Damon Connolly Wants to End a 40-Year Corporate Tax Break That’s Costing California Billions

California lawmakers are revisiting a decades-old corporate tax policy as the state searches for ways to close a large budget gap. A new proposal would phase out a system that has shaped how multinational companies report income for nearly 40 years.

Assembly Bill 1790 targets the “water’s-edge” tax election, which allows corporations to pay state taxes based only on income tied to California rather than their global earnings, as reported by The Center Square, a structure critics say has enabled companies to reduce tax liability by shifting profits overseas. The bill has already advanced out of committee and will face further review.

Under current law, corporations can choose between reporting worldwide income or limiting taxation to activity within U.S. borders. Many companies opt for the latter approach because it often results in lower taxes, especially when profits are routed through foreign subsidiaries.

Supporters of the legislation argue the policy has not kept pace with changes in corporate tax strategy and global business structures. They say eliminating the option would bring more consistency to how large corporations are taxed in California.

Assemblymember Damon Connolly, who introduced the bill, has said the change could generate between $3 billion and $4 billion annually. That revenue could help address the state’s projected multi-year budget deficit, which lawmakers estimate at roughly $35 billion.

Opponents warn that removing the tax option could make California less competitive, particularly for multinational companies that operate across multiple countries. Business groups have argued that changes to corporate tax rules may influence where companies choose to invest or expand.

Debate around the proposal reflects a long-running divide between efforts to increase state revenue and concerns about maintaining a favorable business environment. Lawmakers are expected to weigh both sides as the bill moves through the legislative process.

If approved, the measure would eventually require companies to account for global income when determining their California tax obligations. That shift would mark one of the most significant changes to the state’s corporate tax structure in decades.

Further hearings are expected as the proposal advances, with both supporters and critics preparing to argue the broader economic impact. The outcome could shape how California approaches corporate taxation as it navigates ongoing financial pressure.