Ending a corporate tax break pitched to offset federal healthcare cuts
SACRAMENTO — The corporate tax policy that has caused billions of dollars in lost tax revenue in California each year may be coming to an end as the state scrambles to fill federal cuts and address a looming budget shortfall.
Proposed legislation, Assembly Bill 1790It would repeal the “waterfront” tax credit, a recourse option that allows multinational corporations to exclude the income of their foreign subsidiaries from state taxation.
“The tax bills of the world’s richest, most powerful corporations are at all-time lows,” Assemblyman Damon Connolly (D-San Rafael), one of the bill’s primary sponsors, told The Times. “Meanwhile, we are struggling to fund programs that feed children – I think everyone understands now is the time for long-term budget solutions.”
Republican Sen. Roger Niello, vice chairman of the Senate Budget and Fiscal Review Committee, said the bill to remove the waterfront would not 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 likened taxing companies’ foreign profits to issuing tariffs.
“California already has a reputation for not being business friendly,” said Niello (R-Fair Oaks). “This will really increase that even more.”
A spokesman for Gov. Gavin Newsom did not respond to a request for comment on the governor’s views on the proposal. But Newsom has largely avoided proposals for new tax increases.
Legislation to raise taxes requires a two-thirds approval vote rather than a simple majority. Democrats in California hold supermajorities in both the House and Senate; That means the bill could pass without Republican support, but would require support from the party’s progressive and moderate wings.
Kayla Kitson, a senior analyst with the California Budget and Policy Center, said the measure has a good chance of winning support among moderate Democrats given the state’s budget woes.
“The stakes are really high this year,” he said. “With any tax policy, it’s certainly difficult to bring people together outside of the progressive community, but there’s a lot of discussion going on behind closed doors, given the challenges the state knows it’s going to have to deal with over the next few years.”
A multinational company in the United States can currently choose between two methods when filing taxes. While worldwide reporting takes into account all of the company’s global profits or losses, the waterfront option allows the U.S.-based parent company to exclude income from foreign subsidiaries. This could help companies with profitable foreign companies pay less taxes in the United States.
California is scrambling to find solutions at a time when the state is facing an estimated $18 billion budget deficit and the effects of federal cuts that have cut into health care. A Republican-backed tax and spending bill signed by President Trump last year shifted federal funding from safety net programs to 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 such as Maryland, Minnesota and New Hampshire also considering repealing the idea due to increased awareness of profit shifting in recent years.
“People are outraged when they hear that these companies are pretending to make their profits from the Cayman Islands or Switzerland and, as a result, skip paying U.S. taxes,” he said. “This feels like an insult to the many people who pay the taxes they owe every day.”
At an informational hearing in the Legislature last month, economist Rowan Isaaks of the nonpartisan Legislative Analyst’s Office said the state does not know the extent to which companies use profit shifting, making it impossible to determine exactly how much revenue California would raise by eliminating the riparian tax exemption. But he estimated it would bring the state “single-digit billions” each year.
“While there will be revenue gains, the Legislature also faces a choice between expanding the tax base and managing additional uncertainties,” Isaaks said, explaining that this could increase budget volatility because foreign revenue is more sensitive to global economic conditions.
Issaks added that the Legislative Analyst’s Office found no strong evidence that companies would flee California if the waterfront tax credit was repealed.
Jennifer Barton, director of the legislative services bureau for the California Franchise Tax Board, told lawmakers that requiring worldwide reporting would not be administratively difficult for the state, just requiring some additional outreach or education efforts.
Guest fellow Jared Walczak of the California Tax Foundation said the waterfront option exists for a reason and that requiring worldwide reporting wouldn’t be fair. “The vast majority of activities abroad are genuine economic activities abroad,” he told MPs. “The companies are not just based in the United States; they have sales, they have production, they do business abroad as well.”
A. last year survey The nonpartisan Pew Research Center found that 63 percent of adult Americans believe large corporations or businesses should pay more taxes, 19 percent want corporate taxes to be lower, and 17 percent believe corporate tax policy should remain the same.
Tech companies appear to be particularly aggressive about profit shifting. Six US multinational companies (Apple, Cisco, EBay, Facebook, Google and Microsoft) may have underpaid US corporate income taxes by $277 billion over periods ranging from 2009 to 2022. to a report From the Center on Budget and Policy Priorities.
Repealing the waterfront tax abatement isn’t the only tax-related proposal being considered as the state aims to raise revenue. The Billionaire Tax Act is a controversial state ballot initiative that would impose a one-time 5% tax on state billionaires to help offset federal cuts. Newsom is among his critics.
Davis believes this issue will continue to be a hot topic regardless of the bill’s outcome this year.
“There’s a very good reason to think that [repeal] “It will happen at some point,” he said, adding, “This is definitely a debate that will never end.”
