State committee passes proposal to raise billions from multinational companies
An Assembly committee passed progressive lawmakers’ proposal to change the way California taxes multinational corporations. The measure eliminates, according to bill proponents, a pathway they use to offshore profits and pay less corporate income tax in California.
The Assembly Tax and Revenue Committee’s 4-2 vote to advance the bill, with one lawmaker not voting, is a notable step for the hotly-contested tax proposal. Proponents say it could raise billions of dollars amid the state’s ongoing budget deficit. But the idea has drawn deep opposition including from eight foreign governments, some major trading partners of the state.
The tax proposal authored by Assemblymember Damon Connolly, D-San Rafael, has drawn fervent interest. It is backed by a broad coalition of labor unions and progressive advocacy groups who have made raising more revenue from large corporations doing business in the state — but often paying little in taxes — a core part of their response to protect social services from deep budget cuts enacted by Republicans in Washington D.C.
Proponents estimated the tax code change could raise between $3 billion and $4 billion annually when they introduced the legislation in February. In a report published last week, legislative analysts estimated the measure could raise between $700 million and $2.8 billion.
The political appetite for raising taxes is low both in the Legislature and particularly from Gov. Gavin Newsom. Amid global economic uncertainty, Californians face high costs of living, including high taxes. And lawmakers from both parties say they want to confront the state’s “affordability” issues. But Connolly’s bill has gained momentum as a measure that proponents feel is unlikely to impact working people.
At Monday’s committee hearing, Connolly said the bill would only affect the biggest multinational corporations operating in the state, and would not touch 98% of businesses.
Newsom’s budget includes cuts to some social programs, largely driven by President Donald Trump and congressional Republicans cuts into federal funding for healthcare, food stamps and other social safety net programs last year. The federal One Big Beautiful Bill also cut taxes for corporations and wealthy individuals. Connolly listed off program cuts in the governor’s budget proposal, such as a $1 billion cut to dental care provided through Medi-Cal and a $100 million cut to programs for survivors of human trafficking, domestic violence and sexual assault. He said his bill provides the Legislature an opportunity to save some of those programs.
“We can do this by making sure the world’s most wealthy corporations simply pay their fair share in California,” Connolly said.
Dozens of advocacy groups, representing labor, immigrants, environmentalists, and public education workers support the measure. And it’s a key priority for the Legislative Progressive Caucus. It is one of two principal bids progressive lawmakers, labor unions and other advocacy groups brought this year to extract more revenue from corporations doing business in California. The other is a fee levied on corporations whose employees rely on Medi-Cal for healthcare.
But the list of opponents to Connolly’s bill is also long. Along with business and trade groups, it includes the governments of eight foreign nations who are trading partners to California. The governments of Japan, Canada, South Korea, the United Kingdom, Ukraine, Germany, Iceland and Ireland all signed a letter to lawmakers urging them to oppose the bill.
Opponents of the tax measure say California would become an outlier in international tax codes and face retaliation from its trading partners. They also suggested the tax would not raise as much money as proponents hope and would be burdensome to administer and enforce — given the webs of foreign subsidiaries corporations maintain.
“The bill is an assault on long-standing international tax norms built on the basic principles of equitable fairness that prevent double taxation,” said Kelsey Johnson, a spokesperson for Global Business Alliance.
Opponents say the state would tax income that companies earned in other countries and already paid taxes on abroad. Proponents reject that argument.
“California will only ever tax the portion of sales into California,” University of California Davis professor Darien Shanske, who is working with the bill proponents, told lawmakers.
California has taxed corporate income since 1929. But beginning in 1986, the Legislature allowed companies to choose to separate out their foreign-based corporate entities when calculating their income, according to a report from legislative staff. Corporations can choose to enact that exception and become what’s called a “water’s edge” filer. The change came under pressure from the administration of President Ronald Reagan. Some of the same countries oppose Connolly’s bill today.
Other states followed California’s example, according to the report. Advocates for reform argue corporations exploit the system by creating shell companies in low-tax countries like Ireland or the Cayman Islands to lower their tax bills in California.
The fight over the water’s edge exemption is just beginning. Several Democrats on the committee said they would advance the measure out of the committee but remained undecided on how they would vote on the bill on the floor. Two-thirds of the Legislature have to vote in favor of the bill.
It goes next, however, to the Assembly Appropriations Committee.
