Assemblymember Connolly Introduces Bill to Close Corporate Tax Loophole

The Water's Edge tax election costs California $3 billion annually by allowing multinational corporations to hide profits in offshore tax havens

• Isabella Jimenez
• [email protected]

SACRAMENTO, CA - Today, Assemblymember Connolly (D-San Rafael) introduced AB 1790, which will end the corporate tax loophole known as Water's Edge, that allows multinational corporations (MCNs) to prevent paying California taxes on approximately $3-4 billion in profits every year. This massive tax break has cost California billions of dollars since its creation in 1986, including a whopping $4.1 billion in the 2024-25 alone. Assemblymember Connolly was joined by Asm. Sade Elhawary (D-South Los Angeles), Asm. Alex Lee (D-Milpitas), and representatives from the Service Employees International Union (SEIU), California Environmental Voters, California Teachers Association, and United Domestic Workers, who are supporting AB 1790.

"For the last 40 years, California has allowed the biggest corporations to choose a tax scheme that ensures they pay as little in taxes as possible," said Assemblymember Connolly. "Even though corporate profits have increased to record levels, and the Federal government has reduced their tax rate to historic lows, these multinational companies still stash profits overseas to avoid paying billions in state taxes every year. AB 1790 will even the playing and end the Water's Edge tax loophole to return California to a system that fairly taxes multinational corporations."

Following immense pressure from President Ronald Reagan's administration, California established the Water's Edge tax election in 1986. This system allows multinational corporations (MNCs), who are based in the United States, to choose to pay California state taxes only on earnings they designate as being generated within the borders of the state. The ability to self-designate earnings as within the borders, or "water's edge," of the state creates a perverse incentive that has led corporations to use shell companies to hide as much of their profits in offshore tax havens, like the Cayman Islands, thus reporting less income to be taxed on.

The Water's Edge loophole is the largest corporate tax breakin California. It cost the state $4.1 billion in 2024-25, more than every other major identifiable tax expenditure for corporations combined. In 2017 alone, the corporate tax revenue lost to Water's Edge could have subsidized child carefor more than 250,000 children throughout the state. In the wake of the Federal government's massive funding cuts to healthcare, education, food assistance, infrastructure projects, and emergency aide, California is in dire need of revenue generation for its most vital programs.

Under AB 1790, California will return to a Worldwide Combined Reporting (WWCR) method for determining the tax burden of MNCs. WWCR is similar to California's tax system prior to the establishment of the Water's Edge. AB 1790 will institute a WWCR tax system beginning with the 2028 tax year.

"Across California, families are doing everything right and still living paycheck to paycheck," said Assemblymember Sade Elhawary (D-South Los Angeles). "At a time when healthcare and food assistance are on the line, we cannot afford to leave billions of dollars on the table because of a corporate tax loophole. This bill holds powerful corporations accountable so we can protect these essential services that our constituents rely on."

"Our tax system must be centered on people, not corporations. But mega corporations continue to benefit from billions of dollars worth of tax breaks, even as the state struggles to fund essential public services," said Assemblymember Alex Lee (D-Milpitas). "California tax code legalizes corporate manipulation, enabling multinational companies to evade taxes on profits shifted to their foreign subsidiaries. Working families bear the costs through cuts in health care, food aid, and infrastructure. Eliminating the Water's Edge tax loophole will restore critical public investments, and move California toward a more equitable tax system."

"Working people in California are scraping their last dollars together just to keep food on the table for their families," said Arnulfo De La Cruz, President of SEIU Local 2015 and SEIU California Executive Board Member. "Meanwhile, multinational corporations are rigging the rules, shifting profits to global tax havens, and sticking working families and small businesses with the bill. With health care for more than 2 million Californians and food assistance for millions more on the line because of federal cuts, there is zero justification for letting corporations dodge what they owe. It's time to unrig California by ending corporate global tax haven abuse and making the biggest corporations pay their fair share so we can protect the services our communities rely on."

"The Water's Edge tax loophole came directly from oil and gas industry lobbying decades ago, and while this industry and others continue to reap the benefits of this corporate shell game, California misses out on about four billion dollars annually. In the face of climate cuts during a budget deficit, we can use these dollars to keep investing in our communities," said Gracyna Mohabir, Clean Air and Energy Regulatory Advocate, California Environmental Voters. "Our state can send a clear message with this bill: tax loopholes that unfairly benefit major corporations at the expense of everyday Californians are unacceptable."

"As a public school teacher, I know what happens when classrooms are asked to do more with less-outdated materials, overcrowded classes, and fewer counselors and support staff for students who need them most," said Mara Harvey, board member with the California Teachers Association. "When critical resources are stripped away from classrooms because massive corporations dodge taxes, students suffer. If we want California students to have safe, stable, fully-funded schools, closing the largest corporate tax loophole in the state is just common sense."

"Closing loopholes like Water's Edge is a smart, responsible way to protect state programs such as In-Home Supportive Services and subsidized child care without raising taxes on working families," said Johanna Hester, Deputy Executive Director, United Domestic Workers. It ensures that corporations that profit in California, contribute to California. With federal support under threat, the state must be the step up. California cannot afford to balance its budget on the backs of caregivers, children seniors, and people living with disabilities."

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Assemblymember Connolly represents the entirety of Marin County and Southern Sonoma County