FISCAL NOTE
Date Requested: March 16, 2021
Time Requested: 11:42 AM |
| Agency: |
Tax & Revenue Department, WV State |
|---|
| CBD Number: |
Version: |
Bill Number: |
Resolution Number: |
| 1313 |
Introduced |
HB3216 |
|
|---|
| CBD Subject: |
Corporations |
|---|
|
FUND(S):
General Revenue Fund
Sources of Revenue:
General Fund
Legislation creates:
Increases Revenue From Existing Sources, Decreases Existing Revenue
Fiscal Note Summary
Effect this measure will have on costs and revenues of state government.
The stated purpose of this bill is to establish an Excess Executive Compensation Tax upon corporations when the rate compensation for a corporation’s highest paid employee exceeds the average employee compensation by a defined ratio.
According to our interpretation of this bill, for tax years beginning on or after January 1, 2022, an annual Excess Executive Compensation Tax would be imposed on domestic and foreign corporations engaging in business in West Virginia where the executive pay ratio for the tax year of that corporation exceeds 100:1. This bill defines executive-pay ratio as the ratio of the annual compensation paid to the corporation’s highest paid managerial employee to the median compensation paid to the corporation’s full-time and part-time employees. The proposed tax rate would be 0.15 percent of the corporation’s West Virginia taxable income for a tax year if a corporation has an executive pay ratio greater than 100:1 but less than or equal to 250:1. This tax rate increases to 0.3 percent if the ratio is greater than 250:1 but less than or equal to 500:1 and 0.5 percent if the executive pay ratio exceeds 500:1. In November 2020, 65 percent of the voters of San Francisco, CA approved Proposition L (Overpaid CEO Tax) . This city tax is similar to the proposed bill, except that the executive compensation ratio of 200:1 to 600:1 is applied to the business’s gross receipts or payroll expenses at a tax rate of 0.1 percent to 0.6 percent.
This proposed tax would largely affect corporations engaging in multistate activity based on their level of apportioned income in the State rather the relative level of officer compensation. We do not know how many corporations are affected by the proposed tax and potential collectible tax revenues associated with this proposal. Yield is likely to be low relative to collection costs.
Corporation tax liability under this proposal increases with an increase of economic activity in West Virginia and vice versa based on apportioned income. There would be no tax liability on corporations with net operating losses regardless of executive compensation level. The provisions of the bill would likely have unintended consequents for the State and its economy.
Additional administrative costs incurred by the State Tax Department would be $25,000 in FY2022.
Fiscal Note Detail
| Effect of Proposal |
Fiscal Year |
2021
Increase/Decrease
(use"-") |
2022
Increase/Decrease
(use"-") |
Fiscal Year
(Upon Full
Implementation) |
| 1. Estmated Total Cost |
0 |
25,000 |
0 |
| Personal Services |
0 |
0 |
0 |
| Current Expenses |
0 |
0 |
0 |
| Repairs and Alterations |
0 |
0 |
0 |
| Assets |
0 |
0 |
0 |
| Other |
0 |
25,000 |
0 |
| 2. Estimated Total Revenues |
0 |
0 |
0 |
Explanation of above estimates (including long-range effect):
According to our interpretation of this bill, for tax years beginning on or after January 1, 2022, an annual Excess Executive Compensation Tax would be imposed on domestic and foreign corporations engaging in business in West Virginia where the executive pay ratio for the tax year of that corporation exceeds 100:1. This bill defines executive-pay ratio as the ratio of the annual compensation paid to the corporation’s highest paid managerial employee to the median compensation paid to the corporation’s full-time and part-time employees. The proposed tax rate would be 0.15 percent of the corporation’s West Virginia taxable income for a tax year if a corporation has an executive pay ratio greater than 100:1 but less than or equal to 250:1. This tax rate increases to 0.3 percent if the ratio is greater than 250:1 but less than or equal to 500:1 and 0.5 percent if the executive pay ratio exceeds 500:1. In November 2020, 65 percent of the voters of San Francisco, CA approved Proposition L (Overpaid CEO Tax) . This city tax is similar to the proposed bill, except that the executive compensation ratio of 200:1 to 600:1 is applied to the business’s gross receipts or payroll expenses at a tax rate of 0.1 percent to 0.6 percent.
This proposed tax would largely affect corporations engaging in multistate activity based on their level of apportioned income in the State rather the relative level of officer compensation. We do not know how many corporations are affected by the proposed tax and potential collectible tax revenues associated with this proposal. Yield is likely to be low relative to collection costs.
Corporation tax liability under this proposal increases with an increase of economic activity in West Virginia and vice versa based on apportioned income. There would be no tax liability on corporations with net operating losses regardless of executive compensation level. The provisions of the bill would likely have unintended consequents for the State and its economy.
Additional administrative costs incurred by the State Tax Department would be $25,000 in FY2022.
Memorandum
The stated purpose of this bill is to establish an Excess Executive Compensation Tax upon corporations when the rate compensation for a corporation’s highest paid employee exceeds the average employee compensation by a defined ratio.
This bill would be difficult to administer. While “compensation” is defined, it is defined broadly and may result in administrative challenges. This proposed tax is also imposed without reference to a threshold for either a corporate income or number of employees or both.
Executive compensation will have to be reported by the taxpayers. The ability to cross-check this information may be difficult. Personal income tax returns may be used but may lack sufficient information. As this tax may apply to foreign corporations and executives that are out-of-state, confirmation of information upon which calculations were based may prove difficult.
Person submitting Fiscal Note: Mark Muchow
Email Address: kerri.r.petry@wv.gov