CalChamber Opposes Bill Seeking to Harm International Businesses

The California Chamber of Commerce is opposing legislation that will increase taxes for international businesses.

AB 1790 by Assemblymember Damon Connolly (D-San Rafael) would eliminate the water’s edge election — an intentional provision of California’s corporation tax structure — forcing all taxpayers to file on a worldwide combined reporting basis beginning January 1, 2028.

CalChamber has identified the bill as a Cost Driver.

Makes State Less Affordable

Without the water’s-edge election, some companies would face higher overall tax liabilities in California on income earned abroad, increasing their cost of doing business.

The increased tax burden gets passed through to consumers in the form of higher prices for goods and services, especially for products with relatively inelastic demand.

Manufactured goods — electronics, vehicles, machinery, and other common products sold in California — are largely produced abroad and priced competitively. Adding significant tax costs would reduce that competitiveness and make these goods less affordable for California consumers, at a time when affordability is a major concern for state residents.

Jeopardizes Relationships with Foreign Trading Partners

Before the water’s-edge election was enacted, the United Kingdom, Japan, Canada, and other trading partners were outraged by California’s method of taxing multinational companies. Those governments called for significant retaliatory measures against California and the United States unless corrective measures were adopted.

This outrage led to the creation of California’s water’s-edge election in 1986 with the passage of SB 85 by Senator Al Alquist. Adoption of the water’s edge was a bipartisan decision to prevent trade retaliation.

The water’s-edge election ensured that California can accurately tax profits derived from or attributable to California, while California and other international businesses are not overburdened with reporting requirements or penalized for their California investments.

At the same time, trading partners are satisfied with California’s water’s-edge election because their constituents are not being unreasonably burdened.

Trading partners argue that eliminating the water’s edge choice will lead to double taxation. In some cases, taxpayers could be required to report taxable income that already is taxed by foreign governments.

Risk of Retaliation

In a letter to the author of AB 1790, CalChamber pointed out that foreign governments would likely view enactment of the bill as a violation of tax treaties and agreements made by the United States.

Foreign governments would view a move to mandatory worldwide combined reporting as an aggressive extension of taxing authority to income earned outside the United States, potentially targeting companies headquartered within foreign borders.

That perception risks straining trade relationships, discouraging foreign investment, and limiting California’s ability to engage in future diplomatic or economic partnerships.

California cannot effectively pursue international partnerships while adopting policies that global partners see as hostile to their domestic employers.

Global Outlier

Currently, no other state in the nation mandates worldwide combined reporting for all taxpayers. Similarly, no other nation in the world utilizes a system that taxes extraterritorial income in this manner.

AB 1790 taxes water’s-edge filers more than worldwide filers for the 2026 and 2027 tax years. If the bill is enacted, California would become the only subnational government in the world to mandate such a system, placing the state at a competitive disadvantage.

Water’s Edge Not ‘Loophole’

Taxpayers that choose to file on a water’s edge basis enter a binding seven-year contract to use that method. During the contract period, they don’t have the ability to go back to the worldwide method for a year simply because it results in a lower tax burden.

It is possible that businesses will pay higher taxes during portions of the seven-year period because they chose to file on a water’s edge basis.

Coalition Effort

AB 1790 is expected to be considered by the California Assembly Revenue and Taxation Committee on Monday, April 27.

CalChamber is working in a coalition representing the business community to stop this bill from moving forward.

To sign on to the coalition opposition letter or receive more information, contact Alexis Rodriguez.

Coalition members so far include nearly two dozen local chambers of commerce.

Staff Contact: Alexis Rodriguez