HR5298-119

What This Bill Does

The Tax Excessive CEO Pay Act adds an Internal Revenue Code corporate tax surcharge based on pay ratios. A corporation with a pay ratio greater than 50-to-1 pays more than the ordinary 21 percent corporate rate. The surcharge is 0.5 percentage points for ratios above 50-to-1 and not above 100-to-1, 1 point above 100-to-1 and not above 200-to-1, 2 points above 200-to-1 and not above 300-to-1, 3 points above 300-to-1 and not above 400-to-1, 4 points above 400-to-1 and not above 500-to-1, and 5 points above 500-to-1. The pay ratio uses the SEC pay-ratio concept but measures annualized average compensation over the five-year period ending on the taxable year's last day and uses the highest compensated employee if that person is not the principal executive officer. Large private corporations not otherwise subject to SEC pay-ratio disclosure must calculate and report the ratio if their average annual gross receipts for the prior three-taxable-year period are at least $100 million; smaller private corporations are exempt. The changes apply to taxable years beginning after December 31, 2025, and Treasury must issue anti-avoidance regulations, including rules against manipulating the ratio by changing workforce composition or using contractors instead of employees.

Who Benefits and How

Workers at large corporations benefit if the tax surcharge pressures companies to narrow extreme executive-worker compensation gaps. Labor unions benefit from a tax-code lever they can use in campaigns over executive pay and workforce composition. Federal taxpayers benefit from additional corporate revenue from corporations with pay ratios above 50-to-1. Corporate governance advocates benefit from mandatory pay-ratio calculations for large private corporations as well as public companies.

Who Bears the Burden and How

Corporations with high executive pay ratios pay higher corporate tax rates beginning after 2025. Large private corporations with at least $100 million in average annual receipts must calculate and report pay ratios. Treasury Department tax staff must write anti-avoidance regulations addressing contractor use and workforce composition changes. Corporate tax departments must track five-year compensation averages and apply the highest-compensated-employee rule.

Key Provisions

• Raises corporate tax rates when pay ratios exceed 50-to-1.
• Creates surcharge tiers from 0.5 percentage points to 5 percentage points depending on the pay ratio.
• Requires large private corporations with at least $100 million in average annual receipts to calculate and report pay ratios.
• Applies the surcharge to taxable years beginning after December 31, 2025.
• Directs Treasury anti-avoidance rules for contractor use and workforce-composition changes.