Senate Standing Committee on Revenue and Taxation

Good morning. The joint informational hearing will now come to order. And thank you for joining us this morning. For today's informational hearing, I'm especially grateful to be joined by my counterpart in the State Assembly, Assemblymember Mike Gipson. Thank you, Mr. Gipson. We're both bow-tied up this morning for you all.

He's the chair of the Assembly Revenue Tax Committee. It's been several years since the two committees have come together for a joint hearing. So I thank the chair and the staff are organizing this hearing. I would like to welcome two Members, although they're not here right now.

We have Vice Chair Alvarado-Gil who will be joining us on the Senate side. She's replacing Senator Valaderis. And we also have Senator Becker who will be replacing Senator Umberg on the Senate side. Okay. Today's hearing is an assessment of the way the state currently taxes income on foreign subsidiaries of U.S. corporations.

It's been 40 years since legislation was enacted on water's edge election and that was a generation ago. Much has changed since then in the form of technological innovation. The rapid growth of profits and power of US Technology companies and the acceleration of new forms of innovation.

Creatively shifting of profits to foreign lands to shield them from taxes in the United States and in California. In recent years, Congress and the President determined that sufficient taxing the profits of global international companies was a bad thing and that denying health care for those who can't afford it is a good thing.

While California's pending budget deficit and the balancing of a budget requirement, it's important to better understand whether the state's system of taxing is both fair and sufficient and if it is not, whether changes our need to reflect our values as Californians.

We are fortunate today to have world class lineup of speakers and witnesses to help us better understand the current system and assess potential changes. I want to thank them for coming today, especially those who traveled across the country to be here with us.

And I'd like now to turn it over to Chair Gipson for any opening remarks he may have.

Thank you very much. First of all, I want to say good morning buenos dias to each and every one of you. First off, I would like to thank my colleague Senator McNerney for organizing today's informational hearing. I look forward to working with you today in this hearing and also the year ahead of us.

The taxation of a multinational companies is certainly a topic that has gained significant attention in the recent years. To that end, I am eager to learn more about this complex subject matter and also to hear the expert testimonies and also to gain a robust conversation, to gain more information and knowledge about the subject matter and also hearing the testimonies that we are in store to hear.

So with that being said, I'm going to bust, buckle my seatbelt and let the show begin. Thank you very much for the opportunity to partner with the Senate on this very important matter. And thank you very much for those of you who will be participating in today's hearing. Look forward to it.

Okay, at this point, it's time to begin testimony. I'd like to call up our first panel from the Legislative Analyst Office, Rowan Isaaks, he's an economist. Thank you, Rowan.

And from the Franchise Tax Board, Jennifer Barton, Director, Legislative Services Bureau, Franchise Tax board and John McMahon, he's the chief economist and Statistical Research Bureau from the Franchise Tax Board. Welcome aboard.

And please proceed with your presentations. Thank you. Chairs, Members and staff, Rowan Isaaks, from the LAO so I'm going to give a very broad overview of this topic and then hopefully our other panelists can go into greater detail and the exact mechanics.

But to start, I think it's just helpful to step back and just ask why this issue is pertinent. So over the last several decades, globalization has really blurred the line between what we think of as domestic and and foreign income. Large corporations now operate across borders with supply chains, intellectual property and financing spread across multiple countries.

And as a result, states must decide how much, if any of that profit foreign activity should be reflected in their corporate tax bases. And although multinationals are a small fraction of corporate taxpayers, they represent a relatively large share of the tax base. And so decisions about how we decide to treat foreign income can have meaningful revenue implications.

On one hand, there are concerns about profit shifting, that is income being registered or booked in low tax countries or jurisdictions, even when there is underlying economic activity that is plausibly linked back to California.

On the other hand, there are concerns about double taxation or unfair taxation, where the same income could be taxed multiple times by multiple countries as well as by states which can lead firms to make inefficient decisions in an attempt to try and avoid those taxes or to try and reduce activity, business activity in the state altogether.

And so California's water's edge, which is like one of the broad components of this discussion, reflects a very deliberate attempt to try and balance these tensions. It's a very practical trade off between reaching a broader tax base on one hand, but also maintaining a system that is maybe administratively simpler or politically more palatable to other parties.

And so before turning To California's current policy, it's just useful to clarify maybe a couple of concepts. So, multinational corporations are firms that operate through multiple legal entities across countries. And so the legal structure might be fragmented, but the core business decisions of those entities are often centralized. And this mismatch is especially relevant for foreign subsidiaries.

They could be legally separate or, but economically intertwined with a US Parent corporation. And so that brings us to the concept of unitary groups. So California, like many states, uses unitary taxation to look past these legal boundaries. And the basic question is whether these related entities are truly operating as part of a single business.

And so courts have articulated this typically through three related tests, often referred to as unities, of ownership, operation, and use. So unity of ownership simply asks whether these entities are commonly owned or controlled, whereas unity of operation and use looks at whether there are centralized functions or resources that are generally shared between these entities.

And so when these unities are judged to be present, the state will treat them as part of a single unitary group for tax purposes. And this approach is designed to just better reflect the economic reality. And the final key concept here is apportionment.

So once a unitary group's scope and their income is determined, the state still has to decide how much of that income should be applied to California or taxed in California. And apportionment is the mechanism that does this, usually based on an indicator of in state business activity.

