When Portland’s 'Weird' Stops Being Harmless

Since the 2000s, Portland’s “weirdness” has been a cultural point of pride. The slogan went up on the side of a record store and it signified an embrace of alternative cultures, food carts, more lanes for bikes than cars, a unicyclist in a Darth Vader mask playing flaming bagpipes, and a television show that could gently mock the culture because everyone, including the city, was in on the joke. Weird was a point of pride because it was harmless.

Six years ago, I co-authored an article in Tax Notes State with my colleague and friend Nikki Dobay about the city’s off-kilter identity metastasizing into its tax system. At the time, that was an observation about a handful of quirky, yet problematic, tax provisions. It has since become a trajectory — one that, at least in part, explains the economic struggles facing the city and region — and it came from a clear starting point.

In December 2016, the Portland City Council made the city the first jurisdiction in the country to tax a publicly traded company based on the difference between its compensation for chief executives and median workers as reported to the Securities and Exchange Commission. The tax adds 10 percent to a company’s income tax liability if its reported pay ratio reaches 100-to-1 and 25 percent at 250-to-1. At the time, the ordinance’s sponsor applauded its passage as the closest “to a tax on inequality itself.”

While the city’s surtax is controversial and legally dubious, it survived by flying largely under the radar. It only generates a few million dollars per year, less than a rounding error in the city’s budget, and many companies view it as juice that isn’t worth the squeeze of costly litigation. Now, however, a proposal within council chambers seeks to supercharge the surtax, setting its rates to double, triple, and even quintuple a company’s tax liability based on the pay ratio. Dubbed the “Fair Share Tax,” the proposal from Councilors Mitch Green and Angelita Morillo would expand the surtax to pay ratios as low as 50-to-1 and scale the rate up to 500 percent for ratios above 500-to-1.

Portland’s existing surtax already stands on shaky legal ground and the latest proposal would multiply the stakes of every infirmity. First and foremost, the City Council lacks the charter authority necessary to impose a tax without seeking approval from the voters. In the mid-2010s, the City Council sought to increase revenues by enacting an ordinance expanding its lodging tax to apply to online vacation rental booking agents. In City of Portland v. HomeAway.com, Inc., the U.S. District Court for the District of Oregon found the City lacked a grant of inherent taxing authority, unlike many other jurisdictions, requiring the City to seek voter approval before creating, expanding, or otherwise modifying a tax. The decision underscores that in Portland, the power to tax runs from the voters to the Council, not the other way around. The original surtax was enacted by ordinance in 2016 on a 3–1 vote and never went to the ballot. The Council cannot cure that defect by ordinance, they can only compound it.

The surtax also runs the risk of being facially discriminatory under the U.S. and Oregon constitutions. Targeting a tax against a narrow subset of individuals or companies deemed politically undesirable could be found to violate the U.S. Equal Protection and Oregon Uniformity clauses. Courts generally give taxing bodies wide latitude to draw lines, to be sure, but that latitude is not boundless. Portland’s surtax only applies to publicly traded companies filing SEC pay ratio disclosures, meaning a large privately held firm with an identical Portland footprint and an identical pay gap owes nothing, while its publicly traded competitor is capriciously singled out.

And finally, there is the question of what, exactly, Portland is taxing. As a constitutional principle, a taxing body may impose a charge on activity within its borders. The Portland surtax reaches well beyond any activity even loosely connected to the city. The SEC pay ratio disclosures are calculated against a company’s entire global workforce. Portland’s reliance on this metric as the basis for its tax means a company’s liability is determined by activities occurring primarily outside city limits, perhaps not even in the same hemisphere.  

Consider a company, let’s call it Cascade Manufacturing Logistics, with 200 employees within city limits, all paid comfortably above the city’s median wage, and $20 million in net income apportioned to the city. In year one, it reports a pay ratio of 45-to-1 and owes no surtax. In year two, it acquires a contractor manufacturer with 15,000 employees making local minimum wage in Southeast Asia. Its Portland sales, Portland payroll, Portland property, and Portland profits are identical to the previous year. Its reported ratio, however, now is 550-to-1 and its Portland business license tax has gone from $520,000 to roughly $3.12 million. Not one dollar of that increase corresponds to anything that happened within city limits.

The U.S. Supreme Court has long relied on a four-part test for determining whether a state or local tax satisfies the Commerce Clause. Under that test, the taxed activity must have a sufficient connection to the jurisdiction, it must be fairly apportioned, it must not treat out-of-state activities worse than in-state activities, and it must reflect services the jurisdiction provides. Perhaps Portland could satisfy the first prong — companies only pay the tax if they have activities triggering a filing requirement — but the second, third, and fourth prongs are another matter.

By its definitions, the surtax penalizes a company for activities occurring elsewhere. Very few, if any, publicly traded companies engage exclusively in locally contained activities. Using the previous theoretical example, where a company acquired a business elsewhere and saw its tax burden quintupled, the increase is disassociated from any local reality. Thus, it is difficult to imagine a service the city provides that became six times more valuable the day a company bought a factory in Vietnam. In reality, the CEO pay ratio rules were created to inform shareholders of company spending decisions; they certainly were never envisioned as an input for computing a tax.

Setting aside the constitutional concerns, there is a far more practical problem with relying on an arbitrary shareholder disclosure rule as the basis for a local tax — what if it disappears? Last month, the SEC announced it was considering a proposal to scale back its CEO pay ratio disclosure rules, suggesting efforts to make it a more “rationalized” process. It makes no sense for Portland, or any jurisdiction for that matter, to predicate the rules underpinning a tax to rely on a federal securities bureaucrat sitting in an office 2,500 miles away.

Populism makes for powerful campaign messaging, but a tax that fits on a bumper sticker is almost never a tax that works. The genuine levers of our tax system are tedious by nature to make sure they are economically rooted and legally sound. Portland’s original surtax misses the mark on both of those tenets of thoughtful policymaking and the proposal in front of the City Council today multiplies that risk, turning an eccentric gimmick into a legal time bomb for the city’s general fund.

Weird was fine when it was harmless, but the joke stops being funny when it undermines the tax code.