• Oregon: Portland Adapts First-In-The-Nation Surtax on CEO Compensation
  • January 20, 2017 | Authors: David D. Ebersole; David M. Kall; Susan Millradt McGlone
  • Law Firms: McDonald Hopkins LLC - Columbus Office; McDonald Hopkins LLC - Cleveland Office
  • Much data has been released in recent years pertaining to the disparity between chief executive officer (CEO) compensation and that of regular workers. Portland, Oregon’s response was to authorize a surtax to its Business License Tax on the income of any CEO of a publicly traded company doing business in Portland, when that compensation is equal to or greater than 100 times a median worker’s compensation.

    The Ordinance, passed by City Council on December 7, 2016, calls for a 10 percent surtax of base tax liability on such income for tax years beginning on or after January 1, 2017, when the pay ratio is between 100 to 1 and 250 to 1. When that ratio exceeds 250 to 1, the surtax increases to 25 percent. About 550 firms will be subject to the new tax.

    A Securities and Exchange Commission (SEC) rule, adopted in August 2015, made Portland’s measure possible. A result of a mandate by the Dodd-Frank Wall Street Reform and Consumer Protection Act, the rule requires public companies to disclose the ratio of the compensation of their CEO to median employee compensation. In a press release announcing its action, the SEC asserted that the “carefully calibrated rule...provides companies with substantial flexibility in determining the pay ratio, while remaining true to the statutory requirements.”

    The rule was designed to provide shareholders with information they can use to evaluate a CEO’s compensation. At the same time, the SEC asserts, it addresses concerns about the costs of compliance by providing companies with flexibility in meeting the rule’s requirements by allowing businesses to select their own methodologies for identifying its “median employee,” and that employee’s compensation. The rule does not apply to smaller reporting companies, emerging growth companies, foreign private issuers, Multijurisdictional Disclosure System filers, or registered investment companies.

    The Portland City Council cited numerous factors that lead to enactment of the Ordinance:
    1. Research by economist Thomas Piketty, set forth in his book Capital in the Twenty-First Century, describing inequality in the United States that has “exploded” during the last 40 years. Between the 1970s and 2010, the share of income held by the top 0.1 percent went from 2 percent to between 7 and 8 percent. This explosion of CEO pay is a major contributor to growing inequality.
    2. Reports from the Center on Budget and Policy Priorities showing that between 1979 and 2007, average after tax income for the top one percent of income earners rose by 314 percent, while average after tax income for the middle 60 percent rose by only 42 percent.
    3. Data from the Economic Policy Institute revealing that chief executive officers in the nation’s largest firms made an average of $15.5 million in compensation in 2015, or 276 times the annual average pay of the typical worker.
    4. A 2008 paper by the researchers Janna Matlack and Jacob Vigdor, published in the Journal of Housing Economics, concluding that “in the United States, tight housing markets tend to be those where incomes are rising rapidly at the high end of the distribution, while incomes at the low end trend upward only slowly, if at all.”
    5. The fact that rising inequality is a “major factor” in Portland’s housing crisis.
    6. Research indicating that that companies with high estimated chief executive officer-worker pay ratios have worse employee morale and shareholder returns compared to companies with lower ratios.
    7. The opinion that spectacular concentration of income and wealth among the top 1 percent and 0.1 percent are bad for the economy, and for democracy.
    The impact statement attached to the Ordinance estimates that Portland’s revenues will increase by $2.5 million to $3.5 million annually, though this will be lower in the first year due to timing of implementation. Administration costs will be about $50,000 annually. This new revenue will be used to provide additional resources for the Joint Office of Homeless Services.

    In an email exchange with The New York Times, economist Piketty opined that the Ordinance is “certainly part of the solution, but the tax surcharge needs to be large enough; the threshold ‘100 times’ should be substantially lowered.”

    On the other hand, the paper reported, groups like the Portland Business Alliance see the Ordinance as an “empty gesture.” Better to “work with business leaders to create more jobs that will lift people up and improve incomes.”