Most commonly, this is done in California by the percentage of sales that occur in California. It's not a perfect proxy for business activity. No apportionment formula is a perfect proxy for business activity, but it is viewed as a justifiable metric to approximate the state's contribution to a corporation's income.

And so, with those concepts in mind, we can turn to California's two main approaches for taxing multinationals. So under what's known as worldwide combined reporting, the state looks at the income of the entire unitary group. So both domestic and foreign entities and apportions a share of their combined income to California using these apportionment formulas.

And importantly, worldwide combined reporting is the default approach in California. And so by doing this, worldwide combined reporting diminishes the incentives for corporations to shift profits among their various entities within the unitary group.

By contrast, water's edge limits the scope of this unitary group primarily to US Based entities, although there are some limited categories in which foreign income can enter, even under water's edge. But I will leave the exact mechanics of those to my fellow panelists.

Rather than automatically being water's edge, it's an election that corporations have to choose to make subject to certain conditions. And the key distinction here is conceptual. You know, worldwide combined reporting aims for a comprehensive measure of global economic activity, whereas Water's Edge is more about drawing a practical boundary around what income we include in the tax base.

Obviously, the practical outcome of this is that taxpayers given a choice, will simply choose the option they believe will result in the lower tax liability for them.

And as was sort of alluded to by the chair, California's adoption of the Water's Edge election was shaped in part by litigation, most notably a U.S. Supreme Court decision in the 1980s that sort of upheld California's authority to use worldwide unitary taxation. However, it also led to a lot of scrutiny about the broader implications of this.

And so in the years that followed, worldwide combined reporting became the subject of a lot of political pressure, not only from the firms that were affected by this, but by foreign governments who argued that states taxing worldwide income created a lot of compliance, excessive compliance burdens, and unfair taxation.

And so in response to this, at the time, the Reagan Administration convened a working group to sort of investigate the consequences of states taxing worldwide income.

And it was against this backdrop and political pressure that California decided to adopt this Water's Edge election as a compromise which fundamentally, the Water's Edge election preserves the a really important core logic of unitary taxation, but limits the inclusion of foreign income. That has proven to be politically contentious.

And just so in light of this renewed interest in recent years in the taxation of multinationals and potential changes, including repealing Water's Edge or increasing foreign income inclusion in other ways, I'll just finish by reiterating a couple of broad policy considerations that are good to keep in mind as we go forward.

One is just how broadly, how broadly should California define the scope of income that we view as sufficiently connected to the state to merit or justify taxation? Expanding the unitary group under the worldwide approach might be viewed as an attempt to capture more completely reflect economic activity of these corporations.

By contrast, maybe other options, such as increasing taxation of specific categories of foreign income, might also raise additional revenue, but maybe get away a little bit from directly using apportionment principles to tie firms to in state economic activity.

And so policymakers therefore have to weigh not only potential revenue gains, but also how much priority should the state place on adhering to a very close alignment with a principled measure of economic presence when deciding whether to impose taxes? There are also a couple of important revenue considerations here.

So estimates of the revenue effects of repealing Water's Edge and some of these other policies are inherently very uncertain. In part, this represents limited information about the extent to which profit shifting is occurring and how firms might respond to a change in the law.

It's very difficult to observe, you know, how much the profits that these firms are making if they're not currently. If they're not currently using worldwide combined reporting. And because we don't directly observe this, any revenue estimates are inherently imprecise, especially relative to maybe estimates of other tax changes.

At the same time, including more foreign income in the tax base can not only affect revenue levels, but also volatility.

And so, because a substantial share of corporate tax comes from a relatively small number of multinational foreign firms and their profits can be sensitive to global economic conditions, expanding the role of foreign income in apportionment calculations could increase exposure to revenue swings further.

And bringing this up just in the context of California's overall budget volatility, which is already quite high due to the state's reliance on those high personal income tax brackets.

And so while there would be revenue gains, the Legislature also faces a trade off between broadening the tax base but also managing additional uncertainty that would be brought in in terms of volatility in a tax structure that is already quite cyclical and potentially volatile.

So I will leave it there, but I'm happy to respond to any comments or questions. And thank you for your time.

Thank you, Mr. Isaaks. Nice testimony. And now Jennifer Barton, if you'd like to present. Proceed.

Thank you and good morning, Mr. Chairs and Committee Members. I'm Jennifer Barton, the Legislative Services Director for Franchise Tax Board. And with me today is John McMahan, our chief economist, and Delinda Tamagni, she is our assistant Chief counsel and subject matter expert on multi state and multinational corporations.

So today we will be covering how California taxes foreign subsidiaries and we will be providing you with some relevant filing statistics. To accompany the discussion, we do have a handout and PowerPoint slides to illustrate our discussion. Let's begin with some background information.

When a corporation derives income both in and outside of California, California may tax a portion of the corporation's total income. To determine the portion of income that is attributable to California, the unitary business principle is used. This concept has been validated by income and franchise tax cases for more than 80 years.

Two or more corporations conducting a unitary business within and outside California are required to use the combined reporting approach to determine California source income subject to tax by California limited liability. Companies and partnerships may be included in a combined report.

While a corporation that has made a valid election to be treated as an S Corporation is not generally included. A combined report is not equivalent to a consolidated report for federal purposes. A combined report is not a return, but merely the name given to the calculations by which multi entity unitary businesses apportion income on a geographic basis.

