BY ADAM ANDERSONThis article originally appeared in the January 3, 2017, edition of the Business Tribune.
A new Portland City Ordinance passed on December 7, 2016, has thrust the City of Portland into the forefront of the national discussion over CEO compensation and its effect on increasing wealth inequality. The law, sponsored by outgoing city commissioner Steve Novick, is the country’s first to essentially impose a fine upon businesses that pay their CEO and other executives at rates the new law deems excessive. While the City’s own impact study of the Ordinance admits that “the ordinance is, on its own, unlikely to cause companies to reconsider their pay structures,” the City Council hopes that the Ordinance is only the first such law of many nationwide that will ultimately cause a sea change in what it sees as unreasonably excessive CEO pay.
Effective as of January 1, 2017, the Ordinance is an amendment to the Portland Business License Tax (PCC 7.02.005, et seq.), a tax with which Portland business owners should already be well acquainted. With few exceptions, the License Tax generally imposes a 2.2 percent tax on net income generated from business activity conducted within the City. Since 1976, the License Tax has been imposed in lieu of fees for a business license itself. The License Tax, along with the separately imposed Multnomah County Business Income Tax, must be remitted on a combined city/county return due within 3 ½ months from the end of the business’s taxable year.
In addition to the generally imposed 2.2 percent tax, the new Ordinance now also imposes an additional 10 percent surtax on publically traded companies whose ratio of CEO pay to median employee pay is or exceeds 100-to-1. For example, if the usual License Tax liability of such a company were $100,000, the new surtax would increase the liability to $110,000. The surtax increases to 25 percent if the pay ratio is or exceeds 250-to-1. As of January 1, 2017, such pay ratios are required to be disclosed annually to the federal Securities and Exchange Commission (SEC) pursuant to Dodd-Frank reforms, and the application of the Portland surtax is tied to the new SEC disclosure rules.
The Ordinance recites findings of the City Council that, among other things, the increasing accumulation of wealth among the top 1 percent of Americans, and disparate rates of increase in pay among CEOs versus rank-and-file employees, are “bad for the economy and bad for democracy.” The Ordinance recites a direct link between rising income inequality and “Portland’s housing crisis.” The City’s impact study estimates that the surtax will raise an additional $2.5 to $3.5 million in revenue annually for the City’s General Fund from an estimated 500 affected companies doing business in Portland. The additional revenue will be earmarked to address the ongoing funding gap for the Joint Office of Homeless Services.
The new law has attracted national attention in such publications as the New York Times, Forbes, and Bloomberg, and the reaction is predictably mixed. While some like the Huffington Post praise the City for being the first to tackle “outrageous” CEO pay, others like Forbes accuses the Ordinance as “tak[ing] empty political symbolism to new heights.” Whatever its merits and ultimate effect, the Ordinance is yet another example—like paid sick leave and recent minimum wage increases—of Portland and Oregon’s continuing commitment to progressive labor policies. If your business is considering or is already doing business in the City of Portland, effective counsel is crucial to ensuring compliance with various local tax and employment law requirements. Let us know how we can be of service to you.