California’s long running “Water’s Edge” tax regime has quietly shaped how multinational corporations report profits and how much they contribute to the state budget. A new proposal from Assemblymember Damon Connolly would scrap that framework, forcing companies to bring more of their global income into the state tax base and potentially reshaping who pays for schools, roads, and climate programs. The fight over this bill is really a fight over whether California should keep letting global firms choose the tax rules that suit them, or insist on a single standard that treats offshore profits more like in‑state paychecks.
At stake is not just a technical filing election but a broader question of fairness between corporations and the Californians who cannot move their wages to a low tax jurisdiction. Supporters frame the change as closing a loophole that has drained revenue and encouraged profit shifting, while opponents warn it could push investment out of the state. How lawmakers resolve that tension will signal whether California is prepared to trade some corporate comfort for a more predictable, and potentially greener, revenue stream.
How the Water’s Edge option works, and why it is under fire
Under current law, multistate and multinational corporations can choose to file California taxes on a “worldwide combined” basis or under the “Water’s Edge” method that largely excludes foreign affiliates. Giving corporations the option of two filing methods means they will always choose the one that lowers their tax bill, which effectively lets them decide how much of their income is taxable by each state, according to analysis from the California Budget Center. In practice, that choice has become a powerful planning tool for large firms with complex global structures and the advisers to match.
Critics argue that allowing corporations to ignore foreign profits encourages them to shift income to low tax jurisdictions and avoid state taxes by booking more earnings offshore, a pattern that has been documented in state level data reviewed by the Department of Finance. The result is a system where the most globally mobile companies can minimize their California liability, while smaller, purely domestic businesses and individual taxpayers shoulder a larger share of the load. That asymmetry is what Connolly’s bill is designed to confront.
Connolly’s bill and the political coalition behind it
Assemblymember Damon Connolly, D‑San Rafael, has emerged as the face of the effort to unwind Water’s Edge and require corporations to report all income that is tied to the “edge” boundaries of California. In public remarks highlighted by reporter Madeline Shannon, Connolly has argued that this choice of filing method gives corporations the incentive to shift as much income as they can outside the state’s reach, a dynamic he says undermines both fairness and fiscal stability, as described in coverage carried by The Center Square. By targeting the election itself rather than tinkering at the margins, his proposal goes to the heart of how multinationals interact with the state tax code.
Connolly is not alone. Assemblymember Alex Lee, D‑Milpitas, has framed the debate in blunt terms, saying it is very important that lawmakers finally tax the rich and make corporations pay their fair share, a message that has resonated with progressive advocates and labor groups, according to reporting shared through KPVI. That coalition sees the bill as part of a broader push to rebalance the tax code toward high earners and large corporations at a time when budget gaps are forcing difficult choices on social services.
Revenue stakes, budget gaps, and the oil and gas angle
Advocates for Connolly’s bill say the additional revenue from ending Water’s Edge could help backfill lost federal funds that California has historically counted on for education, health care, and other services Californians rely on, a point underscored in recent coverage of the proposal on Yahoo. While precise estimates vary, the direction of travel is clear: more corporate income would be pulled into the state tax base, giving lawmakers a larger pool to stabilize programs that have been squeezed by cyclical downturns and shifting federal priorities. For ordinary residents, that could mean fewer midyear cuts to schools or transit when Washington trims support.
The oil and gas industry sits at the center of this debate because of its outsized profits and relatively modest direct tax contributions. A study of the California oil and gas sector concluded that the industry accounted for 3.4% of state GDP in 2017, yet state tax data for the most recent years showed a much smaller share of total corporate tax payments, according to research compiled by The Climate Center. That gap has fueled arguments that Water’s Edge functions as a kind of tax haven for extractive industries, allowing them to route profits through affiliates and dampen their California liability even as they contribute significantly to the state’s economic output.
Corporate pushback, SEIU’s role, and fears of capital flight
Business groups have warned that eliminating Water’s Edge could make California less competitive, particularly for firms that already view the state’s tax and regulatory environment as challenging. In testimony summarized by regional outlets, corporate representatives have suggested that a sudden shift to worldwide combined reporting might prompt some companies to reconsider expansions or even relocate operations, although concrete relocation plans remain unverified based on available sources. This choice of what a company pays in taxes, Connolly has countered, already distorts behavior by rewarding those that can move paper profits abroad, a tension captured in reporting from Wyoming News.
On the labor side, the Service Employees International Union has emerged as a prominent supporter, arguing that corporations should not be able to use offshore structures to avoid contributing to the public services their workers depend on. Coverage of the bill has noted that the debate has drawn in advocates for Service Employees International Union alongside progressive lawmakers and community groups, as detailed in a report carried by the Rochester Sentinel. Their argument is straightforward: if corporations benefit from California’s workforce and infrastructure, they should help pay to maintain both, even when profits are booked overseas.
Parallel efforts: AB 1675 and the broader tax fairness agenda
The Water’s Edge fight is not happening in isolation. Earlier this month, lawmakers also introduced AB 1675, the “No Tax Breaks for ICE Contractors Act of 2026,” which would deny certain state tax benefits to companies that contract with federal immigration enforcement. The bill’s text notes that existing law, the Personal Income Tax Law, imposes taxes based upon gross income and sets out how credits and deductions apply, and AB 1675 would layer new restrictions on top of that framework, according to the official bill analysis. While the policy target is different, the underlying logic is similar: the state should not subsidize corporate behavior that runs counter to its stated values.
Taken together, Connolly’s proposal and AB 1675 signal a broader shift toward using the tax code as a lever for social and economic policy rather than a neutral revenue tool. That approach has its critics, who argue that layering value judgments into tax rules can create complexity and uncertainty for businesses trying to plan long term investments. Yet for supporters, the alternative is a system that silently rewards profit shifting and controversial contracts while asking residents to accept service cuts, a tradeoff they increasingly reject.
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*This article was researched with the help of AI, with human editors creating the final content.
Julian Harrow specializes in taxation, IRS rules, and compliance strategy. His work helps readers navigate complex tax codes, deadlines, and reporting requirements while identifying opportunities for efficiency and risk reduction. At The Daily Overview, Julian breaks down tax-related topics with precision and clarity, making a traditionally dense subject easier to understand.
