Sacramento – The corporate tax policy that causes California to lose billions in tax revenue each year could end as the state struggles to meet federal cuts and solve a growing budget deficit.
proposed legislation, Assembly Bill 1790Would repeal the so-called “water edge” tax break, a filing option that allows multinational corporations to exclude the income of their foreign subsidiaries from state taxation.
Assemblymember Damon Connolly (D-San Rafael), one of the bill’s primary sponsors, told The Times, “The tax bills of the world’s richest, most powerful corporations are at their lowest ever.” “Meanwhile, we are struggling to fund programs that feed children – I think everyone understands that now is the time for a long-term budget solution.”
Republican Senator Roger Niello, vice chairman of the Senate Budget and Fiscal Review Committee, said a bill to repeal the water bill would not get support from GOP lawmakers. He said the legislation would lead to double taxation, meaning the same income would be taxed twice by different countries, and compared taxing corporations’ foreign profits to imposing tariffs.
“California already has a reputation for not being particularly business friendly,” said Niello (R-Fair Oaks). “This will really add to it.”
A spokesperson for Governor Gavin Newsom did not respond to a request for comment about the governor’s views on the proposal. However, Newsom has largely rejected new tax increase proposals.
Legislation to increase taxes requires a two-thirds approval vote rather than a simple majority. Democrats in California have supermajorities in both the Assembly and Senate, meaning the bill could still pass without Republican support, but it would require support from the progressive and liberal wings of the party.
Kayla Kitson, a senior analyst at the California Budget and Policy Center, said the measure has a good chance of winning support among moderate Democrats because of the state’s budgetary crisis.
“The stakes are really high this year,” he said. “As with any tax policy, it’s certainly hard to get people on board beyond the progressive community, but there are a lot of discussions happening behind closed doors given the challenges the state knows it will have to deal with over the next few years.”
When filing taxes, a multinational corporation in the United States can currently choose between two methods. Worldwide reporting takes into account all of the corporation’s global profits or losses, while the water edge option allows the US-based parent company to exclude the income of foreign subsidiaries. This could help corporations that own profitable offshore companies pay lower taxes in the United States.
California is struggling for a solution as the state faces an estimated $18 billion budget deficit and health care shortfalls due to federal cuts. A Republican-backed tax and spending bill signed last year by President Trump shifted federal funding away from safety net programs toward tax cuts and immigration enforcement.
Carl Davis, research director at the Institute on Taxation and Economic Policy, said the idea is gaining momentum across the country, with states like Maryland, Minnesota and New Hampshire even considering repealing it in recent years due to growing awareness of profit shifting — a loophole in the offshore tax that some corporations use to reduce their tax burden by shifting profits made in a high-tax country to a tax haven.
“When people hear that these companies are pretending they’re making their profits in the Cayman or Switzerland and avoiding paying U.S. taxes as a result, they get angry,” he said. “It seems insulting to the many people who are paying the taxes they owe every day.”
During an informational hearing in the Legislature last month, Rowan Isaac, an economist with the non-partisan Legislative Analyst’s Office, said the state does not know the extent to which corporations use profit shifting, making it impossible to determine how much revenue California would gain from eliminating the waterfront tax exemption. But he estimated it would bring “billions in the single digits” to the state each year.
“While there would be revenue gains, the Legislature faces a trade-off between broadening the tax base while managing additional uncertainty,” Isaacs said, explaining that this could increase budget volatility as foreign earnings are more sensitive to global economic conditions.
Issac said the Legislative Analyst’s Office found no strong evidence that companies would flee California if the water border tax exemption were repealed.
Jennifer Barton, director of the Legislative Services Bureau of the California Franchise Tax Board, told legislators that mandating worldwide reporting would not be difficult for the state from an administrative standpoint, only requiring some additional outreach or educational efforts.
Jared Walczak, visiting fellow at the California Tax Foundation, said the waterside option exists for a reason and it would be unfair to mandate reporting worldwide. “The vast majority of activity abroad is real economic activity abroad,” he told MPs. “Companies don’t just exist in the United States; they sell, they manufacture, they operate overseas.”
A last year survey The nonpartisan Pew Research Center revealed that 63% of adult Americans believe larger corporations or businesses should pay more in taxes, while 19% want corporate taxes to be lower and 17% believe corporate tax policy should remain the same.
Tech companies appear to be particularly aggressive about profit shifting. Six US multinational corporations – Apple, Cisco, eBay, Facebook, Google and Microsoft – may have underpaid their US corporate income taxes by $277 billion over different periods from 2009 to 2022. for a report From the Center on budget and policy priorities.
Repealing the water border tax exemption isn’t the only tax-related proposal being considered as the state looks to raise revenue. The Billionaire Tax Act is a controversial proposed state ballot initiative that would impose a one-time, 5% tax on state billionaires to help offset federal cuts. Newsom is among its critics.
Davis believes that no matter the outcome of the bill this year, it will remain a hot topic.
“There’s very good reason to think that this (repeal) is going to happen at some point,” he said. “This is a debate that is certainly not going to go away.”
