This text replaces the uniform corporate franchise tax for publicly held corporations with a variable rate keyed to each company’s compensation ratio (the higher the CEO-or-top‑pay to median employee pay, the higher the tax rate), while leaving non‑public corporations subject to the existing net‑income rate and minimum tax. It also forces publicly held corporations to file detailed compensation reports with the Franchise Tax Board (FTB) and empowers the FTB to adopt rules without following the state Administrative Procedure Act.
The bill adds an anti‑offshoring adjustment: if a taxpayer reduces U.S. full‑time employees by more than 10% in a year while increasing contracted or foreign full‑time employees, its applicable tax rate is increased by 50%. Practically, the measure targets pay disparity and employment shifts by creating both a disclosure regime and direct fiscal incentives that raise taxes on firms with large executive pay gaps or significant labor shifts offshore or to contractors.
At a Glance
What It Does
For taxable years beginning on or after January 1, 2026, publicly held corporations pay a net‑income tax at a variable rate determined by their compensation ratio (chief operating officer or highest‑paid employee pay divided by median U.S. employee pay), with rates rising in bands up to a top rate of 13%. The law requires a detailed compensation report with the original tax return and allows the FTB to issue binding implementation guidance exempt from the Administrative Procedure Act.
Who It Affects
Publicly held corporations doing business in California (including those in combined reports) face the new rate schedule and reporting obligations; privately held or otherwise non‑public corporations remain under the existing net‑income rate and minimum tax. Payroll, tax, and HR teams at affected companies, tax preparers, and the FTB will handle most operational effects.
Why It Matters
This creates a narrow but powerful lever to tax firms with large executive pay gaps or those shifting work offshore/into contracting, linking state tax policy directly to compensation structure and employment practices. The combination of detailed disclosure, an aggressive rate schedule, a steep penalty for workforce substitution, and an APA exemption raises both implementation and compliance stakes for public companies.
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What This Bill Actually Does
The statute preserves California’s longstanding corporate tax framework for most corporations but carves out a distinct regime for publicly held corporations beginning in the 2026 tax year. Instead of a single flat percentage, the bill substitutes a schedule of tax rates tied to a company’s compensation ratio — effectively the pay of the chief operating officer or highest‑paid employee divided by the median U.S. employee pay — so that companies with larger top‑to‑median pay gaps pay higher tax rates.
The text places the detailed schedule in the statute and sets a top statutory rate of 13% for the largest ratios.
To calculate the ratio the bill draws on two reporting sources: wages (as defined under federal law) for rank‑and‑file employees and total compensation reported in the SEC Summary Compensation Table for the COO/highest paid executive. For firms included in combined state reports, the calculation aggregates the group as a single taxpayer.
Each affected taxpayer must attach a detailed compensation report to its timely original return, making the ratio and supporting data part of the tax record.The bill also contains an anti‑avoidance provision: if a corporation cuts its U.S. full‑time workforce by more than 10% year‑over‑year while increasing contracted or foreign full‑time employees, the applicable tax rate from the schedule is increased by 50%. The statute defines annual full‑time equivalents, contracted full‑time employees, foreign full‑time employees, and full‑time status, so the penalty is tied to specific measurement rules.
Finally, the Franchise Tax Board is given authority to issue rules and guidance necessary to implement the new provisions, and those rules are expressly excluded from the state’s normal administrative rulemaking procedures under Chapter 3.5 (the APA).
The Five Things You Need to Know
The law applies the new compensation‑ratio tax schedule only to publicly held corporations for taxable years beginning on or after January 1, 2026, while nonpublic corporations remain subject to the existing net‑income rate and statutory minimum tax.
Taxable public companies must file a detailed compensation report with their timely original California return showing median U.S. employee pay and the COO/highest paid employee compensation (using SEC Summary Compensation Table figures for the latter).
If a taxpayer reduces U.S. full‑time employees by more than 10% versus the prior year while increasing contracted or foreign full‑time employees, the statute increases that taxpayer’s applicable rate by 50%.
For combined‑report groups the compensation ratio is calculated treating all members as a single taxpayer, and the statute includes precise definitions for annual full‑time equivalents, contracted employees, and foreign full‑time employees.
The Franchise Tax Board may prescribe implementing rules, guidelines, or procedures and the bill exempts those directives from Chapter 3.5 (the Administrative Procedure Act), meaning FTB guidance becomes the primary vehicle for technical interpretation.
Section-by-Section Breakdown
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Baseline corporate tax framework and historical rates
These subdivisions retain the basic structure: corporations (except banks and financial corporations) pay tax on net income at the statutory rate or the minimum tax under Section 23153, and the text preserves the statute’s historical rate provisions. Practically, this means the new compensation‑ratio regime is layered onto an existing body of law that still references the minimum tax and legacy rate language; tax practitioners must reconcile the new publicly held corporation rules with these baseline provisions when preparing returns.
