The Portland City Council, with a 3–1 vote at its December 7, 2016 meeting, approved a new surtax on its business license tax for publicly traded companies subject to U.S. Securities and Exchange Commission (SEC) disclosure and reporting requirements. The surtax is effective for tax years beginning on or after January 1, 2017 and is imposed on companies with a high CEO to median employee compensation ratio.

The Portland Business License Tax

All corporations doing business in Portland are subject to the 2.2 percent business license tax. There is also a separate Multnomah County business income tax of 1.45 percent, but the surtax applies only to the City of Portland’s business license tax (not Multnomah County’s business income tax), even though both are reported on the same form.

The “CEO Tax”

In 2015, the SEC adopted a rule requiring public companies to disclose their pay ratio reflecting the total compensation of their CEOs as compared to the median compensation of their employees. A company is subject to the surtax if its pay ratio is at least 100:1 as reported on SEC disclosures. For companies with a pay ratio between 100:1 and 250:1, the surtax is equal to 10 percent of a company’s business license tax base liability. The surtax increases to 25 percent if the pay ratio is 250:1 or greater.

Notably, this tax applies regardless of where a corporation is headquartered, and regardless of whether the CEO ever travels to Portland. The surtax applies if the corporation is subject to the business license tax and its pay ratio exceeds the above thresholds. As with other similar income based taxes, taxpayers with income from business activities inside and outside the City of Portland can correspondingly apportion their income in and out of Portland.

We expect other home-rule cities around the country will be closely monitoring this tax (and potential challenges) in determining whether to follow suit.