California’s latest budget scramble has lawmakers eyeing a tax maneuver that could seriously shake up how multinational companies pay the state. Assembly Bill 1790 takes direct aim at the long‑standing “water’s edge” election, a rule that lets U.S. parent companies leave income from many foreign subsidiaries out of their California tax calculations. Fans of the bill say ending that break could unlock billions for schools, Medi‑Cal and other core services, while critics are already sounding alarms about double taxation and businesses heading for the exits.
What AB 1790 Would Change
AB 1790, introduced February 10 by Assemblymember Damon Connolly and coauthors, would require worldwide combined reporting and shut down water’s‑edge elections for taxable years beginning on or after January 1, 2028, according to the bill text on the Legislature’s website. Companies that currently use the water’s‑edge election could choose to end it earlier, but after 2028 the option disappears across the board. Because it changes how taxable net income is measured, the proposal is written as a tax levy, which means it needs a two‑thirds vote in each house to make it into law.
How Much Could It Raise?
Nobody is pretending the math is simple. Nonpartisan fiscal staff told lawmakers the state cannot clearly see how much profit companies are shifting offshore, which makes precise estimates tricky. An economist from the Legislative Analyst’s Office told legislators the repeal would likely generate “low single‑digit billions” of dollars each year in new revenue.
That guarded projection sits next to a broader body of research that points to large‑scale international profit shifting. A review by the Center on Budget and Policy Priorities notes studies showing that a small set of large U.S. multinationals has moved hundreds of billions of dollars in profits overseas, highlighting the pool of income advocates say California could partially pull back into its tax base. Analysts say that mix of huge potential and murky forecasting means AB 1790 could help close budget gaps while also tying state revenues more tightly to global economic ups and downs.
Why It Is Getting Traction
Momentum for the bill has grown as lawmakers stare down multibillion‑dollar shortfalls in the upcoming budget cycle, a structural problem flagged by the Legislative Analyst’s Office. Supporters also point to recent federal changes that cut funding for certain health programs and argue that California is under pressure to step in and fill some of those holes at the state level.
Political Hurdles
Republicans have been pushing back hard, warning that repeal could amount to double taxation and make California an even tougher sell for employers. “California already has the reputation of being not particularly business friendly,” Sen. Roger Niello told the Los Angeles Times, adding that ending the water’s‑edge election would “really just compound that.”
Even with Democrats holding a supermajority in both chambers, AB 1790 is not a slam dunk. Its status as a tax levy means supporters must lock down two‑thirds support in each house, which will require threading the needle between progressive lawmakers who want aggressive revenue measures and moderates who worry about chasing companies, and their jobs, out of the state.
What Comes Next
The bill is moving through the normal Sacramento grind. After being printed in February, it was sent to the Assembly Revenue and Taxation Committee, and the Legislature’s site tracks its formal status and history. Lawmakers could schedule more informational hearings or tweak the language before any key committee or floor votes. In the end, no matter how the details shake out, final passage still hinges on meeting the constitutional two‑thirds threshold that applies to tax levies.
Who Is Pushing And Why
Unions, educators and several Democratic lawmakers cast repeal as a question of basic fairness, arguing that large multinationals should pay what they see as a more accurate share of taxes, especially as the state looks for ways to replace funding lost to federal cuts in health and social programs. At a recent informational hearing, classroom and health care advocates testified that closing the water’s‑edge loophole could bolster budgets for schools and Medi‑Cal.
Industry representatives and Republican legislators countered with warnings about higher compliance costs, likely legal challenges and even potential diplomatic complaints if California moves on its own while other states stand pat. That clash sets up a classic Capitol showdown over who should shoulder the pain as the state tries to patch its budget: corporate taxpayers with global operations or the public programs now straining under repeated funding hits.
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