There is no combined report forms. Tax is calculated on an attachment to either Form 100 or Form 100W. To illustrate what is included in a combined report, consider the following diagram. The outermost dark blue ring represents the entire amount of income from all entities in the.

Jennifer, would you pull the microphone a little bit closer, please?

Of course. Yes. Is that better? Okay. The outermost dark blue ring represents the entire amount of income from all entities in the unitary group, regardless of where the entities are located. The next lighter blue smaller ring represents the group of entities that would be included if the taxpayer elected to file using the Watt Water's Edge method.

As you can see, the Water's Edge election involves less entities which results in less reportable income. The next step, which is contained in the sky blue ring, is to then apportion the combined income of the Worldwide or Water's Edge group to the entities that are subject to California tax. This is called intrastate apportionment.

Finally, each individual within the group then calculates its California business income by taking into account allowable net operating losses. Once the taxable income amount is determined, the corporate tax rate is then applied and the tax liability is computed and then reduced by any applicable credits.

As illustrated on this page, California law provides two methods for corporations to use when they are reporting their combined group's income. The traditional way is to use the Worldwide method. This method is considered the default method that corporations use unless they elect to use the alternative Water's Edge method. To simplify, the blue oval reflects the Worldwide method.

The term Worldwide also implies how it operates. That is, the Worldwide method takes into consideration all the corporation subsidiaries, both domestic and foreign. As a corporation's business income may be generated across the globe. The smaller green oval reflects which subsidiaries are included on a tax return when a corporation uses the waters and edge method.

This method requires a corporation to generally report the income of all of its domestic subsidiaries, plus controlled foreign corporations that have what is called subpart F income, as well as foreign corporations to the extent of any income effectively connected to the United States. The phrase Water's Edge implies what it means.

That is, the scope of what must be included in a corporation's return reaches the edges and must be primarily connected to the United States. Generally, Worldwide is viewed as the default filing method while the Water's Edge method may only be used if a corporation elects to use that method, the election is made.

When a corporation files an original return timely for the year of the election.

The election is considered valid if one the corporation's tax is computed in a manner consistent with the Water's Edge method and a written notification of election is filed with the return or on a form prescribed by the Franchise Tax Board such as the form 100.

We the water's edge election must be made by every Member of the combined report that is subject to the tax. If one or more Members leave the combined group, the election stays in in effect for the remaining Members.

The Water's Edge election is initially valid for a 7 year or 84 month period and the election remains in place thereafter until it is terminated. During the 84 month period, the taxpayer may request FTB's consent for an early termination.

After the initial 84 month period, a taxpayer may terminate their election by filing a timely filed original return using the Worldwide method. In theory, the Worldwide and Water's Edge methods should have similar results because the amount of sales made to California is the same regardless of of which method is used.

However, in reality, when the income of foreign entities is eliminated from the combined report due to the Water's Edge election, the amount of total income subject to tax decreases, which in turn results in less tax being assessed. Let's take a look at this page which shows a combined group that has been has both foreign and domestic entities.

The fact pattern in this table involves a group where the foreign entities generate greater sales and income than the domestic entities. The blue columns contain the income and sales for the domestic entities while the green columns contain the income and sales for the foreign entities.

The numbers to pay attention to Here are the $50 million of only domestic income and then the total sum of all the entities $250 million. Also note there are $25 million of sales to California. These numbers are important for when we consider how the combined group would report this income when using the Water's Edge method.

So next on this slide it shows how this fact pattern can result in different amounts of tax depending on whether the Water's Edge or the Worldwide method is used. As you can see, when the income of foreign entities is eliminated due to the Water's Edge election, the amount of total group income subject to tax decreases.

Both methods take into consideration that there are $25 million of California sales. So even though the apportionment percentage is higher by using Water's Edge due to the decreases in everywhere sales. The result is that less tax is assessed using the Water's Edge method than by using the worldwide.

In this example, the taxpayer would have approximately $117,000 by electing to use the Water's Edge method. It's important to note this example reflects the use of Water's Edge method resulting in tax savings. However, if profitability factors were reversed, I.e.

there's more domestic profit than foreign, the worldwide method may result in greater tax savings compared to the Water's Edge method. At this time I'll turn it over to John to provide statistics related to Water's Edge taxpayers. Thank you.

Thank you very much Jennifer and good morning. If we turn to the next slide, we will see filing statistics for our most recent complete tax year of 2023. You can see that we received 21,562 Form 100W water's edge returns compared with around 337,000 Form 100 worldwide reporting Form 100s.

This shows that while the population of Water's Edge filers is small in number just 6% of California C corporation tax filers, they make up roughly half of the total tax liability. Turning to the next slide, we have some statistics based on industry for Water's Edge filers.

This table presents the top five industry groupings by count and by tax liability. You can see from this that a significant portion of Water's Edge filers are physical goods sellers, followed by professional and scientific and technical services, then holding companies and finance and real estate investment.

Any industry not listed here generally makes up less than 3% in both count and tax liability. The last slide shows the annual change in filing counts for both our Form 1/ Hundreds and Form 100Ws. About 4 to 6% additional taxpayers elect Water's Edge each year.

