Income Inequality – Will Portland’s Tax On CEO Pay Start A National Conversation?

Jeremy Raglin

There’s no denying that CEO pay has been one of the biggest issues in the news over the last 10 years as it’s not been uncommon to read stories about some CEO’s earning more than 300 times the average American worker, especially during the last recession.

With the City of Portland’s plan to start taxing companies that pay their CEO’s more than 100 times their median employee pay some economists are wondering if this tax will really make a difference at addressing the problem of income inequality in the United States.

A Step In The Right Direction?

Portland’s ordinance dovetails with a change in the U.S. Securities and Exchange Commission (SEC) disclosure and reporting requirements set to begin in January 2017. Congress approved the Dodd-Frank law in 2010 that requires such information be published, but it took the SEC until 2015 to adopt a rule that would require public companies to disclose the ratio of compensation of the company’s CEO to the median compensation of all its employees.

Before the law, calculating the CEO-to-worker pay ratio was left to researchers, such as those at the Economic Policy Institute, which drew from a variety of data, including from the Federal Reserve. In the last two years, both Glassdoor and PayScale have done their own reports on the CEO-to-staff pay ratio as well as survey workers about how they perceived the gap.

Portland’s Revenue Bureau identified more than 500 publicly traded companies currently doing business in the city including Wells Fargo, Walmart, and General Electric. According to the most recent data from PayScale, Wells Fargo CEO John Stumpf made 130 times more, Walmart’s Douglas McMillon made 209 times more, and GE’s Jeffrey Immelt made 202 times more than the average median wage of employees.

A statement from Portland’s City Council observed that the surtax may generate an estimated $2.5 million to $3.5 million per year, and revenue from the proposal will accrue to the General Fund and help the Portland Housing Bureau meet the city’s commitment to funding homelessness services.

“The closest thing I’d seen to a tax on inequality itself.”

The City Council’s proposal for the surtax included an argument that not only would it add to Portland’s revenue stream, but also that it would support human services by extension. The ultimate goal, according to City Commissioner Steve Novick, was for it to tackle income inequality. “When I first read about the idea of applying a higher tax rate to companies with extreme ratios of CEO pay to typical worker pay, I thought it was a fascinating idea—the closest thing I’d seen to a tax on inequality itself,” Novick said in a statement.

He cited the work of French economist Thomas Piketty, who found “60% to 70% . . . of the top 0.1% of the income hierarchy in 2000-2010 consisted of top managers in large firms.” The average gap between CEO and worker pay was around 70 to 1 in PayScale’s survey. The found a similar ratio that, while still falling below the average in the 2000s, is still far higher than it was in the 1960s through the 1990s.

Only Time Will Tell

The reality when it comes to tackling the problem of income inequality in the United State is only time will tell if Portland’s attempt to tax excessive CEO pay will actually inspire other cities to do the same.