Lawmakers probe "water's edge" tax election as experts debate revenue, risk and fairness

Senate and Assembly revenue and tax committee leaders convened a joint informational hearing this morning to examine whether California should change the "water's edge" election that allows some corporations to exclude many foreign subsidiaries from the state corporate tax base.

The question before lawmakers was twofold: could California raise substantial revenue by requiring broader inclusion of foreign income, and if so, at what cost in administration, litigation risk and economic side effects? Witnesses from the Legislative Analyst's Office (LAO), the Franchise Tax Board (FTB), academic advisers, business groups and labor organizations offered sharply different answers.

LAO economist Rowan Isaac said the policy tradeoffs are real and data are limited. Isaac explained unitary taxation and apportionment — the legal and accounting framework states use to decide how much of a multinational's global income is taxable in California — and warned that firm‑level foreign income is often unobservable. "Low single‑digit billions of dollars is probably about as precise as we're willing to be here right now," Isaac told the…