’s going to influence corporate behavior about where to invest,” said Jennifer Barrera, a lobbyist for the California Chamber of Commerce, which opposes the bill.
“Imposing such a punitive corporate tax rate actually jeopardizes the jobs of the workers they say they’re trying to protect,” she said.
Brown, a 76-year-old Democrat running for a fourth term, has taken no position on the bill, spokesman Evan Westrup said by e-mail.
DeSaulnier spokesman Sam Mahood said the bill ultimately would be good for companies, as it would promote a larger middle class.
“If you’re incentivizing companies to pay their workers more fairly, you’re putting money back into the middle class and increasing their purchasing power and jobs,” he said. “We think this is a strong first step.”
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