California: Proposed corporate tax increases based on CEO compensation

California Senate Bill 37, if enacted, would increase tax rates for corporations and financial institutions based on the company’s “compensation ratio,” as defined. Currently, general corporations pay corporate income tax at a rate of 8.84 percent; a 10.84 percent tax is imposed on financial institutions. Under the bill, effective for taxable years beginning on or after January 1, 2020, corporations with net income of $10 million or more would be subject to an increased rate ranging from 10.84 percent to 14.84 percent. Financial institutions with gross income of $10 million or more would be subject to increased rates ranging from 12.84 percent to 16.84 percent. The tax increase would be based on the corporation’s compensation ratio, which is determined by taking the greater of the compensation of the CEO, COO, or highest paid employee divided by the median compensation of all employees of the corporation. In other words, the greater the compensation ratio (i.e., the disparity between the highest paid individual and the median worker), the higher the rate. Note that for combined reporting filers, the compensation ratio would be determined as if the taxpayers were a single taxpayer. The bill would also mandate that the new rates increase by a factor of 1.5 for those taxpayers that have greater than a 10 percent decrease in full-time employees in the United States as compared to the previous year and have an increase in domestic contracted employees or an increase in foreign workers in that year. Lastly, the bill would temporarily make the tax increases inoperative in any tax year in which the federal corporate tax rate is 35 percent or more. Because this bill would increase taxes, it must be approved by a 2/3 vote in each house of the California legislature. For more information on Senate Bill 37, please contact Gina Rodriquez at 916-551-3132.