Will San Francisco Become the Second City to Tax Extreme CEO-Worker Pay Gaps?

Will San Francisco Become the Second City to Tax Extreme CEO-Worker Pay Gaps?

Last year, Portland became the first city in the world to collect revenue from a tax on extreme gaps between CEO and worker pay. In a sign of healthy West Coast rivalry, San Francisco may be next in line. A majority of members of the city’s Board of Supervisors recently passed a motion to place such a tax proposal on the ballot this November, with revenue going into mental health services.

The San Francisco proposal differs from the Portland model in a few ways. The Oregon city is making use of data U.S. publicly held corporations must now report every year on the gap between their CEO pay and the median for their total workforce, wherever in the world they may be. The California proposal calculates the median from workers based only in San Francisco. This will likely narrow the gaps somewhat because of that city’s relatively high wages.

Another difference: the Portland model is a surtax on top of an existing local profits tax, while in San Francisco, companies with extreme pay gaps would face an increased tax rate on their gross receipts (total sales). The tax rates would range from an additional 0.1 percent on corporations that pay their CEO (or highest-paid employee) more than 100 times their typical San Francisco worker pay to 0.6 percent for companies with chief executives who earn 600 or more times the median. The city controller’s office estimates the potential revenue at $140 million per year.

To get a sense of how companies might be affected if the ballot measure passes, I looked at the top two largest employers in San Francisco: Wells Fargo and Salesforce. Both are headquartered in that city.

Wells Fargo CEO Timothy Sloan pocketed $18.4 million in 2018. If the tax had been in place, the bank’s median pay in San Francisco would’ve had to have been above $184,267 to avoid the tax altogether. It would’ve had to have been above $30,711 to avoid the highest tax rate applied to firms with gaps of 600 to 1 or higher

Salesforce CEO Marc Benioff made $28.4 million last year. If the tax had been in place in 2018, the software firm’s median pay in San Francisco would’ve had to have been above $283,918 to avoid the tax altogether. It would’ve had to have been above $47,320 to avoid the top rate.

The San Francisco proposal differs from the Portland one in another major way. All new taxes in San Francisco need to be approved by the people. And in this case, the ballot measure will require support from two-thirds of voters. In the Oregon city, advocates only needed support from three out of five members of the local council.

Well-funded opponents will no doubt mount a major campaign to block the CEO pay tax. And two-thirds is a high bar. A similar measure on the ballot last year to increase taxes on large companies to pay for homeless programs (Proposition C) fell short of that, with 61 percent of the vote. This prompted an anti-tax group to sue the city to block the measure, arguing that it needed two-thirds support to be legal.

On July 8, the San Francisco Superior Court ruled in favor of Proposition C, arguing that because a citizens campaign had pushed that measure onto the ballot — and not the Board of Supervisors — only a simple majority was needed.

The CEO pay tax will be held to the supermajority threshold, but this should not be insurmountable. Polls have shown that Americans across the political spectrum are outraged about overpaid CEOs. The outrage factor is likely even higher in a progressive city facing rising inequality like San Francisco.

Whatever the result on election day, the San Francisco ballot initiative will undoubtedly educate millions of people about this approach to narrowing the extremely unfair disparities within large U.S. corporations. And this will surely bolster support for similar campaigns in other cities, states, and in the U.S. Congress.