Taking the approximately 20,000 Water's Edge returns filed in 2023, a 6% increase would be around 1200 returns. As for worldwide taxpayers, there's less than a 1% increase in waters in worldwide filers in any given year. This means that of the roughly 300,000 worldwide returns, there's an increase of approximately 3,000 returns per year.

It is important to note here that these are net increases, so they include both new filers and filers who switch filing type and those who became non filers. But the table does show that taxpayers are increasingly taking the Water's Edge election.

Through our analysis we also found that many of the Water's Edge filers who made the election have continued to do so beyond their initial seven year election.

Around 35% of Water's Edge filers making up around 60% of the total tax liability made their election at least seven years ago and are currently renewing after their seven year election initial seven year election had expired.

Making one last point echoing some of what Rowan said with regards to doing revenue estimates that impact the Water's Edge election, these filers often have complex structures and returns that make analysis and data data gathering in this area challenging.

Return information reported to FTB has limitations because it may be rolled together with similar items into a similar single line on the return or otherwise just unavailable as in the case of the Water's Edge combined reports where we have limited to no information on the foreign affiliates that are not included with the return.

Just to reiterate, as Jennifer explained, there are scenarios where worldwide filing can result in less tax for certain taxpayers than if they were to elect Water's Edge filing.

Water's Edge doesn't necessarily result in tax savings and there are many factors that contribute to overall tax liability that can change from year to year such as utilization of credit or net operating losses. So thank you for allowing me to share these statistics and considerations. We're happy to answer any questions you may have.

Well, I think the panelists now I'm going to turn to Committee Members if there are any questions or comments. Josh.

I have a question.

Okay, I'll turn to the chair of the Assembly Committee.

Thank you very much. Mr. Chairman, this is to the LAO. Given California history with the issue, do you believe that we would face pressure from foreign government if we move away from the Water's Edge election?

It is fairly likely that there would be international pushback to this. Yeah, I would say in a similar manner and they would likely do so through the Federal Government. I think it's fair to say that it might result in a similar approach as to in the 1980s, but it's hard to say.

Well, because I was looking at and I want to thank the staff for putting this very well documentation together for us because In May of May 61987 we had this Executive document from the Executive order from a Gerald H. Goldberg from the Treasury.

It was a press release from Britain's government expressing concerns, then the treasury news expressing concerns. So that's why I raised the question that you would believe that there will be pushback from our allies.

I think it is plausible that there would be a similar reaction as to, you know, back in the 1980s, I think that foreign governments would be concerned about the competitiveness of corporations domiciled in their countries and they would be concerned about unfair taxation on corporations located in their countries.

And yeah, I mean, it's hard to say anything further than that, but yeah, I don't see any reason why it would be any different.

Yeah. Okay. And this question is from ftb, from the administrative standpoint, how challenging would this be for your agency to transfer or to mandate a worldwide reporting transfer?

Thank you for the question. Because today we do administer both Water's Edge and Worldwide. We have formed and instructions in place for Worldwide. So it would just be a matter of providing some education and outreach as to the fact that that is the only option.

Okay, one more question. One more of the follow question. Are there any certain industries where overseas profit shift is more common than others.

We don't have any direct data on that, but I suspect that these very large companies have presence both inside the United States and outside the United States as well.

I think, maybe, you know, as one comment, you know, industries or firms where intellectual property is very valuable and you know, maybe drives a lot of their profits, it's maybe there's maybe a greater concern. You know, often California is the hub of like, you know, new innovations and intellectual property development.

And so there's maybe more of a case that, you know, California has contributed in some way to those innovations and those profits. So this, you know, conceptual case for industries where there's a lot of intellectual property. But like John said, we don't really have any physical evidence you, you know, to put numbers on that.

In that same vein, you had made mention in your testimony to this committee that you would not be able to confirm companies fluctuation when it comes down to their revenue gains. Can you elaborate on that?

Sorry, just to clarify it, you said we wouldn't necessarily be able to. It's difficult for us to know exactly how much profit is currently being shifted or how much additional profit would be taxable if we shifted to worldwide combined reporting as a mandatory thing. Because we cannot observe if a firm does not...

If a firm elects the water's edge, we cannot observe directly the income of their foreign subsidiaries. So I think maybe that's what I was getting at is it's just difficult to observe. You know, it's difficult to put an estimate on the amount of revenue gain that we would see just because that information is not available to us. I don't know if that is the question. Maybe that's a different question than you were asking.

So you said you said it wouldn't be available to us.

It's just very difficult for us to put a confident estimate, a confident estimate on revenue gains from enacting mandatory worldwide combined reporting just because we don't really have access to the sufficient information at a company level to figure out. The estimates that exist rely on sort of aggregate statistics.

So how are we relying on it now? How are we tracking it now?

How are we tracking how much profit is shifted?

Yes.

That is a big question. There are some studies that have attempted to put a figure on it, but there's a lot of debate and there's no real consensus on sort of a broad number. You know, typically it's easier to use national data.

People have tried to estimate how much profit is being shifted out of the US as a whole. And then based on, you know, California's share of GDP within the US we can sort of assign a percentage of that, you know, profit shifted out of the US as a whole, you know, to California.

And that's where a lot of the estimates of, you know, eliminating Water's Edge come from. You know, a calculation like that. But as I mentioned, it's highly uncertain and there's a lot of complexities.

