San Francisco Voters to Decide on Taxing Companies With Outsized Executive Pay

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Local elected leaders are sending the tax plan to the ballot, citing concerns about equity and the large hole that the coronavirus has blown in the city's budget.

Companies with steep pay gaps between their most richly compensated executives and other employees would face additional taxes in San Francisco under a measure that a group of local lawmakers said on Tuesday would be put before city voters on this November’s ballot.

Five San Francisco supervisors have backed the proposal, which they’ve dubbed the “Overpaid Executive Tax.” They say it could raise between $60 million and $140 million annually. The measure would impose additional taxes on companies where the highest-paid executive earns more than 100 times the median amount paid to the business’ employees based in the city.

The move comes as elected officials in San Francisco are looking for ways to address a budget shortfall brought on by the economic crash that the coronavirus outbreak has caused.

Supervisor Matt Haney, who is spearheading the measure, said the proposed tax could help the city avoid cuts to public health agencies on the frontlines of dealing with the virus response.

“Our health system was already stretched and strained to its limits and the prospect of hundreds of millions of dollars in cuts to the department of public health is unthinkable,” Haney said. 

Revenues raised from the tax, he added, “will be prioritized to prevent layoffs and ensure that essential services are protected.”

City departments in San Francisco are preparing for sharp cuts in the 10% to 15% range. Mayor London Breed’s office said last month that the city was facing a $250 million shortfall in the current year and a projected $1.5 billion gap in the upcoming two-year budget. 

But in addition to offering a way to help plug budget holes, supporters of the executive pay tax measure say it is also meant to address concerns over equity and sharp disparities in pay between workers at the top and bottom of the income ladder. 

"Any corporation can avoid this tax by adopting more equitable pay structures,” said Supervisor Dean Preston, a co-sponsor. “Raise wages for your struggling workers, lower executive compensation, it's that simple,” he added. “If you don't, prepare to be forced to pay your fair share to help address our city's budget shortfall."

Haney emphasized that the tax would only apply to companies that gross over $1.17 million annually and pay executives over $2.8 million a year. “This does not affect small businesses,” he said.

On Monday, Breed unveiled a proposed ballot measure that calls for a broader overhaul of the city’s business taxes.

The mayor’s office said that part of this proposal involves unlocking about $300 million already paid towards two taxes that voters approved in 2018 to address the city’s homelessness problem and to fund childcare and early childhood education. Those funds have been tied up due to court challenges over whether the taxes needed supermajorities to pass.

Haney said the executive pay measure was needed regardless of the outcome of negotiations between supervisors and the mayor’s office over other possible tax changes.

At least five of the city’s 11 supervisors—Haney, Preston, Hillary Ronen, Shamann Walton and Gordon Mar—are backing the executive pay tax plan. Under San Francisco election rules, four or more supervisors can jointly submit proposals to voters to decide on in elections. It would only take a simple majority of voters backing the tax measure for it to pass, Haney said.

For most businesses covered by the tax, it would be based on a percentage of gross receipts. Rates would increase in steps, rising from 0.1% for companies where the highest-paid executive earns between 100 and 200 times the median pay level for other workers, up to 1% for businesses where that pay ratio is upwards of 1000 to 1.

There’s also a separate set of rates for businesses that fall under the city’s “administrative office tax.” For them, the tax would be a percentage of payroll costs. But a staff member for Haney’s office said these rates would likely only apply to a “small subset of businesses.”

Revenue from the tax would flow to the city’s general fund. But Haney said he and others would fight to ensure the money goes towards programs related to public health and raised the possibility of follow-up legislation to that effect.

The San Francisco proposal is similar to one that California state Sen. Nancy Skinner, a Bay Area Democrat, has been pushing for in the state legislature. Her bill passed a committee vote in January, then stalled.

Portland, Oregon already has a “pay ratio surtax” akin to the system that the San Francisco supervisors are sending to the ballot. The city began collecting it with taxes paid for 2017.

The city’s Bureau of Revenue and Financial Services said Tuesday that for the 2018 tax year, the city had collected close to $3.5 million from the tax, that the median payment was $4,763 and that the highest pay ratio reported was 3,660 to 1.

In San Francisco, Haney and Ronen last year pushed to get a tax proposal much like the one they’re now supporting on the ballot to help pay for mental health programs. But the supervisors later held off doing so. The San Francisco Chronicle previously reported that some of the companies likely to be hit by that tax included Comcast, Bank of America, JP Morgan, Chipotle, Salesforce and Wells Fargo.

Bill Lucia is a Senior Reporter for Route Fifty and is based in Olympia, Washington.

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