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California Bill Would Raise Taxes on Corporations With Large CEO-Worker Pay Gaps

California’s debate over a CEO pay tax foreshadows a larger federal fight.

The California Senate has introduced a bill that would tax large CEO-worker pay gaps.

A bill to raise taxes on corporations with large gaps between CEO and worker pay moved forward in the California state senate Wednesday after a hearing that drew sharp lines between labor and anti-poverty supporters and corporate and Wall Street opponents.

The California proposal is similar to legislation introduced in the U.S. Congress last November by Senators Bernie Sanders and Elizabeth Warren, Representatives Barbara Lee and Rashida Tlaib, and 18 other House members.

Under the California bill (SB 37), the wider a company’s gap between CEO and median worker pay, the higher their state corporate tax rate. An estimated 2,000 corporations with annual profits in the state of $10 million or would be subject to the tax, with revenue projected at as much as $4 billion per year.

Abigail Disney was the star witness for the bill’s supporters. A Disney heiress, she has garnered enormous media attention over the past year for speaking out against the enormous pay disparities at large U.S. corporations, including the company her grandfather co-founded.

“In the 40 years during which CEO pay has ballooned by over 900 percent,” Disney told the California legislators, “wages have barely risen enough to cover inflation and certainly not enough to cover the skyrocketing costs of things like education, housing, and healthcare. The social mobility of which my grandfather and great uncle were exemplars has all but evaporated.”

Art Pulaski, head of the California Labor Federation, also testified, pointing out that CEOs of major corporations like Uber like to say they’re concerned about today’s extreme levels of inequality, but they don’t do anything about it. He encouraged lawmakers to take action before the next recession strikes. The bill would give corporations an incentive to narrow their pay gaps, “giving workers the purchasing power to keep our economy growing,” Pulaski said.

Numerous other California labor union officials lined up at a hearing room microphone to express support for the bill, including representatives of the Teamsters, UNITE HERE, the California Teachers Association, AFSCME, and SEIU. They were joined by supporters from several anti-poverty groups, including the Western Center on Law and Poverty and the End Child Poverty in California Campaign. Revenue from the proposed tax reform would go towards child tax credits and improvements to early childhood and other educational programs.

Patriotic Millionaires and California Voices for Progress, groups that organize business leaders and other high net worth individuals to advocate for economic justice, also issued a joint sign-on statement in support of the bill.

On the opposition side, witness Rob Lapsley began his testimony by declaring, “I am not here today to defend CEO pay.” This was interesting, given that Lapsley is the president of the California Business Roundtable, which represents many of the highest-paid chief executives in the country.

Lapsley attempted to portray Roundtable opposition to the bill as rooted solely in their CEO members’ deep concern for rank-and-file workers. “Take CEO pay out of it,” he urged. “The magnitude of this policy will send the wrong message in terms of jobs climate.”

Other corporate and Wall Street lobby groups that took to the mic to oppose the bill included the California Chamber of Commerce, the Securities Industry and Financial Markets Association, the California Bankers Association, and the California Attractions and Parks Association (which includes Disneyland as a member).

Abigail Disney called the corporate lobbyists’ “job killer” argument “patent nonsense.” Corporations could easily avoid the tax, she explained, by lowering their executive pay — a move that would free up more resources to invest in jobs and make capital investments.

Steve Silberstein, a California-based philanthropist, also took on the corporate fear mongering. “The Chamber of Commerce wants us to believe that SB37 is a job-killing bill simply because it encourages corporations to shave a tiny amount off of one person’s pay and put it in the pockets of the workers who will put it right back into California’s economy,” he said in a press release issued by the Patriotic Millionaires. That logic is “centered on greed rather than any real consideration of how to grow our economy,” Silberstein said.

Disney also had a sharp rebuttal to the Roundtable’s Lapsley when he asserted that the CEO-worker pay divide “should be a shareholder matter.”

“Shareholder governance is a very limited way to get change within companies, especially given the shareholder primacy that has become the order of the day,” Disney said. Under the 2010 Dodd-Frank financial reform legislation, shareholders gained the right to a non-binding vote on executive compensation. Unfortunately, this has done little to affect average CEO pay levels, as pay incentives continue to encourage executives to boost share prices by nearly any means necessary, including squeezing workers.

The California hearing foreshadowed the coming debate over a similar proposal at the federal level — the Tax Excessive CEO Pay Act (H.R. 5066/S. 2849). While the two legislative models’ objectives are the same, they have some differences in design.

Both would apply graduated tax increases, based on the size of a corporation’s CEO-median worker pay gap. The California proposal, championed by Democratic Senator Nancy Skinner, would begin with a 1 percentage point rate increase for companies that pay their top executives between 50 and 100 times more than their typical workers. The highest penalty, a 4 percentage point increase, would kick in for companies that pay top executives over 300 times worker pay.

The federal proposal begins with a 0.5 percentage point increase on corporations with pay ratios of 50 to 1 and rises to 5 percentage points on firms with ratios above 500 to 1.

The California bill bases median worker pay on all U.S. employees. This allows for a special penalty on corporations that outsource jobs from the United States to foreign countries. For these companies, the tax hikes based on their pay ratio would rise by an additional 50 percent.

The federal bill bases median worker pay on a firm’s global workforce. This acts as a disincentive for offshoring since shifting jobs to low-wage countries would lower a company’s median wage and thus increase their tax liability.

The California Governance and Finance Committee voted 4-2 to move the bill to the Rules Committee. Reaching the senate floor in the current legislative session will be a challenge because of a January 31 deadline. Senator Skinner also signaled openness to revising the bill to build stronger support, whether in this session or the next. Her commitment was echoed by Committee Chair Mike McGuire.

“The bottom line is this,” he said. “Income inequality has never been greater, and I’m nervous. It could cause tremendous unrest if we don’t tackle it.”

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