Would you like to comment? I see you shaking your head. Would you like to weigh in on that?

I would mostly echo what, when they file their, when they file, when companies file on Water's Edge return, we don't receive information on their foreign affiliates. And so if we were to move to a worldwide combined reporting, mandatory worldwide combined reporting, we wouldn't, we have to make assumptions about those affiliates that we cannot observe. And so that a lot of uncertainty is derived from that.

Interesting. Okay, thank you very much. That concludes my questioning, Mr. Chairman.

Well, I thank my colleague and I thank the witnesses. Basically, the point of this hearing in my mind is to help us understand whether it's a good idea to eliminate the Water's Edge and then be able to convince my colleagues which decision is the right decision. So I'm trying to understand.

I'm getting a pretty good understanding of what the Water's Edge means, but there's a tremendous amount of uncertainty that you're pointing to. Eliminating Water's Edge could increase volatility in our revenue stream, which is not a good thing.

It's a bad thing in my mind. So I'd like to get... I'd like to drill down a little bit on that. But first of all, I see that not that many corporations are using Water's Edge. Seems like it's a fairly small percentage. Is that right? 6%?

C corporation filers.

So how come it's so small? I mean, how come there aren't more corporations doing business that use that method? Is it more cumbersome or is it...

That's a great question. I don't think I have any information to add to that.

Hello. Delinda Tamagni with the Franchise Tax Board. So even though there's only 6% of corporate filers that choose the Water's Edge method, they do make up almost half of of the tax liability. So even though in that one slide that John showed that showed the 21,000 filers compared to 300 of our current worldwide filers, they still, they make up the bulk of the corporate tax that is collected in California. Or not the bulk, I should say they make up approximately half of the corporate tax.

Those are the big guys, the big corporations.

So even though they might be small, they are mighty.

All right, thank you. So would you please reiterate then the trade offs. I mean what is a benefit of going to worldwide, compelling all corporations to go worldwide versus allowing them or even loosening the Water's Edge? Just reiterate. Because you already went over it, but just get a clear understanding.

There's a lot of disagreement, but I think broadly speaking there's this idea that profit is being shifted out of the US to lower tax countries essentially and they're avoiding tax by doing this. And by implementing the worldwide combined reporting and not allowing the Water's Edge election, that will be less possible.

So we will be able to reduce the amount of profit that is hidden from US, from California taxation in this case. And it will also, even though there's a lot of disagreement over the revenue effects, I think broadly speaking it is expected to be positive for the state.

In terms of revenue?

Yeah, yeah. Even though there's a lot of disagreement on the magnitude of would likely...

We've heard 3 million, 3 billion, 4 billion. I mean it's kind of over the map.

Yeah, yeah. Low single digit billions of dollars is probably about as precise as we're willing to be right now. Yeah.

So Mr. McMahan, thanks for joining us. It's always a pleasure to have another PhD on the dais. Although your PhD is in economics and not math, I can forgive you for that. So based on the data you shared today, what about the population of taxpayers that elect Water's Edge? Can you tell me a little bit about that? I mean we discussed that it's a small percentage. But tell me about who they are, what they look like.

I think that maybe the best way to describe them is if you imagine sorting all of the corporations from largest to smallest, maybe in tax liability or state net income, things like that. And you take the top 1500 companies and about half of them are Water's Edge and half of them are worldwide. And so I think that's maybe the best way to describe them. Do you want additional information?

I just wanted to get an idea. So my feeling is that they're the big, the big companies, big pharmaceutical companies, companies that have IP that is valuable, as Mr. Isaaks mentioned. So. Okay.

Yeah, that's correct.

So we're not, I mean we're not going to hurt the little guys by eliminating the Water's Edge opportunity. Right? We're not going to hurt most of the little guys?

On the scale from more progressive to less progressive, it's on the more progressive end, like this, this type of tax change taxation in relative terms. Yeah.

What other information besides the amount of money to be gained should we be aware of? I mean, are we going to be losing California companies? Are we going to be losing some of our capability as the fourth largest economy in the world if we eliminate Water's Edge?

I would say that primarily because of the way that we apportion income tax. So largely tax liability is based on sales in California rather than employment or having physical facilities in California. So largely we think that that sort of mitigates a lot of this, to some extent, that issue.

There are still customers in California that have demand to buy products. And so there may be some adjustments from companies, but largely we think that those are lessened because of the way that we apportion taxes by focusing on sales rather than by employment or physical presence in the state.

I apologize.

Sure, sure. No problem. So, you know, often, you know, If, you know, there are different ways in which we can determine tax liability. So, you know, we, once we determine the unitary group or, you know, the Water's Edge or otherwise, we then have to figure out how to, how much of the total income of the corporation or the group to tax.

And the way we do that usually is by looking at what percentage of their sales occur in California compared to in total. And so that, you know, that it means that your tax liability is based on how much you sell in California, broadly speaking. And that doesn't really, you know, in terms of we're thinking about, like, companies leaving the state, you know, know, things like that.

That's largely not a problem when we're, when we're thinking about sales tax, sales. Just because, you know, whether a company has its, you know, has a lot of physical presence or employs a lot of people in California isn't going to affect its tax liability. So we're less concerned about companies leaving the state necessarily because of the way that we calculate taxes, if that helps.

