The California State Senate is considering SB 1372, which would raise the top corporate tax rate by 47% to 13%. The proposal ties the corporate tax rate to the ratio of a company’s CEO compensation to that of its median worker. While proposals to cap CEO pay are not entirely novel, the Tax Foundation stated that California’s tax increase would be the first to attempt to do so through the tax code.
Proponents of the bill argue the measure would push “companies to put less money into the hands of their CEOs and more into the hands of average employees.” The legislation creates a sliding corporate tax rate scale tied to CEO pay. For CEO compensation from zero to 25 times the median worker compensation, the bill would cut California’s corporate rate from 8.74% to 7%. But for each multiple increase of 25 times CEO compensation, the corporate tax rate would increase 0.5%, up to a top rate of 13%.
California’s already has 10th highest corporate tax rate in the United States. The state legislature’s scheme would raise the top corporate rate to the highest of any state. When added to the top United States corporate income tax rate, which is the world’s highest at 35%, corporations would face a California top marginal rate of 48%.
According to the Tax Foundation, the proposal
would disproportionately affect retail companies where much of the workforce is comprised of sales associates in entry-level positions. Using median worker compensation as the denominator for corporate tax liability hurts business models that are primarily composed of large numbers of customer service representatives (JC Penny, Abercrombie and Fitch, Starbucks, and other chain store employers). These businesses would be less competitive at attracting capable CEOs if they were forced by tax law to cut executive wages in half.
California politicians already have a grab-bag of uncoordinated tax incentives they have woven into the corporate tax code, supposedly to incentivize job creation, spur research and development, boost investment in manufacturing, and encourage companies to change geographical locations. But this would be the first time the tax would “promote wage equality.”
The California Legislature’s timing for raising its combined federal and state corporate tax rate to 48% comes as international pharmaceutical giant Pfizer, Inc. proposed a merger with a British company April 28, which would require the company to relocate to Britain. Pfizer has been headquartered since 1849 in New York City. But by escaping the punitive 42.1% combined state of New York and federal corporate rate for the United Kingdom’s top rate of 20%; Pfizer will immediately improve earning by over $2 billion a year.
Ian Read, Pfizer’s Scottish-born Chief Executive, said that the proposed deal would also let Pfizer eliminate “redundant functions” and overlapping operations. “Redundant functions” is business-speak for Pfizer’s likely plan to dump most of their 4,400 employees at corporate headquarters at 235 East 42nd Street, near Grand Central Terminal.
Chief Executive.net annual survey, which polls CEOs on business issues, revealed that CEOs rated California the absolute worst state for taxation and regulations in 2013, nosing out New York for the first time. By the proposing a 47% corporate tax rate increase, it’s a good bet that California will retain its worst rating with CEOs this year.