Why Portland’s Tax On CEO Pay Matters

Last week, Portland, Oregon, became the first city in the nation to impose a tax on publicly traded companies that pay their CEOs more than 100 times the median employee pay.

Portland’s City Council passed an ordinance that will have companies pay an additional 10% surtax on top of the city’s current 2.2% adjusted net income tax if the gap exists. Those leaders who make in excess of 250 times more than their staff must pay an additional 25%.

Portland’s ordinance dovetails with a change in the U.S. Securities and Exchange Commission (SEC) disclosure and reporting requirements set to begin in January 2017. Congress approved the Dodd-Frank law in 2010 that requires such information be published, but it took the SEC until 2015 to adopt a rule that would require public companies to disclose the ratio of compensation of the company’s CEO to the median compensation of all its employees.

Before the law, calculating the CEO-to-worker pay ratio was left to researchers, such as those at the Economic Policy Institute, which drew from a variety of data, including from the Federal Reserve. In the last two years, both Glassdoor and PayScale have done their own reports on the CEO-to-staff pay ratio as well as survey workers about how they perceived the gap.

Portland’s Revenue Bureau identified more than 500 publicly traded companies currently doing business in the city including Wells Fargo, Walmart, and General Electric. According to the most recent data from PayScale, Wells Fargo CEO John Stumpf made 130 times more, Walmart’s Douglas McMillon made 209 times more, and GE’s Jeffrey Immelt made 202 times more than the average median wage of employees.

A statement from Portland’s City Council observed that the surtax may generate an estimated $2.5 million to $3.5 million per year, and revenue from the proposal will accrue to the General Fund and help the Portland Housing Bureau meet the city’s commitment to funding homelessness services.

The City Council’s proposal for the surtax included an argument that not only would it add to Portland’s revenue stream, but also that it would support human services by extension. The ultimate goal, according to City Commissioner Steve Novick, was for it to tackle income inequality. “When I first read about the idea of applying a higher tax rate to companies with extreme ratios of CEO pay to typical worker pay, I thought it was a fascinating idea—the closest thing I’d seen to a tax on inequality itself,” Novick said in a statement.

He cited the work of French economist Thomas Piketty, who found “60% to 70% . . . of the top 0.1% of the income hierarchy in 2000-2010 consisted of top managers in large firms.” The average gap between CEO and worker pay was around 70 to 1 in PayScale’s survey. The found a similar ratio that, while still falling below the average in the 2000s, is still far higher than it was in the 1960s through the 1990s.

Critics of the ordinance include Sandra McDonough, president and CEO of the Portland Business Alliance, who told Fortune that the tax will have “virtually no impact” on income inequality. “This tax is yet another signal that Portland is hard on businesses that want to invest here,” she said. “I really think this was more of a media stunt than a real, sincere effort to address income inequality.”

For its part, the City Council admitted that the ordinance itself is “unlikely to cause companies to reconsider their pay structure.” However, they stated:

The SEC’s new rule offers local and state governments, as well as Congress, the opportunity to develop policies to address the growing gap between the very rich and the middle class. If other governments adopt policies based on the SEC’s publicly reported ratio, companies may consider changes. California and Rhode Island have already considered proposals based on the new SEC filing.

Both California and Rhode Island have also led legislation to offer paid parental leave benefits in absence of a federal policy. We’ve since seen that other states and cities have joined their ranks to create a patchwork of similar benefits across the country. Naysayers such as those in the Portland Business Alliance may be right about a potential hit to economic development, but the fact is that for business to be successful, it must also be sustainable.

The recent PayScale study of CEO-to-employee pay gaps revealed that 72% of lower-wage employees approve of their CEO’s compensation, and among those who disapprove, 57% said it negatively affects their view of the company. Unhappy workers are more likely to look for work elsewhere, and the employer may have a tough time making a case to attract new talent to replace them.