Connolly’s Major Corporate Tax Reform Bill Passes First Committee

AB 1790, a bill to close California's biggest corporate tax loophole, passed out of the Assembly Revenue & Taxation Committee after showing broad support

• Isabella Jimenez
• [email protected]

SACRAMENTO, CA - Yesterday, Assemblymember Damon Connolly (D-San Rafael) successfully passed AB 1790 through the Assembly Revenue and Taxation Committee after a robust debate. This bill will end the corporate tax loophole known as Water's Edge, which allows multinational corporations to shift profits overseas and pay less in taxes than most California households. This massive tax break has cost California billions of dollars annually since its creation in 1986, including a whopping $4.1 billion in 2024. Assemblymember Connolly was joined during the bill's hearing by an expansive support coalition that includes SEIU, the California School Employees Association, the California Tax Reform Association, California Environmental Voters, the State Building and Construction Trades Council, and everyday Californians.

"I am proud that AB 1790 passed, and I want to thank my colleagues and thousands of supporters for moving forward with this important tool of revenue generation," said Assemblymember Damon Connolly (D-San Rafael). "AB 1790 offers a path to avoid cuts to critical services and lessen the impact of others by simply making the world's wealthiest corporations pay their fair share by closing the Water's Edge tax loophole. Californians are looking to the Legislature to protect them from the worst of the impacts of Trump's bad budget, and I believe this bill is our answer."

"We are encouraged by the passage of AB 1790 out of the Assembly Revenue and Taxation Committee. The legislature has taken a major step forward toward eliminating the use of abusive tax havens which are exploited by multinational corporations at the expense of California businesses and taxpayers," said Dani Kando-Kaiser, Legislative Director for the California Tax Reform Association.

"For many decades, large corporations had little trouble complying with worldwide combined reporting; even the US Supreme Court observed the costs for taxpayers were minimal. Since the advent of the water's edge election in 1987, many large taxpayers have opted for reporting on a worldwide basis even when they did not have to," said University of California Davis professor Darien Shanske, who testified in support of the bill. "It will be a lot easier to file on a worldwide basis in 2027 as opposed to 1987 not only because of changes in technology and simplification of the law, but because many of our trading partners already are moving to a form of worldwide reporting."

Following immense pressure from President Ronald Reagan's administration, California established the Water's Edge tax election in 1986. This system has allowed multinational corporations 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.

The Water's Edge loophole is the largest corporate tax break in 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 care for more than 250,000 children throughout the state. In the wake of the Trump Administration's massive 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.

AB 1790 continues through the legislative process and will now go to the Assembly Appropriations Committee for consideration.

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