The Flight of the Tax Base

While a seemingly innocuous law recently proposed in San Francisco to target CEO compensation may look harmless, the consequences of such a policy pose a grave threat to the growing economies of these emerging cities.

The current policy initiatives to deprive CEOs of their higher compensation is veiling a more ominous repercussion: the flight of companies out of the cities where these policies are enacted. | Graphic by Emma Liu ’22/Staff

San Francisco voters have approved a new tax that will target businesses with the most disproportionately paid chief executive officers. Wealthy companies whose CEO is paid 100 times more than their median worker will have to pay a higher gross receipts tax. This affects the vast majority of companies, because, on average, a company’s CEO makes 300 times more money than the median company employee. While the law was supposedly justified on the grounds that CEOs are vastly overpaid–as defined by third party decision makers bearing no stake in the companies–most CEOs receive their high salaries due to the risk that they bear. The decisions made by the CEOs can cause the company to miss expectations of Wall Street and lose shareholders’ money; employees, on the other hand, can make a mistake with a lesser effect on the company simply by nature of being a minor part in the production process.

Every company that has its highest paid employee making 200 times more than the median worker will have to pay an additional 0.2% tax. For companies whose CEO (or other high paid executive) makes 300 more than the median worker, the charge jumps to 0.3%. The rate further increases as the difference grows. San Francisco has repeatedly ranked first in the country in income disparity and the new measure was designed to address this problem. Not too far away from San Francisco, Portland has attempted similar tactics. In 2018, it became the first city in the United States to begin taxing some of its companies based on a CEO to worker pay ratio. Portland’s tax only applies to publicly held companies, but San Francisco was able to target both private and public companies. Many companies will either decrease their CEO salary or increase their employee salary. While this may seem like a way to cure the salary disparities, many unintended consequences soon follow that potentially offset any gains. A study that was taken when the law was being proposed found that about 8.2% of Silicon Valley based tech founders, or 1,240 startups, intend to move their companies to another city in the next twelve months—a major problem for the city, employees, and tax revenues. Many employees will lose their jobs, defeating the purpose of the tax. Furthermore, these employees may have difficulty following the fleeing companies, lacking funds to move to a new city. In 2007, Newton, Iowa faced its own struggle to reshape itself when its major employer Maytag, a job provider for over a century, decided to relocate it. The city lost a total of 4,000 jobs, which was twenty percent of its overall population.  While this tax plan has already been approved by the San Francisco voters, it is one that will have numerous unintended consequences for the city. This is coming during a time when many companies, including big names such as Oracle, HPE, and Tesla, are fleeing the state for tax havens like Texas.