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California Proposes To Base Tax Rate On Compensation Ratio

The California legislature may soon be considering a bill that would revise the tax rates for publicly held corporations based on their compensation ratios.  As introduced by Senator Nancy Skinner, SB 1398 would establish the following rates beginning next year:

If the compensation ratio is: The applicable tax rate is:
Over zero but not over 50 8.84% upon the basis of net income
Over 50 but not over 100 10% upon the basis of net income
Over 100 but not over 200 11% upon the basis of net income
Over 200 but not over 300 12% upon the basis of net income
Over 300 13% upon the basis of net income

The bill defines "publicly held corporation" by reference to Section 162(m)(2) of the Internal Revenue Code.  Although the bill refers to Item 402 of Regulation S-K, it does not appear that the definition of "compensation ratio" is necessarily the same as the ratio required to be disclosed pursuant to Item 402(u).  Under the bill, the compensation ratio means a ratio of the amount equal to the greater of the compensation of the chief operating officer or the highest paid employee of the taxpayer for the calendar year preceding the beginning of the taxable year to the amount equal to the median compensation of all employees employed by the taxpayer, including all contracted employees under contract with the taxpayer, in the United States for the calendar year preceding the beginning of the taxable year. 

The bill has been referred to the Senate Governance and Finance Committee, but has not yet been set for hearing.  It requires a 2/3 vote of the membership of each house for passage.

 

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