"San Francisco is a city of startling events. Happy is the man whose destiny it is to gather them up and record them in a daily [blog]!"*
Tomorrow, voters in San Francisco will vote on a measure ("Measure L") that would impose an additional gross receipts or an administrative office tax on a business with a greater than 100 to 1 ratio of the compensation of the "highest-paid managerial employee" to the median compensation paid to the business employees based in the city. The "According to the City Controller:
"For businesses other than an administrative office, the tax rates would be a percentage of gross receipts attributable to the City and, depending on the executive pay ratio, would range from 0.1% to 0.6%. For businesses engaged in business as an administrative office, the tax rates would be a percentage payroll expense attributable to the City and, depending on its executive pay ratio, would range from 0.4% to 2.4%."
This tax would not be limited publicly traded companies that must disclose the executive pay ratio pursuant to Item 402(u) of Regulation S-K. Nor is the ratio calculated in the same way. Item 402(u), for example, refers to the median of the annual total compensation of all employees (except the Principal Executive Officer) while the proposed tax ordinance refers to median compensation paid to the business employees based in San Francisco.
The measure's proponents argue that "[c]orporations can avoid the tax by simply paying their executives less or by raising their employees' wages." However, corporations could could also avoid the tax by moving out of the city entirely. Even those corporations that choose to remain in the city could reduce or even eliminate the tax by terminating low-paid employees based in the city.
Although Measure L is aimed at overpaid executives, it is unclear why 100:1 is the "right" number for triggering the additional tax. Some businesses may have a much smaller executive pay ratio when calculated pursuant to Item 402(u) (i.e., the ratio to all employees other than the PEO) but exceed the San Francisco threshold because they have a very small number of employees based in that city. Because this would be a "gross receipts" tax, businesses that are losing money would nevertheless be subject to paying the tax.
* Samuel Clemens (aka Mark Twain), letter to the Territorial Enterprise (Dec. 23, 1865).