Okay. I think that's pretty much wraps up our questions at this point. Sure. Oh, I'm sorry. Yes. The Assembly Member is recognized.

Yes. Can you provide any evidence that eliminates water... That would eliminating Water's Edge would cause companies to leave California? Given that our market size, not our tax structure, is price primary, is a primary driver of the corporate presence.

Right. Yeah. So kind of related to the previous question. Yeah. We don't think there's strong evidence that companies would leave California as a result of this, primarily because the tax liability is based on the amount of sales they make rather than how many people they employ here or what physical facilities they have here.

It's possible that there might be some marginal effect that companies might, if they face a higher, if they face more taxation on their California sales, they might try and, you know, shift away from making sales in California and try and focus more on other markets which would reduce their tax liability. But in general, we're not, we're not predominantly concerned with firms leaving the state.

Thank you. Yes, thank you.

Chairman is recognized.

Thank you. Are you concerned... Thank you. Are you concerned about how the crippling of the IRS at the federal level might frustrate these efforts? Does California really have the resources to tackle the international profit shifting without real support from the Internal Revenue Service? I guess it's a Franchise Tax Board question.

So the Franchise Tax Board Audit Division, because they currently handle worldwide audits and handle over 300,000 of them at this point, I don't think that having the additional 15,000 is something that would impact them in a negative way because we already have the infrastructure available to perform those sort of audits.

Okay, thank you. I yield.

One other comment. The slides that were shown, I didn't follow that well. There was some terminology that was a little opaque. Perhaps we could work to improve those for next time we discuss the issue.

Of course, and I apologize for any confusion on the slides. And we'll work on that.

Thank you. At this point, I'll turn it over to Chairman Gipson to introduce and manage the second panel.

Okay, going to welcome up our second panel. Mr. Darien Shanske and also Jared Walczak. We invite you up, who will be representing California Tax Foundation and also the professor at the law at UC Davis. Welcome and thank you very much and we look forward to your presentation. I think some of the questions I've asked that you may want to elaborate in your opening. We would love for you to introduce yourself and please commence when ready. Thank you.

Wonderful. Too loud. Okay. It's a great honor to be here. I'm very excited to be able to present information to you. As an academic, I have also submitted long, boring testimony, which I hope will be of use to you. And I'm very happy to answer any follow up questions you might have.

So I hope to address some of the questions from the, from the last panel to some extent as well. I hope the slides are at least a little bit helpful. So first, I just want to take advantage of being a professor to talk about what it is we're trying to do with good tax policy.

We're not going to drill too deep into this, but we want a tax policy that's fair, that's efficient, that's administrable, and sufficient. If everybody pays a reasonable or a fair and efficient amount, but only to only $1, and we can't afford emergency rooms for people who need them, then this tax system has failed.

So that is, I think, an important consideration. Now, one issue that has come up in the last panel was this question of tax income shifting. To what extent is this happening? So I am sorry, this chart is kind of small. It is IRS data asking US multinational corporations where they earned income.

And as you'll see, several US or many multinational corporations report income in countries that are many, many multiples of those countries gross domestic product. And the question is, how can that be possible? And the answer is it's not possible. It's because income was shifted to those jurisdictions.

And to be clear, it's not the fault of small jurisdictions to enforce American corporate tax law. It's our fault. But that's the situation. Here's another chart. This chart shows the amount of profit associated with employees in different countries, whether they're employed by a foreign company or a local company. You'll see for most countries, they're about the same.

Interestingly, in Italy, the local companies have much more productive workers than the foreign workers. And we can think about why that's true. But then there are some other jurisdictions associated with tax shifting that have employees employed by foreign firms that are super productive, like Ironman level productive relative to regular workers.

And the question is, how is that possible, that the foreign firms are so much more profitable? And the answer is income shifting. How does it happen? You have a couple of lawyers working in Ireland, right? Ten lawyers sitting on $10 billion worth of IP. And those lawyers are really productive. Of course, they're not really.

They didn't develop the IP. The IP was developed in California. But in terms of the statistics, they turn out to be extremely profitable. And these kind of games are not just made up by law professors, right? There is significant data that suggests that companies do indeed engage in this.

And this is a Senate report that's there in the inset about a pharmaceutical company, AbbVie. One question then was, well, how much does it all add up to? If you take these IRS numbers and other kinds of information we have about corporations, it turns out that it's something like 20% of the US corporate tax base has been shifted. California's corporate tax largely piggybacks on the US corporate tax base.

Again, we can talk about all sorts of fun ways that doesn't happen, but in general it does. And if you then take that 20% number and you apply it to about the size of California's corporate tax revenue, about 20 billion, you get about a $4 billion increase if we eliminated income shifting altogether.

And not surprisingly, that's about the size of the estimate that our DOF has come up with. And so these estimates are credible. They're not guaranteed. The last panel, not guaranteed, but they are credible. In general, a few other things to note about income shifting. One is that the trend has been for it to increase.

So another thing to think about is also just playing defense. To the extent that income shifting is not addressed, it is likely to get worse. Another point about this, which people talk about is, well, what about the 2017 tax reforms? Weren't they supposed to make things better? And they have not.

We can talk about why that might be, but they simply haven't. Okay, a few other interesting pieces of information I wanted to share with you. First, this chart shows, again at the national level, so essentially same as California, that just a handful of very big corporations pay most of the corporate tax. We could sweep out huge numbers of smaller taxpayers from the corporate tax base and lose very little revenue and cause people a lot less headaches.

