Taking on income inequality with a CEO pay tax

It remains to be seen whether President-elect Donald Trump will make rising income inequality a priority when he takes office in January. At least, his tax plan indirectly aims to ease inequality by making wealthy Americans “pay their fair share.”

In Portland, Oregon, lawmakers aren’t holding their collective breath. In a move that made international headlines, Portland’s City Council voted earlier in December to approve a first-of-its-kind tax on public companies that pay their chief executive officers more 100 times their median workers’ pay.

According to Portland Commissioner Steve Novick, the tax aims to address growing income inequality by targeting “the phenomenon of outrageous CEO pay.” Some economists, said Novick, argue that escalating CEO pay is more than just a symbol of income disparity in the U.S. but has actually contributed to the nagging problem. Novick sponsored the ordinance authorizing the new tax.

“If we can do something to roll back the explosion in CEO pay, then we can do something about the explosion of economic inequality in general,” he said.

In 2015, CEOs of the 350 largest U.S. firms took home 276 times more than the typical worker, according to a study by the left-leaning Economic Policy Institute. By comparison, the CEO-to-worker compensation ratio was 20-to-1 in 1965 and peaked at 376-to-1 in 2000.

“In the 1960s, when the U.S. economy was the envy of the world, the typical CEO made 20 times what the typical worker made. I’m just doing my part to make America great again,” said Novick, borrowing Mr. Trump’s campaign slogan.

Portland’s new tax, effective in 2017, applies to publicly traded companies that do business in the city. Firms that exceed the 100-to-1 CEO-to-median worker pay ratio will face a 10 percent surcharge on their city tax bill. (Portland already levies a 2.2 percent business tax on net income.) Companies that pay their CEOs more than 250 times the median employee pay will pay a 25 percent surcharge.

More than 500 publicly traded firms do business in Portland -- including Wells Fargo (WFC), Walmart (WMT) and General Electric (GE), companies known for their “sky-high CEO pay,” said Novick. 

To monitor CEO compensation, Portland will rely on data that public companies must file with the Securities and Exchange Commission beginning in 2017. Public companies will be required to report their CEO-to-employee pay ratios to the SEC, under a rule designed to shine on a light on extreme pay gaps and allow cross-company comparisons.

While income inequality is a national problem, Novick said it has contributed to Portland’s current housing-affordability crisis. The fast-growing Northwest city regularly leads the country in home-price appreciation, partly because of the strong demand for housing created by an influx of new residents in recent years.

“The evidence [of income-disparity in Portland] has become more dramatic because a lot of people want to move here, and many of them are very wealthy. Housing prices have been skyrocketing,” said Novick.

Not surprisingly, the new tax hasn’t gone over well with some in the business community. In a letter to Novick in September, the Portland Business Alliance said it opposed the then-proposed tax and argued that the measure would “do nothing to address income inequality.”

“Punishing and public shaming” of large companies “that employ thousands of workers in high wage jobs is no way to address income inequality,” according to the letter by Sandra McDonough, president and chief executive of the Portland Business Alliance. The group represents more than 1,850 businesses in the Portland area. 

McDonough has called the tax “more of a media stunt than a real, sincere effort to address income inequality.”

Portland officials estimate that the tax will generate $2.5 million to $3.5 million a year in revenue for the city. That’s barely noticeable for many large corporations, and Novick doesn’t expect the tax to move the needle on big-company CEO pay in any significant way. However, he’s hoping it will inspire other cities and states to follow Portland’s lead. Similar tax measures, he said, might ultimately help pressure large companies to rein in CEO pay. 

“We are delighted by the media attention we’ve gotten,” said Novick, “because other jurisdictions will hear about [the tax].”