The surcharge, called the first of its kind in the U.S., is hailed by backers as a step against income inquality. Critics call it ‘an empty gesture’ and say the city instead should focus on creating more jobs.
Moving to address income inequality on a local level, the City Council in Portland, Oregon, voted Wednesday to impose a surtax on publicly traded companies whose chief executives earn more than 100 times the median pay of their rank-and-file workers.
The surcharge, which Portland officials said is the first in the nation linked to chief executives’ pay, would be added to the city’s business tax for those companies that exceed the pay threshold. Currently, roughly 550 companies that generate significant income on sales in Portland pay the business tax.
Under the new rule, public companies doing business in Portland must pay an additional 10 percent in taxes if their chief executives receive compensation greater than 100 times the median pay of all their employees. Companies with pay ratios greater than 250 times the median will face a 25 percent surcharge.
The tax will take effect next year, after the Securities and Exchange Commission begins to require public companies to calculate and disclose how their chief executives’ compensation compares with their workers’ median pay. The SEC rule was required under the Dodd-Frank legislation enacted in 2010.
Portland’s executive-pay surcharge will be levied as a percentage of what a company owes on the city’s so-called business license tax, which has been in place since the 1970s. City officials estimated that the new tax would generate $2.5 million to $3.5 million a year for the city’s general fund, which pays for basic public services such as housing and police and firefighter salaries.
Criticism of how much chief executives are paid has risen in recent years as their compensation has grown substantially. In 2015, the median compensation for the 200 highest-paid executives at U.S. public companies was $19.3 million, up from $9.6 million five years earlier.
Comparing such compensation with how much lower-level employees earn is likely to show a very wide gulf. A 2014 study by Alyssa Davis and Lawrence Mishel at the Economic Policy Institute, a liberal-leaning advocacy group in Washington, found that chief executive pay compared with the earnings of average workers had surged from a multiple of 20 in 1965 to almost 300 in 2013.
Thomas Piketty, a professor at the Paris School of Economics and an authority on income inequality who wrote “Capital in the Twenty-First Century,” said he favored the Portland tax as a first step.
“This is certainly part of the solution,” Piketty wrote in an email, “but the tax surcharge needs to be large enough; the threshold ‘100 times’ should be substantially lowered.”
Taxing companies that dole out outsize executive pay in Portland was the idea of Steve Novick, a former environmental lawyer who has been a Portland city commissioner since January 2013.
“When I first read about the idea of applying a higher tax rate to companies with extreme ratios of CEO pay to typical worker pay, I thought it was a fascinating idea,” Novick, a Democrat, said in a telephone interview. “It was the closest thing I’d seen to a tax on inequality itself.”
Novick, who lost a bid for re-election last month, said he had begun weighing such a tax about a year ago but did not discuss it publicly until September.
Another supporter of the tax is Charlie Hales, the mayor of Portland.
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“Income inequality is real; it is a national problem, and the federal government isn’t doing anything about it,” Hales, a Democrat, said in a telephone interview. “We have a habit of trying things in Portland; maybe they’re not perfect at the first iteration. But local action replicated around the country can start to make a difference.”
Hales, who did not seek re-election, will leave office at the end of the month.
Portland officials said other cities that charge business-income taxes, such as Columbus, Ohio, and Philadelphia, could easily create their own versions of the surcharge. Several state legislatures have recently considered bills structured to reward companies with narrower pay gaps between chief executives and workers. In 2014, a bill in California proposed reducing taxes for companies whose executives were paid less than 100 times above the median worker. The bill did not pass.
Among those objecting to the new tax was the Portland Business Alliance, a group of 1,850 companies that do business locally. Alliance officials have predicted that the measure would not have the desired result of reducing income inequality.
“We see it as an empty gesture,” Sandra McDonough, the alliance’s president and chief executive, said in a telephone interview. “We think they’d be far better off trying to work with business leaders to create more jobs that will lift people up and improve incomes.”
Publicly traded companies, she added, are “an easy group to pick on.”
Hales conceded that the pay ratio is “an imperfect instrument” with which to solve the problems of income inequality. “But it is a start.”