Overview

The California Chamber of Commerce has expressed its opposition to Assembly Bill 1790, which aims to impose higher taxes on international businesses. This legislation, proposed by Assemblymember Damon Connolly, seeks to eliminate the water’s edge election, a key feature of California’s corporate tax system.

If enacted, the bill would require all taxpayers to file on a worldwide combined reporting basis starting January 1, 2028, potentially increasing tax liabilities for companies earning income abroad.

Key details

  • CalChamber identifies AB 1790 as a Cost Driver.
  • The bill would remove the water’s edge election from California’s tax structure.
  • Beginning January 1, 2028, all taxpayers would be required to report worldwide income.
  • Without the water’s edge election, some international businesses may face higher taxes on foreign income.
  • This increased tax burden could lead to higher prices for consumers in California.
  • Products with inelastic demand, such as manufactured goods, may see significant price increases.
  • Common products affected include electronics, vehicles, and machinery.
  • The water’s edge election was established in 1986 to prevent trade retaliation from other countries.
  • Prior to its implementation, countries like the UK, Japan, and Canada expressed outrage over California’s tax practices.
  • The water’s edge election allows California to tax profits derived from the state without overburdening businesses.
  • The bipartisan decision to adopt this election aimed to maintain trade relations and avoid penalties for California investments.
  • International trading partners have been satisfied with the water’s edge election, as it minimizes unreasonable burdens on their constituents.

Context

The introduction of AB 1790 has reignited concerns over California's corporate tax policies and their impact on international businesses. The potential removal of the water’s edge election could lead to significant changes in how companies report income and pay taxes in the state.

What happens next

As the bill moves forward, it will be important to monitor the discussions and debates surrounding its implications for businesses and consumers in California. Stakeholders, including CalChamber and other business groups, are likely to continue voicing their concerns about the potential economic impact.

What we don't know yet

Details regarding the specific impacts of the bill on various sectors and the extent of potential tax increases remain unconfirmed.