Bay Area Lawmakers Propose Taxing Profitable Corporations at Higher Rate to Fund Education

Bay Area lawmakers introduced legislation Monday that would increase the tax rate for corporations doing business in the state in order to fund K-12 schools, child care and higher education.

The proposal would raise taxes 2 percent — up to 10.84 from 8.84 percent — on the most profitable companies doing business in California, those with net income exceeding $10 million.

Businesses with the biggest pay gaps between CEOs and average employees would pay even more — up to a rate of 14.84 percent.

Lawmakers estimate the change would affect 0.2 percent of businesses in the state, or about 2,000 companies. And they said it could bring in up to $5 billion a year.

“Regular Californians face the fourth-largest income inequality gap between the super-rich and the average resident,” Skinner said, referring to a ranking of U.S. inequality. “Meanwhile, we struggle to fund our schools, to fund essential services, and many Californians struggle to make ends meet."

Skinner, D-Berkeley, announced Senate Bill 37, known as the Corporate Fair Share for California and Californians bill, in Oakland alongside Assembly members Buffy Wicks, D-Oakland, and Rob Bonta, D-Alameda.

“We are at a breaking point in terms of our educational spending and the wealth inequality that exists in this state,” said Wicks, who co-authored the legislation. “This bill is important to level the playing field; to require our corporate leaders to pay their fair share; to fund the quality public education that I know we can have here in California.”

The lawmakers said the bill would roll back the windfall corporations won through President Trump’s federal tax cut. Based on Congressional Budget Office data, Skinner's staff estimates companies doing business in California are saving between $17 billion and $20 billion a year in federal taxes because of the cuts.

“Our hugely profitable corporations did not need Trump’s massive tax cut windfall. SB 37 will allow California to capture part of that giveaway and redirect funds to state programs that need it most — like public education and social services,” UC Berkeley professor and former U.S. Labor Secretary Robert Reich said in a statement.

The lawmakers also argued the bill would incentivize corporations to reduce income disparities between their highest and lowest-paid employees.

“SB 37 also begins to address California’s widening income inequality by telling big companies: Stop overpaying wealthy CEOs and underpaying your workers,” Reich said.

Chris Thornberg, founding partner of research and consulting firm Beacon Economics, said he sees a lot to like in the bill, but he takes issue with lawmakers’ focus on corporate pay.

He argues the bill’s progressive tax, based on CEO-employee pay discrepancies, is ripe for manipulation. He said companies will likely find clever ways to get around it.

“Trying to make a smarter tax is a good idea,” Thornberg said. “Don’t blow it up by trying to be so clever.”

As for the broader implications for businesses, some are worried. David Wolfe, legislative director of the Howard Jarvis Taxpayers Association, argues the increased taxes will filter down to consumers in the form of higher prices or push corporations out of state.

While moving out of state wouldn't spare businesses from the increased tax rate, Wolfe argues a lower overall tax burden — including payroll, property and sales taxes — might look appealing in the face of a rate bump.

“If you make yourself economically uncompetitive, there’s going to be consequences,” Wolfe said. “People are going to pick up and move.”

Thornberg doesn’t buy it. “California is a relatively expensive place to do business as it is,” he said. “Businesses want to be here. There’s lots of reasons for them to be here. I’d be hard pressed to pretend that this is the straw that’s going to break the camel’s back.”