Variable tax schedule for publicly held corporations
Subdivision (g) replaces the prior single rate for publicly held corporations with a graduated schedule keyed to the compensation ratio, setting higher statutory rates for higher ratios and a maximum statutorily enumerated top rate. The schedule is embedded directly in the statute rather than delegated to regulation, so rates and bands are fixed in law and will govern returns unless the Legislature amends them. Tax preparers must map a firm’s calculated ratio into the statutory bands to determine the applicable rate for the taxable year.
Definitions of compensation and compensation ratio
This clause defines ‘compensation’ differently for rank‑and‑file employees versus the COO/highest paid employee: wages (as defined in IRC §3121(a)) for most employees, and SEC Summary Compensation Table totals for the top executives. The compensation ratio’s numerator is the greater of the COO’s or highest paid employee’s compensation, and the denominator is the median U.S. employee compensation. For combined filers, the ratio is computed on an aggregated basis. These definitions create practical interactions between SEC disclosure, payroll systems, and state tax filings that compliance teams must coordinate.
Mandatory compensation reporting with the original return
The statute requires taxpayers subject to subdivision (g) to file a detailed compensation report with their timely filed original return. That makes compensation data contemporaneous with the tax return (not just disclosed elsewhere) and creates an evidentiary record for FTB review or audits. Preparers will need to assemble median pay calculations, SEC disclosure references, and documentation supporting exclusions or aggregation claims before filing deadlines.
Anti‑offshoring/contracting penalty (50% rate increase)
If U.S. full‑time employee counts decline by more than 10% year‑over‑year while contracted or foreign full‑time employees increase, the taxpayer’s applicable statutory rate is bumped by 50%. The provision specifies how to calculate annual full‑time equivalents and defines contracted and foreign full‑time employees. It is designed to deter labor displacement to contractors or offshore locations by making such shifts costly in tax terms, but it creates sharp compliance and measurement requirements that companies will need to anticipate.
FTB rulemaking authority and APA exemption
The Franchise Tax Board receives express authority to issue rules, guidelines, or procedures necessary to implement subdivision (g), and the bill excludes those directives from Chapter 3.5 (the Administrative Procedure Act). That accelerates the FTB’s ability to issue binding interpretive guidance but reduces opportunities for formal public comment and judicial review of the rulemaking process, concentrating technical interpretation power in the agency.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Median and lower‑paid employees in publicly held firms — the tax creates a fiscal incentive for companies to reduce extreme top‑to‑median pay disparities and may encourage redistribution of compensation or hiring patterns that favor broader pay increases.
- California general fund and state programs — higher effective tax rates on firms with large pay gaps and on firms that offshore labor increase potential revenue, funding state priorities without raising broad‑based taxes.
- Tax and compliance service providers — firms that supply payroll analytics, SEC reconciliation, and tax compliance services will see demand for systems and attestation procedures to calculate and document compensation ratios and FTE counts.
Who Bears the Cost
- Publicly held corporations doing business in California — they face higher marginal tax rates when their compensation ratios are large, plus new reporting and recordkeeping burdens to justify median pay calculations and respond to audits.
- Human resources and payroll departments — these teams must adapt pay data systems to produce median compensation figures on a U.S. employee basis, reconcile SEC disclosures with payroll records, and track annual full‑time‑equivalent measures for compliance.
- FTB and tax administrators — the agency will shoulder complex implementation work to define calculation rules, audit protocols, and the offshoring test, and may face capacity and legal challenges given the APA exemption and technical complexity.
Key Issues
The Core Tension
The bill pits two legitimate goals against each other: the state’s interest in using tax policy to reduce extreme executive pay disparities and discourage offshoring versus the practical need for administrable, predictable tax rules that do not unduly distort business decisions; achieving one tends to increase compliance complexity, measurement disputes, and economic side effects for companies and workers.
Several implementation challenges and trade‑offs are embedded in the text. First, calculating a reliable median compensation across a U.S. employee base is data‑intensive and susceptible to definitional disputes (hours worked, temporary workers, salaried vs hourly classifications, multi‑state employees).
The statute leans on federal wage definitions and SEC tables but leaves significant room for disputed adjustments — which is likely why the FTB is granted broad rulemaking power. That power will shape substantive outcomes but, because the FTB’s rules are exempt from the APA, stakeholders will have limited procedural avenues to shape or litigate interpretive choices until disputes arise in audits or litigation.
Second, the anti‑offshoring penalty and the combined‑report aggregation rule create perverse incentives. Firms can respond by reclassifying employees as contractors, moving payroll outside the U.S. for some functions, or reorganizing corporate groupings to change the denominator in the median calculation; the statute’s definitions try to limit gaming but cannot cover all business models.
The 50% rate increase is blunt: it could catch firms undergoing genuine restructuring or cyclical layoffs, and will likely lead to defensive hiring or contracting decisions that are not socially optimal. In short, the law trades administrative simplicity in the statutory trigger for potentially large economic distortions and litigation risk.
Finally, embedding substantive rate bands in statute rather than leaving them to regulation fixes policy choices in law but also makes correction slower and politicized. Companies and advisors will face uncertainty in the near term about the FTB’s enforcement approach, notice and audit practice, and interaction with federal reporting, all of which matter materially to compliance costs and effective tax burdens.
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