It is now commonplace to criticize corporate CEOs within progressive political circles, so it is no surprise that San Francisco, one of the most politically progressive cities in the country, has proposed a tax on CEOs. But just not any CEO, only those with exceptionally high salaries compared with others in the company. Dubbed the “CEO Excessive Salary Tax,” the proposal would tax a company’s gross receipts depending on the difference between its CEO’s pay and the median salary of its workers. The tax revenue would fund 24/7, no-cost substance abuse and mental-health counseling for all city residents.
This tax is extremely flawed, primarily because it is a political statement that makes little sense as a means of raising revenue. There are much more efficient ways to raise revenue, and any program providing mental-health counseling services must be coupled with a reversal of the city’s long-standing tolerance for public drug use and the attendant issues of homelessness and severe public-health risks.
The proposal would impose a 0.1 percent tax on gross receipts of companies with a CEO whose salary is 100 times higher than the median salary. This tax would rise to 0.2 percent for companies with a CEO whose salary is 200 times higher than the median worker salary, and so forth, up to a 0.6 percent tax rate.
This tax could substantially reduce the return to investment for the affected companies, since the CEO tax would be levied on top of existing gross receipt taxes that currently are as much as 1.3 percent. Grabbing nearly 2 percent of gross sales could reduce the return to capital in these businesses from the US average of about 8 percent to 6 percent. In percentage terms, this is roughly a 25 percent decrease on the rate of return to investment.
This substantially lower rate of return may ultimately lead businesses to leave San Francisco. This would not be the first time. Bank of America, Nestlé, and Toyota are among the thousands of businesses that have relocated their US headquarters outside of San Francisco and other California cities to greener economic pastures.
Supervisors believe the tax would bring $100 million annually. While the supervisors do not explain how they made this forecast, it almost certainly is an overestimate, because I doubt that they are accounting for strategic business responses to the tax, such as business relocation. Losing even just one major business from San Francisco could turn this tax into a net revenue loss for the city.
Strategic business decisions to avoid this tax are not limited to headquarters relocation. The design of the tax—penalizing businesses whose CEO salary is high relative to that of the median-paid employee—is a political statement that just invites businesses to avoid this tax while spending time and resources that could have been devoted to production, innovation, and hiring new workers.
For example, the company can avoid or reduce the tax liability by relocating its lowest-paid employees outside San Francisco, outsourcing the lowest-paid jobs, or creating a new company and placing their lowest-paid workers in the new business, which would be managed by an outsourced management company. All of these approaches would raise the company median wage, which in turn could lower the tax rate. An effective tax is one that changes economic behavior very little, and this an important reason why this new tax proposal is so poorly designed.
The tax revenue would fund a proposal called “Mental Health SF,” which would provide free, 24/7 counseling to any city resident with mental-health issues. This is also problematic for several reasons. One is that supervisors have not confronted the difficulty in assessing whether a user of the service is indeed a city resident, because many with substance-abuse problems and mental-health conditions are homeless, with no verifiable address. This means that virtually anyone could use the service simply by stating that they live on the streets of San Francisco.
The problem that everyone is eligible for health services is compounded by the decision that the services will be offered at no monetary cost to the user. Providing medical services at no monetary cost means that the allocation of the services will be rationed by waiting. This means that those requesting help may be forced to wait weeks or even months for help. And there appears to be no system in place that would prioritize those with the most severe problems.
Both the tax proposal and the mental-health initiative require voter approval, with the CEO pay tax requiring a two-thirds majority to pass because the revenue is for a targeted purpose. This means that the mental-health initiative could pass, but without its funding source. What does the city do if this happens? Who knows? This is yet another problem with this package deal.
But the city is overlooking two critical issues. One is that mental-health issues and drug abuse tend to be fundamentally intertwined in the city. Another is that San Francisco’s long-standing tacit acceptance of public IV drug use has substantially contributed to its enormous homeless problem and awful public-health risks on city streets.
It is commonplace within the city to see homeless drug addicts inject themselves. And not in back allies. This behavior routinely occurs at the Civic Center and other public transit stops and transfer stations, and on sidewalks on the busiest city streets. There are 470 IV drug users per square mile in San Francisco. Nearly 2 million used hypodermic needles line city streets per year, along with human waste. Infectious-disease specialists rank poor African cities as being much cleaner than the streets of San Francisco.
San Francisco has a public drug-abuse epidemic, which in turn fosters mental-health problems. The scope of the city’s current problem simply does not happen unless public policy permits this to happen. And city voters have only themselves to blame. If voters want these problems to be solved, then they can vote for politicians who will choose to solve them.
Instead, San Francisco voters support politicians who prioritize punishing leading companies over solving what has become an untenable public-policy failure. One of the most beautiful and productive cities in the country is now a showcase of human tragedy that is on display for everyone, including children, to see day after day and year after year.