Daily Tax Report: State provides authoritative coverage of state and local tax developments across the 50 U.S. states and the District of Columbia, tracking legislative and regulatory updates,...
A California senator has dropped plans to change the state’s tax treatment of multinational companies with foreign affiliates, but is pushing a bill to end three other tax provisions he calls loopholes for the wealthy.
S.B. 567, by Sen. Ricardo Lara (D), passed the Senate Governance and Finance Committee 5-2 on May 17 after Lara deleted provisions to end California’s water’s edge election. The election, in place for 30 years, allows multinational companies to exclude their affiliates that are beyond the “water’s edge” of the U.S. from the reported income tax base upon which California may levy the corporation tax.
Opposition to the provisions “was just insurmountable,” Lara told Bloomberg BNA after the committee hearing. “We will revisit it in the future.”
Lara proposed to phase out the water’s edge method as the seven-year election expires for corporations using it. Those corporations would have shifted to the worldwide combined reporting method, which is what corporations that don’t elect to use the water’s edge method now use.
The election is California’s most expensive corporate income tax expenditure and its phaseout would have increased state revenue by $1.5 billion a year by the 2019-20 fiscal year, according to the Franchise Tax Board. About 15,000 corporate returns used the water’s-edge method in 2013, the most recent year for which return data is available, according to the California Department of Finance.
The water’s edge method is the required or default method in 25 of 29 states that require combined corporate income reporting, according to Bloomberg BNA data.
Without the water’s edge election provisions, Lara is pushing for:
The three provisions would make California inconsistent with federal law.
Sen. John Moorlach (R) voted against the bill, saying he doesn’t want California to stray further from conformity with federal law. He also took issue with Lara calling the provisions “loopholes,” and cautioned against targeting wealthy people who provide about one third of the state’s income tax revenue.
“I’m nervous about the rule of unintended consequences,” Moorlach said.
Lara said tax proposals from President Donald Trump’s administration and Republicans in Congress that largely benefit the wealthy are a signal that California should break from conformity with federal tax policy.
“How do we allow our lower and middle income families to be able to compete against the 1 percenters who are using these shelters?” Lara said. “Ivanka Trump and Barron Trump are going to be okay. This is what we need to do now to protect ourselves.”
The California Tax Reform Association, the California Reinvestment Coalition and the Service Employees International Union support the bill. Dozens of business groups, including the Computing Technology Industry Association (CompTIA), the California Chamber of Commerce, and the Family Business Association of California, oppose it.
Chris Micheli, a lobbyist representing CompTIA, said the association wants Lara to eliminate the provision related to executive compensation, which has been part of the federal tax code since 1993.
“We are not aware of people abusing it, and we are deeply troubled by characterizing it as a loophole,” Micheli said.
The bill will be heard next in the Senate Appropriations Committee.
To contact the reporter on this story: Laura Mahoney in Sacramento, Calif. at LMahoney@bna.com
To contact the editor responsible for this story: Ryan C. Tuck at email@example.com
Text of S.B. 567 is at http://src.bna.com/oY6.
Copyright © 2017 Tax Management Inc. All Rights Reserved.
All Bloomberg BNA treatises are available on standing order, which ensures you will always receive the most current edition of the book or supplement of the title you have ordered from Bloomberg BNA’s book division. As soon as a new supplement or edition is published (usually annually) for a title you’ve previously purchased and requested to be placed on standing order, we’ll ship it to you to review for 30 days without any obligation. During this period, you can either (a) honor the invoice and receive a 5% discount (in addition to any other discounts you may qualify for) off the then-current price of the update, plus shipping and handling or (b) return the book(s), in which case, your invoice will be cancelled upon receipt of the book(s). Call us for a prepaid UPS label for your return. It’s as simple and easy as that. Most importantly, standing orders mean you will never have to worry about the timeliness of the information you’re relying on. And, you may discontinue standing orders at any time by contacting us at 1.800.960.1220 or by sending an email to firstname.lastname@example.org.
Put me on standing order at a 5% discount off list price of all future updates, in addition to any other discounts I may quality for. (Returnable within 30 days.)
Notify me when updates are available (No standing order will be created).
This Bloomberg BNA report is available on standing order, which ensures you will all receive the latest edition. This report is updated annually and we will send you the latest edition once it has been published. By signing up for standing order you will never have to worry about the timeliness of the information you need. And, you may discontinue standing orders at any time by contacting us at 1.800.372.1033, option 5, or by sending us an email to email@example.com.
Put me on standing order
Notify me when new releases are available (no standing order will be created)