BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1372 HEARING: 4/24/14
AUTHOR: DeSaulnier FISCAL: Yes
VERSION: 4/21/14 TAX LEVY: Yes
CONSULTANT: Grinnell
CORPORATION TAXES: TAX RATES
Replaces a publicly traded corporation's current tax rate
with a ratebased on a ratio between its top paid employee
and the median compensation it pays.
Background and Existing Law
A multistate firm generates profits based on its operations
in many states, and has a right under the U.S. Constitution
to divide income between these states for tax purposes, a
process known as "apportionment," to ensure that no state
taxes more than its fair share of that firm's income. In
California, C-Corporations pay 8.84% of apportioned net
income in corporation tax, with banks paying 2% more,
regardless of whether the firm is publicly traded.
Economic data shows increasing inequality in wage income
between executives, especially CEOs, and employees.
According to the Bureau of Labor Statistics, real earnings,
or wages before inflation, are lower than in 2008, flat
over the last decade, and below its peak in 1973. The
Economic Policy Institute states that individuals in the
bottom 70% of the wage scale have stagnant or declining
wages since 2002, while wages for the 95th percentile have
steadily grown during the same period. Meanwhile, surveys
of executive compensation among publicly traded firms show
continued growth: The USA Today states that CEOs employed
this year and last year by S&P 500 companies had total
compensation growth of 13% in 2013. Concerned about this
increasing inequality, the author wants to change the
corporation tax rate for publicly traded companies to
reflect the ratio between top executive compensation and
median worker compensation.
Proposed Law
SB 1372 (DeSaulnier) - 4/21/14 -- PageB
Starting in the 2015 tax year, Senate Bill 1372 changes the
corporation tax rate for publicly traded corporations,
including wholly owned subsidiaries, according to a ratio
between:
The greater of the chief operating officer or highest
paid employee's pay for the calendar year before the
current taxable year, over
The median compensation of all employees' employed by
the taxpayer in the United States.
------------------------------------------------------------
| | |
|If the compensation ratio is: |The applicable tax rate is: |
|------------------------------+-----------------------------|
| | |
|Over zero but not over 25 |7% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 25 but not over 50 |7.5% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 50 but not over 100 |8% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 100 but not over 150 |9% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 150 but not over 200 |9.5% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 200 but not over 250 |10% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 250 but not over 300 |11% upon the basis of net |
| |income |
|------------------------------+-----------------------------|
| | |
|Over 300 but not over 400 |12% upon the basis of net |
| |income |
SB 1372 (DeSaulnier) - 4/21/14 -- PageC
|------------------------------+-----------------------------|
| | |
|Over 400 |13% upon the basis of net |
| |income |
------------------------------------------------------------
The bill defines compensation differently for the
executives and for employees. Employee compensation is
calculated according to the Internal Revenue Code's
provisions for Social Security Taxes, and includes almost
any kind of compensation paid by the taxpayer to the
employee, such as wages, benefit contributions, the value
of stock options and deferred compensation. For
executives, it's calculated based on the Summary
Compensation Table the firm reports to the Securities and
Exchange Commission, and includes salary, bonus, grants of
stock options and stock appreciation rights, long-term
incentive plan awards, pension plans, and employment
contracts and related arrangements.
Additionally, for taxpayers required to file a combined
report, the chief operating officer or highest paid
employee can include any person in any firm included on the
report. For firms that reduce employment on a full-time
equivalent basis in the United States by more than 10% over
the previous year, and increase contracted employees or
foreign full-time employees for the same period, the bill
additionally increases the rate from the table above by
50%.
The taxpayer must furnish a detailed compensation report to
the Franchise Tax Board (FTB). FTB may prescribe rules and
regulations to implement the bill that are exempt from the
Administrative Procedures Act. The measure defines several
terms, and prescribes a methodology for measuring full-time
equivalents.
State Revenue Impact
According to the Franchise Tax Board, SB 1372 results in
revenue gains of $100 million in 2014-15, $320 million in
2015-16, and $340 million in 2016-17.
Comments
SB 1372 (DeSaulnier) - 4/21/14 -- PageD
1. Purpose of the bill . According to the author, "SB 1372
provides an incentive to corporations to reduce the
disparity in the amount of money they pay their CEO and the
amount they pay their average worker. SB 1372 creates a
corporate tax table that rewards companies with a
reasonable CEO-to-worker pay ratio with lower taxes and
increases taxes on those companies that are fueling income
inequality by lavishing CEOs with outrageous compensation
packages at the expense of their workers. Up until the
1980s, corporate CEOs were paid, on average, approximately
30 times what their average worker was paid. Since the
1980s the pay of the average CEO has risen, from 30 times
the pay of the average worker to approximately 280 times
the pay of an average worker. Among the S&P 500 companies,
the disparity is even greater; the average S&P 500 CEO is
paid approximately 354 times the average worker. Because
California's corporate income is taxed at a flat rate of
8.84%, it does not adequately incentivize corporations to
address this disparity. Some of these corporations are
paying very little to no taxes, meaning in some cases the
average taxpayer is subsidizing out-of-control CEO
compensation. It is important that we address this
disparity and the growing income inequality in this state.
SB 1372 is a vital first step to reestablish the
middleclass and has the potential to increase employee
morale, increase workplace productivity and reduce employee
turnover."
