Prop L

Disproportionate CEO Pay Tax

Ordinance

Business Tax Based on Comparison of Top Executive's Pay to Employees’ Pay

Establishes an additional gross receipts tax on companies whose highest-paid executive make more than 100 times as much as their median San Francisco employee. 

No Recommendation
 

What the Measure Would Do

Prop. L would impose an additional tax on the annual gross revenues of companies based on the compensation ratio of their highest paid executives and median San Francisco employee. The tax would apply to any company that does business in San Francisco, whose highest-paid employees make at least $2.7 million annually and whose executive pay ratio exceeds 100:1 The ratio would be calculated based on the total compensation (including wages, bonuses, commissions, stock options and other forms of pay) of the company’s highest-paid managerial employee and the median compensation of the company’s San Francisco-based employees. Beginning in 2022, the tax rates would be as follows: 

 

Executive Pay Ratio

Additional Gross Receipts Tax Rate

Greater than 100:1 but less than or equal to 200:1

0.1%

Greater than 200:1 but less than or equal to 300:1

0.2%

Greater than 3:00:1 but less than or equal to 400:1

0.3%

Greater than 400:1 but less than or equal to 500:1

0.4%

Greater than 500:1 but less than or equal to 600:1

0.5%

Greater than 600:1

0.6%


Today, the city’s gross-receipts tax rates range from .01% to .65%, depending on the type of business and the amount of annual gross receipts. Businesses that operate only an administrative office in San Francisco pay a payroll tax to the city instead of a gross receipts tax. For those businesses, the tax would be assessed based on their total payroll expense attributed to business done in San Francisco. The tax rates would be as follows: 
 

Executive Pay Ratio

Additional Payroll Tax Rate

Greater than 100:1 but less than or equal to 200:1

0.4%

Greater than 200:1 but less than or equal to 300:1

0.8%

Greater than 3:00:1 but less than or equal to 400:1

1.2%

Greater than 400:1 but less than or equal to 500:1

1.6%

Greater than 500:1 but less than or equal to 600:1

2.0%

Greater than 600:1

2.4%


Nonprofit organizations would be exempted from the tax, as would be businesses who are exempted from the city’s gross receipts tax.1

Based on known salaries, the tax would most likely apply to retailers, grocers and hotel chains. For example, a business whose CEO made $13 million annually and whose median employee in San Francisco made $65,000 annually would owe an additional $200,000 as a result of this tax. The Controller’s Office estimates the measure could raise between $60 million and $140 million annually.

The measure is a general tax and revenues would be deposited in the city’s General Fund, though Supervisor Matt Haney, the measure’s author, has said the money should be used to hire emergency health care workers. The Board of Supervisors could vote to reduce or repeal the tax legislatively, but any increase to the tax would need to be approved by the voters. 

The author originally proposed this tax as a funding mechanism for a universal mental health program in San Francisco. It has since been reintroduced as a means to raise general revenue given the city’s financial strain precipitated by the COVID-19 pandemic. This measure was placed on the ballot by a unanimous vote of the Board of Supervisors. As a general tax, it requires a simple majority (50% plus one vote) to pass. 

The Backstory

The rise of executive compensation has received increased scrutiny in the last decade as part of a national conversation about inequality in the United States. Recent disclosures of compensation packages to CEOs like Elon Musk ($2.89 billion in 2019) have come on the heels of research that estimates executive compensation has risen 940% since 1978, while average worker compensation has risen 12%.2 Executive compensation in the United States outstrips that in other countries by a significant margin. By one measure, the average ratio of U.S. companies’ executive compensation to that of their median worker is 354:1; the next highest average ratio, from Switzerland, is 148:1.3 Many point to the increase in stock-based compensation and stock-based awards as contributing both to the rise in compensation and to the difficulty in accurately tracking CEO pay. 

Federal legislation passed after the Great Recession included some reforms intended to curb the rise of disproportionately high executive compensation. As of 2018, all publicly traded companies are required to disclose to the Securities and Exchange Commission their total CEO compensation, as well as the ratio of CEO-to-worker pay. Other federal changes now give shareholders a vote on executive compensation, though that vote is nonbinding. Earlier this year, the California Legislature briefly considered a bill that would tie the state’s corporate income tax to executive pay ratios. 

