SACRAMENTO\u00a0\u2014\u00a0A corporate tax policy that costs California billions in lost tax revenue each year could be coming to an end as the state struggles to backfill federal cuts and resolve a looming budget deficit.<\/p>\n
The proposed legislation, Assembly Bill 1790<\/a>, would repeal the so-called \u201cwater\u2019s edge\u201d tax break, a filing option that allows multinational corporations to exclude the income of their foreign subsidiaries from state taxation. <\/p>\n \u201cThe tax bills of the wealthiest, most powerful corporations in the world are at all-time lows,\u201d Assemblymember Damon Connolly (D-San Rafael), one of the primary sponsors of the bill, told The Times. \u201cMeanwhile, we\u2019re struggling to fund programs that feed children \u2014 I think everyone understands that now is the time for long-term budget solutions.\u201d<\/p>\n Republican Sen. Roger Niello, vice chair of the Senate Budget and Fiscal Review Committee, said the bill to repeal water\u2019s edge won\u2019t receive 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\u2019 foreign profits to enacting tariffs.<\/p>\n \u201cCalifornia already has the reputation of being not particularly business friendly,\u201d said Niello (R-Fair Oaks). \u201cThis would really just compound that.\u201d<\/p>\n A spokesperson for Gov. Gavin Newsom did not respond to a request for comment about the governor\u2019s views on the proposal. Newsom, however, has largely shunned new tax increase proposals. <\/p>\n Legislation to increase taxes requires a two-thirds approval vote instead of a simple majority. Democrats in California hold a supermajority in both the Assembly and Senate, meaning the bill could still pass without Republican support, but it would require backing from the progressive and moderate wings of the party.<\/p>\n Kayla Kitson, a senior analyst at the California Budget and Policy Center, said the measure has a decent chance of winning support among moderate Democrats due to the state\u2019s budgetary woes. <\/p>\n \u201cThe stakes are really high this year,\u201d she said. \u201cWith any tax policy, it\u2019s certainly hard to get folks beyond the progressive community on board, but there are a lot of discussions happening behind closed doors given the challenges that the state knows it\u2019s going to have to deal with in the next few years.\u201d<\/p>\n 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\u2019s global profits or losses, while the water\u2019s edge option allows the U.S.-based parent company to exclude the income of foreign subsidiaries. This can help corporations that own profitable foreign companies pay less taxes in the United States.<\/p>\n California is scrambling for solutions as the state is facing an estimated $18-billion budget deficit and fallout from federal cuts that slashed healthcare.<\/a> A Republican-backed tax and spending bill signed last year by President Trump shifted federal funding away from safety net programs and toward tax cuts and immigration enforcement.<\/p>\n Carl Davis, a research director for the Institute on Taxation and Economic Policy, said the idea is picking up momentum nationwide, with states like Maryland, Minnesota and New Hampshire also considering a repeal in recent years, due to a growing awareness about profit shifting \u2014 a loophole in the water\u2019s edge tax break that some corporations use to reduce their tax burdens by shifting profits made in a high-tax country into tax havens. <\/p>\n \u201cFolks are outraged when they hear that these companies are pretending that they are earning their profits in the Caymans or in Switzerland and are skipping out on paying U.S. taxes as a result,\u201d he said. \u201cThat feels insulting to a lot of people who are paying the taxes they owe every day.\u201d<\/p>\n During an informational hearing at the Legislature last month, Rowan Isaaks, an economist with the nonpartisan Legislative Analyst\u2019s Office, said the state does not know the extent to which corporations use profit shifting, which makes it impossible to determine exactly how much revenue California would gain by eliminating the water\u2019s edge tax exemption. But he estimated it would bring in \u201csingle digit billions\u201d for the state each year. <\/p>\n \u201cWhile there would be revenue gains, the Legislature also faces a trade-off between broadening the tax base but also managing additional uncertainty,\u201d said Isaaks, explaining it could increase budget volatility because foreign income is more sensitive to global economic conditions. <\/p>\n Issaks added that the Legislative Analyst\u2019s Office has found no strong evidence that companies would flee California if the water\u2019s edge tax break was repealed.<\/p>\n Jennifer Barton, director of the legislative services bureau for the California Franchise Tax Board, told legislators that mandating worldwide reporting wouldn\u2019t be difficult for the state from an administrative standpoint, only requiring some additional outreach or educational efforts. <\/p>\n California Tax Foundation visiting fellow Jared Walczak said that the water\u2019s edge option exists for a reason and that it would be unfair to mandate worldwide reporting. \u201cThe vast majority of the activity abroad is true economic activity abroad,\u201d he told lawmakers. \u201cCompanies don\u2019t just exist in the United States; they have sales, they have manufacturing, they do things abroad.\u201d<\/p>\n A survey last year<\/a> from the nonpartisan Pew Research Center found 63% of adult Americans believe large 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.<\/p>\n Tech companies appear to be particularly aggressive with profit shifting. Six U.S. multinational corporations \u2014 Apple, Cisco, EBay, Facebook, Google and Microsoft \u2014 may have underpaid their U.S. corporate income taxes by $277 billion over varying periods from 2009 through 2022, according to a report<\/a> from the Center on Budget and Policy Priorities. <\/p>\n