San Francisco’s ‘CEO tax’ is bad economics, but threatens to spread


San Francisco voters have told CEOs and their businesses to take a long walk off a short pier into the bay. Not in those exact words but in their own way, by overwhelmingly approving Proposition L.

Under the Overpaid Executive Tax, passed by a 65-35 ratio, the city will impose “an additional tax permanently on some businesses in San Francisco when their highest-paid managerial employee earns more than 100 times the median compensation paid to their employees in San Francisco.”

The tax rates will be between 0.1% and 0.6% of gross receipts or between 0.4% and 2.4% of payroll expenses, depending on how much more a company’s CEO earns compared to median compensation. If it’s 200 times more, the rate moves to 0.2%. At 300 times more, it’s 0.3%, and so on until the cap of 0.6% is reached.

Even the San Francisco Chronicle’s editorial board noted the proposition’s wobbly foundation, calling it a “simple-minded measure” and a “zany dose of populism.”

“The levy (is) bound to produce lawyerly end runs,” The Chronicle said in its October ballot recommendations editorial and is “unlikely to do anything to raise rank-and-file wages. It’s yet another anti-business jab bound to dissuade firms from staying or moving here.”

Collections from Prop. L will be primarily dedicated to health services, but the city won’t benefit from a wave of revenue from the measure. It’s expected to generate between $60 million and $140 million in new taxes each year, a piddling sum in a city that will burn through $13.6 billion of other people’s money in the current fiscal year.

The forecast here is that the revenues won’t even reach the lower estimate. Future gross receipts tax revenues from businesses are also likely to fall, because rather than pay yet another tax, some companies will choose to abandon San Francisco.

So what’s the point? Why dream up a tax that applies only to companies with “overpaid” executives? Pepperdine University economics professor Gary Galles suggests “in part” that “Prop. L was preening to get the votes of the inequality warriors who inhabit the Bay Area.” Public policy shouldn’t be made to impress a constituency or peer group, but that’s where we are, and where we have been for some time, in California.

The broad message of Prop. L is that capitalism is inherently unfair, creates wealth and income gaps, and must be tamed by government action. This ignores that executive pay is principally driven by a company’s value, not some manifestation of greed, and does not come at a cost to the business. CEOs are not taking money from workers’ pockets, but being compensated for their productivity, which is measured by a firm’s success.

Also left out of CEO vs. median pay calculations: “Median wages are biased downward by the inclusion of part-time workers,” Galles reminds us, which makes the gaps look wider.

“When you have two variables with no inherent causal relationship, and the numerator is biased strongly upward and the denominator is biased downward, it is nonsensical,” he said.

Activists disregard, as well, the differences that exist between labor markets, and the dissimilarities among business sectors (median wages in the tech and restaurant industries, for example, are not comparable).

To appreciate just how rancid Prop. L is, look no further than comments made by San Francisco Supervisor Matt Haney, the measure’s sponsor. Earlier this year he said, “corporations can easily avoid the tax by simply paying their executives less or by raising their employees’ wages.”

It’s not exactly godfatherly “nice business you got here, it would be a shame if something happened to it” advice. But if Haney’s line sounds extortionate, there’s a good reason for it. How long can a government maintain the façade of legitimacy when it tells businesses they will be punished if they don’t yield to a political agenda?

While San Francisco is the first city to enact an executive tax, Sacramento might not be far behind with similar legislation to cover the state. SB37, which would have increased the tax rate on corporations where the gap between CEO pay and the median salary for employees is judged to be too wide, never got beyond a committee vote this year. But don’t expect it to end there. The Legislature is filled with lawmakers willing to make political points no matter how much harm they do to the state’s already sick business climate.

Kerry Jackson is a fellow with the Center for California Reform at the Pacific Research Institute, a nonpartisan think tank based in San Francisco.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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