2018 -- S 2058

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LC003377

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     STATE OF RHODE ISLAND

IN GENERAL ASSEMBLY

JANUARY SESSION, A.D. 2018

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A N   A C T

RELATING TO TAXATION

     

     Introduced By: Senators Calkin, Quezada, Satchell, Euer, and Goldin

     Date Introduced: January 18, 2018

     Referred To: Senate Finance

     It is enacted by the General Assembly as follows:

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     SECTION 1. Chapter 44-11 of the General Laws entitled "Business Corporation Tax" is

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hereby amended by adding thereto the following section:

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     44-11-2.3. Pay ratio surtax.

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     (a) Declaration of purpose and findings.

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     (1) According to economist Thomas Piketty in his book "Capital in the Twenty-First

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Century", income inequality in the United States has exploded during the past four (4) decades. In

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the 1970s, the top one percent (1%) collected less than ten percent (10%) of total income in

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America; by 2010, the disparity had grown even larger, and the top one percent (1%) had twenty

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percent (20%) of total income. Much of the gain of the top one percent (1%) has actually been the

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gain of the top one-tenth percent (0.1%). Between the 1970s and 2010, the share of income held

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by the top one-tenth percent (0.1%) went from two percent (2%) to between seven percent (7%)

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and eight percent (8%). Wealth inequality is also growing as wealth concentrates among the

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richest one-tenth percent (0.1%) of Americans; even a conservative analysis presented in a note

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by the Board of Governors of the Federal Reserve System shows that in 1992 the top one-tenth

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percent (0.1%) had eleven percent (11%) of the wealth in the United States, compared to fourteen

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percent (14%) by 2013.

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     (2) The explosion of chief executive officer pay is a major contributor to growing income

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inequality. According to Piketty, the increase in income inequality in the United States after 1980,

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"was largely the result of an unprecedented increase in wage inequality and in particular the

 

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emergence of extremely high remunerations at the summit of the wage hierarchy, particularly

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among managers of large firms." Piketty's research shows that sixty percent (60%) to seventy

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percent (70%) of people in the top one-tenth percent (0.1%) of income in the United States are

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these very highly paid executives.

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     (3) The Center on Budget and Policy Priorities reports that between 1979 and 2007,

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average after tax income for the top one percent (1%) of income earners rose by three hundred

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fourteen percent (314%), while average after tax income for the middle sixty percent (60%) rose

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by only forty-two percent (42%).

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     (4) Average worker compensation has grown just ten and three-tenths percent (10.3%)

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since 1978, while compensation of chief executive officers has increased about nine hundred

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forty-one percent (941%). Data from the Economic Policy Institute show that chief executive

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officers in the nation's largest corporations made an average of fifteen million five hundred

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thousand dollars ($15,500,000) in compensation in 2015, or two hundred seventy-six (276) times

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the annual average pay of the typical worker.

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     (5) A 2016 report by the Economic Policy Institute found that, over the last three (3)

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decades, chief executive officer compensation nationally has grown faster than other highly paid

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workers and is growing faster than corporate profits, the pay of the top one-tenth percent (0.1%)

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of all earners, and stock market growth.

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     (6) In 2015, the U.S. Securities and Exchange Commission adopted a rule requiring

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public corporations to disclose the ratio of the compensation of its chief executive officer to the

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median compensation of its employees. The new disclosure will help shareholders better evaluate

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chief executive officer compensation based on performance, and it offers local and state

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policymakers a tool for penalizing or rewarding corporations based on its ratio of chief executive

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officer to median worker pay, in order to develop policies to address the growing income

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inequality and gap between the very rich and the middle class. Publicly traded corporations are

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required to report the pay ratio for fiscal years that begin on or after January 1, 2017.

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     (7) Research indicates that corporations with high chief executive officer-worker pay

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ratios have lower employee morale and lower shareholder returns compared to corporations with

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lower ratios. For example, the job site Glassdoor analyzed one million two hundred thousand

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(1,200,000) chief executive officer ratings from current and former employees, finding that

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higher chief executive officer compensation is statistically linked with lower approval ratings for

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those executives. And, a review of pay ratios and long-term shareholder returns by CtW

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Investment Group found that corporations with high pay ratios perform worse than corporations

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with lower ratios over the next five (5) years.

 

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     (8) The spectacular concentration of income and wealth among the top one percent (1%)

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and one-tenth percent (0.1%) is bad for the economy and bad for democracy. If other jurisdictions

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follow Rhode Island's lead in enacting policies based on the U.S. Securities and Exchange

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Commission disclosures, shareholders may realize that extreme chief executive officer to median

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worker pay ratios reduce their profits and, with this result in mind, make changes to their pay

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structure.

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     (b) Pay ratio surtax shall be applicable to publicly traded corporations subject to U.S.

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Securities and Exchange Commission pay ratio reporting requirements. The following surtax is

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imposed in addition to the tax established in §44-11-2:

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     (1) For tax years beginning on or after January 1, 2018, a surtax of ten percent (10%) on

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the amount of the tax computed under §44-11-2 is imposed if a corporation subject to this section

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reports a pay ratio of at least one hundred to one (100:1) but less than two hundred fifty to one

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(250:1) on U.S. Securities and Exchange Commission disclosures.

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     (2) For tax years beginning on or after January 1. 2018, a surtax of twenty-five percent

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(25%) on the amount of the tax computed under §44-11-2 is imposed if a corporation subject to

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this section reports a pay ratio of two hundred fifty to one (250:1) or greater on U.S. Securities

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and Exchange Commission disclosures.

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     (3) The surtax shall be added to the amount of the tax computed under §44-11-2 in

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computing the total tax due by the corporation for the taxable year or years under this chapter.

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The estimated tax provisions of chapter 26 of title 44 shall apply to the surtax.

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     SECTION 2. This act shall take effect upon passage.

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EXPLANATION

BY THE LEGISLATIVE COUNCIL

OF

A N   A C T

RELATING TO TAXATION

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     This act would establish a surtax on the business corporation tax for publicly traded

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corporations subject to U.S. Securities and Exchange Commission disclosure and reporting

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requirements, if a subject corporation reports that the ratio of compensation of its chief executive

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officer to median worker is equal to or greater than one hundred to 1 (100:1).

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     This act would take effect upon passage.

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