So we're only talking about a handful of of super big companies. Other thing interesting, and I'm sorry for the jargon, but the upshot of the jargon here is that not all large multinational corporations have the same appetite for aggressive corporate tax shifting.

Which is to say, if we change the Water's Edge election, which is a pretty simple change, some corporations, which are basically compliant types, are going to just pay more tax because that's the right amount. They don't have an appetite to be aggressive.

On the other hand, it does mean some of the very aggressive taxpayers, we need to have some belt and suspenders, some anti-abuse rules as well, or simply taking rid of the Water's Edge election might not do everything we want it to do.

And I'm very happy to talk about those again in excruciating detail if you'd like to talk about them. Okay, next thing, just very quickly, there's a question about who pays the corporate income tax. Corporations formally pay it, but who really pays it? Huge debate. Not going to get into it. Happy to.

But the general upshot is that the corporate income tax is a progressive tax, a relatively progressive tax. Tax policy is all about comparison. Is the corporate income tax wholly progressive? Probably not. Is it more progressive than other taxes, say, increasing the retail sales tax? Almost certainly. Right.

So that's the way to think about how these things fit together. So going back to the first slide, the current situation with the Water's Edge election basically fails, right, every criteria of sound tax policy. It's unfair to smaller businesses, to just domestic businesses, to less aggressive multinational corporations.

It's inefficient because it encourages all this paper shifting to get profits abroad. It's harder to administer because of all the games. And the evasion is not trivial. Okay, this chart shows in general nationally among the states that the corporate tax as a percentage of corporate profits has gone down.

And one feeling about this or conclusion one might draw is that these are big, complicated, sophisticated taxpayers and we should just give up. So I just want to show you this next chart. This next chart shows corporate income tax collections in New Jersey.

And you'll see around 2018 its collections shoot up dramatically. Now as a New Yorker, this brings me no pleasure to point out that New Jersey did the right thing. But nevertheless, it did a series of small things, some of which California has done, some of which it hasn't done.

So my point is not that California can do exactly the same thing or California can get exactly the same results, but the point is that corporate tax policy and reform matters and can have big consequences. And there's no reason to just preemptively give up because these taxpayers are just too big and too complicated.

Okay, so we have several ways forward. We could just go to worldwide combined reporting and don't treat income shifted abroad as outside the tax base. It takes advantage of national international reforms that I will talk about in a second.

We can conform to a provision of the federal tax code called NCTI, which brings in shifted income by formula. We'll talk about that. We can also adopt worldwide combined reporting for large taxpayers, NCTI for smaller taxpayers. And if we do any of these things, we should include some anti-abuse protections, which again we can talk about.

Okay, so before I'm finished, again just to try to be helpful. California pioneered the worldwide combined reporting method and it was forced to abandon it in 1987. I want to really emphasize the difference between recent liberation and and bullying by the Reagan administration. Those are not the same thing. California pioneered worldwide combined reporting. It was successful.

It was upheld by the Supreme Court. Margaret Thatcher wrote to Ronald Reagan. Ronald Reagan threatened to preempt California. California backed down in 1987. And that's all true, but that's not the same as saying, oh, we came to some really great decision in 1987.

One way to know that is that the the current Water's Edge election is a mess. It actually does contain nominally foreign source income in the context of subpart F income. I'm not even going to go into that, but if you want to, we can.

And certain foreign dividend, and those were included by formula and those formulas haven't been updated in light of lots and lots of current events, including the fun fact that subpart F income can be transformed into NCTI income and NCTI income can be transformed into subpart F income, and we only include subpart F income.

So no one would design a tax system that could do that. Okay, NCTI, what is NCTI? Net Controlled Foreign Corporation Testable Income. Incredibly, the one Big Beautiful Bill Act changed the name to this. It used to be called GILTI, which wasn't lovely either.

Suffice it to say GILTI brings back a certain number of income of foreign subsidiaries into the national US corporate tax base. And if California wanted to, it could piggyback on that and bring it into its tax system as well, either as a standalone alternative reform or as a complement to worldwide combined reporting.

And again, we can talk more about that. I talked about the corporate alternative minimum tax, the CAMT. What's that? That is a new national tax. Not that new, put in place by the Inflation Reduction Act in 2022. We can talk about its details. The most important part about it for our purposes is that that national act only applies to large corporations and requires them to use their financial statement income.

So to the extent that large taxpayers would be subject to worldwide combined reporting, and we told them, tell us about the income of your foreign subsidiaries, they already have to do that for this. So it's never been a better time to shift to worldwide combined reporting to the extent that they are already doing something similar.

I talked about Pillar 2. Gosh, what is that? Pillar 2 is one of two major international tax reforms advocated by the OECD that at this point dozens of countries, our allies have adopted in some form or another. And the key thing again about this reform are two actually.

One is it shows that profit shifting is a big deal internationally. The question arose whether our allies would be aggravated by moving to worldwide combined reporting like they were in the 1980s. Most of our allies have already implemented Pillar 2. The UK has a diverted profits tax. The UK has a tax on digital services.