Portland, Oregon, is currently the only jurisdiction in the country that levies a tax based on executive compensation ratios. Since 2018, the city has imposed a 10% surtax on companies that pay their CEOs 100 to 250 times more than the median worker. Those with a pay ratio above 250 times pay a 25% surcharge. The city estimates that the tax raised roughly $3.5 million in its first year.

Equity Impacts

Worker pay has played an important role in the rise in income inequality in the United States. Across the nation, research has shown that, depending on the type of worker, median wages have either grown only slightly or declined since the 1970s.4 The Bay Area mirrors these trends: Median wages have declined since 2000, while workers in the highest wage brackets have seen their incomes increase significantly.5 Previous SPUR research has shown that the region continues to lose middle-wage jobs as it adds employment at the top and the bottom of the wage spectrum.6 These inequities are also racialized. White workers in the Bay Area earn roughly double that of their Latinx counterparts and 35% more than Black workers, for example. The reality of declining economic prospects for average workers stands in stark contrast to the growth of the economy since the end of the Great Recession and the continued rise in CEO compensation. 

If this measure were to change corporate behavior and push businesses to raise wages for their San Francisco employees, it would be a small step toward reducing income inequality. On the other hand, if businesses were to respond by maintaining high CEO compensation but moving low- and middle-wage jobs out of the city, it could lead to a further hollowing-out effect on middle-wage jobs in San Francisco.

Pros

  • Prop. L’s tax rates are modestly structured and would not likely drive businesses out of San Francisco.
  • The measure is delayed until 2022, softening the impact on businesses in the midst of an economic recession and providing time to adjust.
  • Adopting this tax could send a powerful signal to other cities and states and build political momentum for more impactful economic policy reform in the future. 

Cons

  • Rather than lower executive compensation, this measure could instead drive it into less visible forms that are more difficult to track and regulate. 
  • Rather than increase median wages, this measure could encourage businesses to move middle- and low-wage jobs out of San Francisco, or accelerate the automation of those jobs. 
  • This tax may be difficult to enforce. Businesses interpret compensation in different ways, and this measure relies on private companies to self-report their CEO pay ratios.
  • The small number of impacted businesses and the variability in executive compensation mean this tax could be an unreliable revenue source for the city. 

SPUR's Recommendation

Income inequality is a threat to San Francisco and California’s future. Wage stagnation, the loss of middle-wage jobs and other factors make economic prosperity and security a fundamentally different prospect for today’s workers than it was 50 years ago. Executive compensation has risen to stunning heights seen nowhere else in the world at a time of extreme economic insecurity for many Californians.

San Francisco has established groundbreaking policies on issues ranging from domestic partnership protections to carbon emission reductions, inspiring similar efforts around the country and, in aggregate, achieving broad impact. Prop. L could present such an opportunity — and lay the groundwork for future efforts — at a time when the inequities of our society are starkly evident. However, the proposed tax rates may be too low to change corporate behavior, and if they do, it’s unclear if the tax would reduce disproportionate pay. SPUR’s board was divided on these points and was not able to reach enough votes to support either a “yes” vote or a “no” vote on this measure. 

No Recommendation on SF Prop L - Disproportionate CEO Pay Tax
Footnotes 

1 Currently, businesses whose total gross receipts are less than $1.7 million are exempted from the city’s gross receipts tax. 

2 Economic Policy Institute, “CEO Compensation Has Grown 940% Since 1978,” 2019, https://www.epi.org/publication/ceo-compensation-2018/#:~:text=Using%20the%20stock%2Doptions%2Drealized,recovery%20from%202009%20to%202018.

3 “CEOs Get Paid Too Much, According to Pretty Much Everyone in the World”,2014, https://hbr.org/2014/09/ceos-get-paid-too-much-according-to-pretty-much-everyone-in-the-world

4  Analyzing wage trends is complicated, and decisions about time period, type of worker or inflation measure can impact results. See this article: https://www.brookings.edu/blog/up-front/2019/09/10/are-wages-rising-falling-or-stagnating/

5 Bay Area Equity Atlas. See: https://bayareaequityatlas.org/indicators/median-earnings#/?breakdown=1

6 SPUR, Economic Prosperity Strategy, 2015, https://www.spur.org/sites/default/files/publications_pdfs/Economic_Prosperity_Strategy.pdf

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