(The Center Square) – Legislation eliminating California’s biggest corporate tax break, the Water’s Edge tax election, could generate an estimated $3 billion to $4 billion in income for the state, according to the bill’s author.
The bill passed out of the Assembly Revenue and Taxation Committee late Monday afternoon.
Assembly Bill 1790, which proposes to eliminate the state’s largest corporate tax break, is aimed to generate much-needed revenue for the state as California faces a $35 billion multi-year structural budget deficit.
“For the last 40 years, California has given multi-national corporations the opportunity to choose what tax scheme they would like to use to ensure they pay as little in taxes as they possibly can,” Assemblymember Damon Connolly, D-San Rafael and author of Assembly Bill 1790, testified during the bill hearing on Monday afternoon.
The Water’s Edge tax election, Connolly continued, allows such corporations to only pay taxes on revenue determined to have been earned in the “water’s edge” boundary of California. This allows companies to shift income offshore through using subsidiary companies and foreign tax havens, Connolly testified.
Eliminating the tax break, Connolly testified, would allow the state to generate money that could pay for schools and health care, among other taxpayer-funded programs and services.
“The state is facing a severe multi-year budget deficit,” Connolly testified at the committee meeting. “As legislators, if we do not find a way to generate revenue, we will have to make heartbreaking decisions to cut programs that the most vulnerable Californians rely on.”
Arguments in favor of the bill’s passage focused on multi-national corporations’ ability to take revenues out of California and move that money offshore to avoid paying taxes, according to testimony in support of Connolly’s bill.
“Much of the income made by multi-national corporations is based on intellectual property,” Lenny Goldberg of the California Tax Reform Association testified. “That intellectual property, developed in the U.S., developed heavily in California, is parked in the Bahamas, in Ireland, in Luxembourg, in tax havens. So really, all we’re talking about here is eliminating the ability of these multi-nationals to manipulate their assets.”
However, opponents of the bill on Monday said eliminating the tax break would make California’s tax system unstable and possibly result in the loss of revenue, not the generation of revenue.
“Those losses will be coupled with exponentially more complicated agency audits and compliance challenges,” Kelsey Johnson, vice president of state government affairs at Global Business Alliance, testified in opposition to the bill. “Companies would be taxed on the same income in both their home country and in California. In the past, this kind of policy led to international disputes with states. That is why there is a letter co-signed by eight of America’s trading partners urging you not to pass this bill.”
The many opponents to the bill include governments of multiple countries. The national governments of Japan, the United Kingdom, Ireland, Iceland, Germany, Canada, Ukraine and South Korea all oppose Assembly Bill 1790, according to a legislative analysis. Officials with each of those countries’ consulates located in California did not respond to The Center Square on Monday or Tuesday.
Republican lawmakers on the committee on Monday were apprehensive about the tax elimination proposal.
“We already have the highest tax burden of any state in the country,” Assemblymember Carl DeMaio, R-San Diego, said during the bill hearing. “Instead of tightening the belt and implementing cost efficiencies, there’s a whole lobby of special interest groups always looking to get more money from people as though it’s a free lunch that someone else is going to pay.”
The bill now goes to the Assembly Appropriations Committee.
