San Francisco's #CEOtax, also called the OE (Overpaid Executive) tax, means that between 0.1% - 0.6% will be tacked on to the annual business tax payment for companies in the city where companies compensate their CEOs at a rate of 100 times more than their average employee. The tax rate starts at 0.1% for a 100:1 ratio, then increases to 0.2% for a 200:1 ratio up to 0.6% for a six-figure pay disparity between executives and employees. The types of compensation that are included are wages, salaries, commissions, bonuses, and property issued or transferred in exchange for performance service, including stock service.
However, the “CEO Tax” has limitations, and will eventually cause harm for the local economy. Jay Cheng of San Francisco’s Chamber of Commerce has said, “this is trying to find an easy, snappy, buzzy solution to a complicated problem. And beating up on big companies is a fun way to do it.” It is not surprising for a highly politically progressive city like San Francisco to institute a tax on CEOs. Unfortunately, the tax is highly flawed because it is basically just a political statement that makes little sense as a way of raising revenue.
Affected companies wanting to decrease the amount they have to pay in business taxes might respond to this tax hike by substantially reducing their return to investment in the San Francisco economy, when we really need to focus on economic recovery during the post-pandemic era. The OE tax is being levied on top of existing taxes that already amounted to about 1.3%. When almost 2% is grabbed from the gross sales of these companies, it will result in approximately a 25% decrease in return capital. The lower rate of return may drive out businesses from San Francisco. If even 1% of businesses relocate from San Francisco, it will mean a significant loss of revenue for the city. Job losses will also create more income-related issues leading to mental health problems.
Another loophole the OE tax fails to take into consideration is that it might not affect companies in the technology industry, since a high number of their employees are highly paid engineers. strategic business decisions to evade this tax will not be solely limited to headquarters relocating. Any company can evade or reduce their tax liability by just moving their lowest-paid staff outside of San Francisco. Businesses might even decide to split into new corporations and place their lowest-paid workers in a new company, which could then be managed by an outsourced management company. The impact of this move would be to raise the original company’s median wage, thus lowering their tax rate.
According to this design, tax rates are being raised instead of deductions or business tax exemptions being limited. Instead of generating taxes based on a fixed level of executive compensation, it connects the tax penalty to the pay of top management relative to rank-and-file workers. The OE tax policy poses a challenge to retailers or other businesses with a high number of entry-level workers, who are not paid a very high wage, while leaving out tech firms with even higher-paid executives. Since salary is directly proportional to experience and value to the company, hiring of entry-level employees or retaining middle-level employees will likely be drastically reduced.
The OE tax is supposed to fund mental health care for all city residents. Since the funds generated will likely be inadequate, it is unclear how the beneficiaries of this public-funded care will be taken care of.
The OE tax was passed back in November 2020 during a pandemic, which was good timing for populist socialist politicians like Matt Haney. The tax is an irrational punishment to innovative risk-taking CEOs, and companies that already provide massive tax revenue for the city. Some of these companies are already leaving the Bay Area, and taxes like this will motivate future entrepreneurs to find other cities to start their business.
