In an effort to combat income inequality, Portland, Oregon, on Thursday became the first jurisdiction to adopt a tax penalty on companies with excessive CEO-worker pay gaps.
Under the new law, companies doing enough business in Portland to pay the city’s business fee will be taxed an additional 10 percent if their CEO makes 100 times what median workers earn and an additional 25 percent if they make 250 times more.
“This is meant to be a signal that these kinds of ridiculous [pay] ratios are unacceptable,” Portland’s city commissioner Steve Novick told The Huffington Post. “You do not do better as a company because you decide to pay outrages salaries to your CEOs.”
The law will go into effect next year, and Novick said the tax could generate up to $3.5 million in annual revenue for the city.
Sarah Anderson, co-editor of Inequality.org at the Institute of Policy Studies, believes the legislation could “spread like wildfire” to other cities across the nation.
“People are now even more skeptical that anything will happen at the federal level to reduce inequality,” Anderson told HuffPost on Thursday.
She said the threat of “draconian cuts to the social safety net” during a Donald Trump presidency could push leadership from other cities to explore similar innovative sources of revenue.
Corporations can exist without paying their CEOs hundreds of times what they pay their typical workers. Steve Novick, City Commissioner of Portland
More than 500 companies will be affected by the new rule, including Walmart, Honeywell, Goldman Sachs, Wells Fargo and General Electric, according to a statement from IPS.
Anderson said companies affected by this law will have three different options for responding to the tax. They can either narrow the gap by paying their lowest paid workers more, pay their highest paid workers less or do nothing and pay the penalty tax.
“Whichever way they respond, this is going to be good for reducing income inequality,” she told HuffPost.
This progressive law is made possible under Dodd-Frank legislation by a Securities and Exchanges Commission rule that will require publicly traded companies to disclose the pay gap between CEOs and average workers starting next year.
Though Trump has vowed to dismantle parts of Dodd-Frank legislation, Novick isn’t too concerned.
“Donald Trump himself has railed against outrageous CEO pay,” Novick told HuffPost. “I think this would be a particularly embarrassing part for them to repeal.”
Still, an op-ed by the Wall Street Journal editorial board last month warned the legislation could encourage businesses to abandon Portland, but Anderson “can’t imagine” that would happen.
“If they stopped operating here, that would be absurd,” Novick told HuffPost. “Corporations can exist without paying theirs CEOs hundreds of times what they pay their typical workers.”