Calif. bill takes aim at pay disparities of CEOs, workers

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Former President Jimmy Carter reportedly said that whatever starts in California unfortunately has an inclination to spread. That might explain why opposition is so vehement to a California lawmaker's proposal to tax public companies based on how generously they pay their CEOs.

California state Sen. Mark DeSaulnier has introduced a bill that would adjust the income tax rate paid by public companies doing business in the Golden State based on the ratio between what they pay their CEO and the median wage of their U.S. work force.

Instead of paying the current flat rate of 8.84 percent -- the 10th highest among states -- public companies in California would pay as little as 7 percent or as much as 13 percent. The 7 percent rate would apply to companies that paid their CEO up to 25 times what their median worker makes. The 13 percent rate would apply to companies with CEOs who make more than 400 times the median pay.

Tax rates would go up another 50 percent for companies that reduced their full-time work force by 10 percent while simultaneously increasing contracted employees or their non-U.S. full-time staff.

Mr. DeSaulnier's proposal also would apply to financial institutions, which currently are taxed at a rate of 10.84 percent. It would not apply to companies whose stock is not publicly traded, limited liability companies and similar firms.

The California Chamber of Commerce has put the proposal on its list of "job killer" bills. The business group called it bad tax policy and said it would further sour the state's business climate.

Opposition also comes from groups representing restaurant owners, general contractors, manufacturers and retailers, as well as the California Taxpayers Association.

The measure "sends the wrong message to CEOs, the very people making decisions on whether to open a factory or facility in California," taxpayers association lobbyist Gina Rodriquez said in an emailed statement. She said if enacted, the measure would "launch our corporate tax rates into the stratosphere" and could face a constitutional challenge because it favors U.S. business activity over foreign commerce.

Supporters include the California Labor Federation and the California Tax Reform Association.

Mr. DeSaulnier is seeking the congressional seat being vacated by longtime U.S. Rep. George Miller, D-Calif., who is retiring. He says the proposal would address a problem that California's tax code ignores: the growing disparity between the rich and everyone else. The gap between what CEOs and workers make "is a direct threat to American democracy," according to Mr. DeSaulnier.

"I just don't think it's good for the economy," he said in an interview.

He said that as a former restaurant owner, "if I ever paid myself that much more than my employees, they wouldn't have worked for me."

According to the AFL-CIO, the average CEO of a S&P 500 company made 354 times more in 2012 than the median U.S. worker. California's flat 8.84 percent rate "does not adequately incentivize corporations to address this disparity," according to a summary of the proposal provided by Mr. DeSaulnier's office. The pay gap in California "is more extreme than anywhere else in the United States and it's a real problem for our economy," he said.

CEO pay levels and the widening gap between the affluent and the rest of society have become hot button political issues. In the aftermath of the financial crisis, Congress mandated that public companies disclose the ratio of CEO to average worker pay. But the Securities and Exchange Commission has yet to approve rules regulating how the calculation would be made and reported. Critics contend the calculation would cost too much and that the ratio is not an accurate measure of the effectiveness of a CEO or a company's workers.

Conceivably, the SEC's rules could be different from what California would require.

Public companies are also required to submit executive pay packages to a shareholder vote. While voting at some companies has made headlines, the majority of pay plans have been approved by large margins.

Last year, Swiss voters overwhelmingly rejected a proposal to limit executive pay to 12 times what a company's lowest-paid employee makes.

The Pennsylvania Chamber of Business and Industry does not think much of Mr. DeSaulnier's idea.

"This legislation is a prime example of inappropriate government intrusion into the private sector. Between the compensation ratios and correlating tax rates, the whole concept is so arbitrary that it is pretty obvious it is really nothing more than an attack on these employers," spokesman Todd Brysiak said in an email.

Mr. Brysiak wondered why the proposal doesn't address the ratio between what Hollywood stars and film lot workers make, or the ratio between star athletes and stadium vendors.

"These questions just go to show that there is little economic substance behind these types of proposals and the focus is really about new taxes and government control of businesses," he said.

An economist with the Tax Foundation said that despite Mr. DeSaulnier's good intentions, the proposal "is a little bit off the wall."

"This would be a corporate income tax unlike the way anybody else does it," said Scott Drenkard.

Mr. Drenkard said the measure would put California at the top of the list of states that tax business profits the most. Iowa currently tops that list, with a maximum rate of 12 percent. Pennsylvania, with a flat corporate tax rate of 9.99 percent, is second.

"The folks who are saying this will make the corporate tax code more complex are absolutely correct," he said.

Joseph Nicola, a tax expert with Downtown accounting firm Sisterson & Co., said companies could reduce their California income to offset the higher tax rates. The proposal also would make California's already complicated corporate tax return even more difficult, he added.

"Some companies might be inclined to pull up stakes and reduce their overall business activity in California," he said. "This is the kind of thing we wouldn't see in a more conservative state."

Len Boselovic: or 412-263-1941.

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