On Nov. 3, voters in San Francisco passed Proposition L, informally dubbed the “CEO tax” which targets businesses with highly paid executives and low-paid workers—making San Francisco the largest city to enact a corporate inequality tax.
However, legal analysts argue taxes targeting inequality aren’t that simple.
“Executive compensation is incredibly complicated at the highest levels,” said Craig Becker, a San Francisco-based State & Local Tax partner at Pillsbury, noting that CEO pay often includes equity packages tied to stock prices and other performance milestones. “You could see people falling in and out of the ratio not due to any policy of the company, but because the market is up.”
Since companies won’t know their pay ratios until the end of the year, it’s difficult to accurately predict what a company’s exposure might be until after the close of the year, which could have unintended consequences as companies seek to safely avoid exposure to the tax. If employers seek to reduce their tax exposure, they may refrain from hiring more seasonal workers (such as during the holidays), accelerate automation efforts or relocate middle-to low-wage jobs outside city limits.
Breann Robowski, another State & Local Tax partner at Pillsbury, predicted corporate behavior in the C-suite is unlikely to change: “Unfortunately, we’re not likely to see a change at the top end, but less hiring on the bottom end.”