CA Bill Would Base Corporate Income Tax on CEO Pay Ratios – Los Angeles Income Tax Planning & Income Tax Litigation Attorney Bruce Givner

by Bruce Givner on June 3, 2014

A new bill making its way through the California legislature aims to address growing income inequality by basing corporate income tax rates on the ratio between executive compensation levels and the median pay of average employees. The bill, S.B. 1372, is among the first of its kind to address executive and employee pay disparity via the tax code.

Under the proposed legislation, the corporate income tax rate (currently at 8.84%) would be set on a sliding scale. The tax rate could drop as low as 7% of net income for companies where the ratio between CEO and employee compensation is no more than 25. Conversely, the tax rate could soar to 13% if the compensation ratio is more than 400. In addition, the bill stipulates that tax rates could go higher for corporations that reduce employment in the US by more than 10% or that increase employment overseas in any year.

During hearings in the Senate Governance and Finance Committee, the bill received supporting testimony from the former U.S. Secretary of Labor, Robert Reich, as well as Art Pulaski, the secretary-treasurer of the California Labor Federation. In his testimony, Pulaski cited a statistic that the CEO of J.C. Penny earns 1,700 times more than an average J.C. Penny employee. The bill passed the committee on April 24 in a 5-2 vote, with Democrats largely in support and Republicans against.

The bill faces opposition from numerous employer and business groups, including the California Taxpayers Association (CalTax), the California Chamber of Commerce, the California Grocers Association, the California Retailers Association, the Council on State Taxation, and TechAmerica. Gina Rodriquez of CalTax said, “S.B. 1372 would launch our corporate tax rates into the stratosphere with a potential maximum of 19.5%...[and] would only add to California’s reputation as an anti-business state.”

Another point of opposition is the potential burden faced by the Franchise Tax Board in verifying the pay ratios provided by employers, applying the varying tax rates, and dealing with refund claims based on those different rates. Companies, too, would face a heavy compliance burden.

The FTB, in its analysis of the bill, pointed out that the provision raising tax rates for companies that increase employment outside of the US could raise issues under the Commerce Clause of the US Constitution by inappropriately favoring US activity over foreign commerce despite the fact that no court has yet invalidated a law that favors in-state or US activity.

Givner & Kaye focuses on sophisticated income tax planning and compliance, tax litigation and procedure, estate planning, and asset protection plans for individuals and businesses in Beverly Hills, Calabasas, West Los Angeles, Hollywood, and other areas of Los Angeles, Orange, Ventura, San Bernardino, Riverside and Santa Barbara Counties. Call Los Angeles Estate Planning and Asset Protection Plan Attorneys Givner & Kaye at (310) 207-8008 today.

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