SACRAMENTO, CA  - By Kyra Moeller and Mauricio Torres Jr. - The California Budget & Policy Center (Budget Center) has released a new four-part series examining how California’s corporate tax code allows highly profitable corporations to avoid paying their fair share — and what state leaders can do to fix it. The series highlights how corporate tax loopholes, flat tax rates, and unlimited deductions and credits enable big corporations to pay little or nothing in state taxes, even as workers’ wages stagnate and the cost of living soars.

The series includes:

• Legal Loopholes: How Corporations Reduce Their California Tax Bill — Details how provisions like the “water’s edge” election, net operating loss deductions, and overly generous tax credits allow corporations to reduce or completely erase their state tax bills.
• A Graduated Corporate Tax Ensures California’s Most Profitable Corporations Pay Their Fair Share — Highlights the benefit of replacing California’s flat corporate tax with a graduated rate that requires the most profitable corporations to pay more, similar to the state’s progressive personal income tax.
• Profitable Corporations Can’t Keep Paying Zero in California State Taxes — Shows how nearly half of all profitable corporations in 2023 paid nothing more than the $800 minimum tax, despite collectively earning $11.7 billion in state profits, and recommends permanent limits on business tax credits and deductions to more equitably raise revenue that supports the infrastructure and services corporations rely on.
• Water’s Edge: Closing the Largest Corporate Tax Loophole in California — Explains how the “water’s edge” loophole allows multinational corporations to avoid around $3 billion in California taxes each year by shifting profits offshore, and calls for closing the loophole through mandatory worldwide combined reporting to ensure those profits are taxed fairly.

“When the most profitable corporations can avoid contributing to the very services and infrastructure that make their success possible, we all lose,” said Chris Hoene, executive director of the California Budget & Policy Center. “As corporations pocket billions from another round of Trump tax cuts, we risk undermining the schools, infrastructure, and health care programs that keep Californians and our economy strong. Shared prosperity requires large corporations paying their fair share, not paying for intricate tax avoidance strategies and advocating for increased tax breaks at all levels of government.”

Key data from the series reveals:

• In 2023, nearly half of all profitable corporations (roughly 300,000) in California paid only the $800 minimum tax, while collectively reporting $11.7 billion in state profits.
• Large “C corporations” with at least $10 million in California profits made up less than 1% of all corporate tax returns but received more than four-fifths of total corporate profits in the state.
• Corporations have amassed over $1.3 trillion in unused net operating losses and more than $40 billion in unused research and development credits they can use to offset future tax bills.
• The “water’s edge” loophole alone is projected to cost California $3.1 billion in 2024–25, rising to $3.5 billion by 2026–27.

“Trump’s harmful budget cuts and California’s rising inequality are made worse when profitable corporations don’t pay their fair share,” said Kayla Kitson, senior policy analyst at the California Budget & Policy Center and author of the series. “By enacting common sense reforms such as closing the water’s edge loophole, creating a graduated corporate tax rate, and capping excessive credits, lawmakers can generate additional revenue to protect essential programs that support vulnerable Californians, strengthen the state’s infrastructure, and invest in California’s future.”

State leaders have options to combat the harm in Trump’s harmful budget by:

• Closing the water’s edge loophole that allows corporations to avoid taxation on offshore profits.
• Establishing a graduated corporate tax rate or surtax on the most profitable corporations.
• Placing permanent annual limits on corporate tax credits and net operating loss deductions.
• Conducting regular evaluations of costly tax breaks to ensure they deliver meaningful benefits to Californians.

State leaders don’t have to stand by while the federal government undermines California’s finances and rips apart the programs millions of people rely on to make ends meet. State leaders have common-sense options to close corporate tax loopholes, raise revenues, and protect California families. Working to raise revenues and protect programs vulnerable Californians rely on shouldn’t wait until the next budget cycle. It starts the moment they return to the Capitol.

For more information and to read the full series, visit www.calbudgetcenter.org/resources/.

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About the California Budget & Policy Center:

The California Budget & Policy Center (Budget Center) is a nonpartisan research and analysis nonprofit advancing public policies that expand opportunities and promote well-being for all Californians.
Source: California Budget & Policy Center