2. Administrable ? Each year, corporations file more than
750,000 corporation tax returns with FTB. For small
corporations, the return can be reasonably simple, but
larger corporations have returns that can include thousands
of subsidiaries and affiliates around the world, involve
complex unitary group determinations and apportionment
computations, and apply millions in tax credits based on a
variety of circumstances. The compliance burdens for firms
is significant, and FTB must in turn verify that each
corporation has paid the correct amount of tax for that tax
year based on the information in its return. This complex
process requires significant investments of personnel and
information technology, and perhaps an audit. Given the
current compliance burden, and FTB's historically
outstanding performance administering corporation taxes,
the calculations and verifications that each must make
under SB 1372 are blinding: firms will have to accurately
compute the rate based on wages and other forms of
compensation paid for all of its non-contract employees
SB 1372 (DeSaulnier) - 4/21/14 -- PageE
across its unitary group, and FTB will have to make sure
that each taxpayer correctly calculated this ratio, in
addition to its current responsibilities to verify
apportionment formulas, credits, and a myriad other issues.
Firms would also file claims for refund for past taxes
paid if it thinks its calculations regarding the
compensation amounts that derived the rate weren't accurate
at the time it filed the return. It's unclear what
resources will be needed should SB 1372 be enacted, or
whether FTB can hire enough people or divert sufficient
existing resources to ensure that taxpayers are calculating
its new rate accurately. The Committee may wish to
consider whether FTB can administer SB 1372, as well as the
burden it would cause taxpayers.
3. Change behavior ? At its most basic, tax math is easy:
base times rate equals tax. For corporations, recent
research at the federal level indicates that the rate isn't
particularly important when determining tax, instead, firms
have become increasing good at reducing tax by diminishing
its base by sheltering and shifting income abroad, and
applying generous tax credits and other beneficial,
perfectly legal tax benefits.<1> Sophisticated accounting
firms such as PricewaterhouseCoopers deploy specific
strategies for multinational firms to pay as little tax as
possible. California has its own specific reasons for the
decline of its Corporation Tax base, such as apportionment
formula changes (SBx3 15 (Calderon)/ABx3 15 (Krekorian),
2009), research and development and movie production tax
credits, increasingly beneficial treatment for net
operating losses (AB 1618/SB 858, Committee on Budget,
2010) allowing firms to share tax credits within the
unitary group (AB 1452, Committee on Budget, 2008),
resulting in its diminished performance in recent years.
Additionally, only 60% of California Corporations pay much
in tax because they don't show any net income for the year,
and many others are organized in such a way they'll evade
SB 1372's effects (See Comment #5). Given its limited
scope, and the skill taxpayers show minimizing corporation
taxes, will SB 1372's change in rates really result in a
change of behavior? The Committee may wish to consider
whether changing tax rates is the best path for corporation
tax reform.
-------------------------
<1>
"The Sorry State of Corporate Taxes: What Fortune 500
Companies Pay (or Don't Pay) in the USA and What They Pay
Abroad." Citizens for Tax Justice, February 2014.
SB 1372 (DeSaulnier) - 4/21/14 -- PageF
4. Alternative . In the early 1990s, Congress limited a
corporation's ability to deduct executive compensation that
exceeds one million dollars unless the compensation is
pegged to performance, in which case it's completely
deductible. California conforms to this section, which
resulted in more than $30 billion in revenue losses to the
federal government between 2007 and 2010 according to the
Economic Policy Institute. California could instead
decouple from the federal law's allowance for
performance-based compensation, thereby preventing firms
from deducting executive compensation above $1 million,
without SB 1372's other potential complications.
5. Not us . SB 1372 applies solely to publicly traded
C-Corporations, and doesn't include firms that aren't
publicly traded, or are organized as S-Corporations,
Limited Liability Companies, or other pass-through
entities.
6. Discriminatory ? Because the measure would increase the
tax rate on firms employing more people in foreign
jurisdictions, FTB notes that it could raise constitutional
concerns under the Commerce Clause of the United States
Constitution because it could appear to improperly favor
United States activity over foreign commerce.
7. 2/3 vote . SB 1372 would increase a tax on any
taxpayer, so the bill would require a 2/3 vote under
Section 3 of Article XIIIA of the California Constitution.
8. Technicals . FTB and Committee Staff recommend the
following amendments:
The bill uses term "contracted employee" in the
bill and later defines the term "contracted full-time
employee." References to "contracted employee" should
be amended to be consistent throughout the bill.
On page 4, line 2, strike "and" and insert "or
Support and Opposition (04/21/14)
Support : California Labor Federation
Opposition : Air Logistics Corporation; Associated General
Contractors of California; California Apartment
SB 1372 (DeSaulnier) - 4/21/14 -- PageG
Association; California Bankers Association; California
Chamber of Commerce; California Grocers Association;
California Manufacturers and Technology Association;
California Restaurant Association; California Retailers
Association; California Tank Lines, Inc.; Chemical
Transfer Company; Council on State Taxation; National
Federation of Independent Business; Orange County Business
Council; Orange County Taxpayers Association; Silicon
Valley Leadership Group; Superior Tank Wash, Inc.,
TechAmerica; West Coast Leasing; LLC; West Coast Lumber and
Building Material Association.