The idea that they're going to come and say, well, you can't do worldwide combined reporting, I think is pretty implausible. And we can very reasonably say to them, you have the same thing. So it's a very different situation than it was before. But in terms of compliance, right.

Pillar 2 also requires companies to use their foreign statement income in order to have an international calculation. And again, worldwide combined reporting can piggyback on that. So one thing one often hears in these kinds of discussions, well, no state has moved back to worldwide combined reporting. And that's true.

Is that a good argument not to move back to worldwide combined reporting? Now, Professor Charles McClure, who used to be up here a lot, offer the following analogy, right. If every other basketball team insisted on having everybody tie their shoelaces together, why would you do that also?

So to the extent this is just good policy, we should just do it. Few other things, right. One of the big arguments against worldwide combined reporting relates to compliance. Evidence was collected in the context of the Supreme Court cases about the compliance burden posed by worldwide combined reporting. And this is in the 80s.

So before Pillar 2, before CAMT, when you have to use a three factor formula, not just sales. And the conclusion of California court cited by the US Supreme Court was it's not that big a deal. It wasn't that big a deal in the 80s. The idea that it's a big deal now isn't particularly plausible.

Also note that the regulations California used then allowed corporations to use reasonable approximations on the income of their foreign subsidiaries. Those regulations, as we've heard, are still in place. The auditors still use them.

And so there's really no reason why they could not continue to use them. So there's not a big burden on the FTB. Just heard that. Should not be a big burden on these big sophisticated taxpayers. Right. This is sort of summed up in this next slide.

Final slide related to this is, well, is there even more information that could be used by the FTB in assessing worldwide combined returns that companies can use in putting together worldwide combined returns? Yes, under federal securities law, they also have to report where their sales are in many cases.

And so that information could also be piggybacked on for purposes of the worldwide combined report. So in short, no policy is magic, but this is a pretty straightforward possible reform that would advance tax policy along basically every dimension. Thank you. I'm happy to answer any questions.

Thank you, Mr. Chairs and Members of the Committee. Here we go. I'm Jared Walczak. I'm a visiting fellow with the California Tax Foundation. I'm also a senior fellow with the completely separate but similar name Tax Foundation in Washington, D.C. Pleased to be with you here today to talk about this.

Maybe before I go into any planned remarks, I wanted to further answer a question from Chair Gipson that was asked earlier. Actually, I think it was Chair McNerney discussing the question of why do so so few companies, why do only 6% actually elect Water's Edge?

And one important piece to understand there, of course, is that even with C corporations, the vast majority of C corporations are small, they're local, they're probably primarily based in California. Maybe they have some extension to other states, but it doesn't matter.

They don't need to elect Water's Edge because by definition they do not have any sort of global income. So that's sort of the wrong denominator if you're thinking about like the vast majority of them not. It's just they don't have international income. So it's the smaller group we're talking about that's making that election.

More broadly, I would submit to you that, you know, the Water's Edge determination was made for a reason. And yes, there was international pressure, although I think there were reasons for that international pressure, but it's not an accident or an omission. There were good policy reasons for this determination.

And as we have this discussion around profit shifting in particular, I think it's extremely important to understand that this is not and does not purport to be a tax on profit shifting itself. And I think that can sometimes get lost in the analysis as we think through, how much is there? How do we bring that back?

There were questions to the FTB. How do you determine how much profit shifting we there is? This wouldn't actually determine that because that's not what it does. It tries to address that issue, but that's not what it's taxing. So firstly, to that question of how much profit shifting is there, Professor Shanske cited a $300 billion shifting nationwide.

I believe that's from Kim Clausing's study. There's a recent study out of Duke University suggesting it's 20 billion. So there's huge variations in the understanding of how much profit shifting is actually taking place.

More than that, though, what is functionally being done here is bringing in all of the factors of foreign corporations or multinationals, whether they're based here or they're based abroad. So it's not saying here's all this activity in the United States, they're doing some profit shifting, let's bring that back.

It's saying let's take all of the subsidiaries and affiliates of this multinational corporation, whether it's based in the US or whether it's based abroad, and let's bring those into the unitary group. Now the vast majority of the activity abroad is true economic activity abroad. Companies don't just exist in the United States.

They have sales, they have manufacturing, they do things abroad. So you would be bringing all that in. Imagine for sake of hyper simplicity, you have a foreign based company that has two subsidiaries. One's here in the US, sells into the US. We'll just say it sells entirely into California. Another is based abroad and sells entirely internationally.

If you bring in worldwide combined reporting here, you bring all of the activity of that foreign subsidiary, but of course they have no sales into California. So you've dramatically diluted the amount of sales in that factor. If the foreign entity is more profitable, then you gain. If they're less profitable, you lose.

But you're not saying what profit shifting activity is taking place. You are taking in that entire group and then using sales factor apportionment. The problem here in part is that the rest of the world doesn't use formulary apportionment. US states use factor apportionment. Most states like California just use sales factor now.

But the rest of the world is using separate entities accounting. They are looking at the activity within that country. And if a single entity operates across multiple countries, they are going to use credits for taxes paid to other countries. California does not offer those credits.

So there's this significant potential for double taxation where those other countries are doing this credit system. California is doing it based on this sales factor. And those two regimes do not speak to each other. They don't work together in any way. That lack of credits in particular is a significant issue.

Fundamentally, much of the consideration on worldwide combined reporting I think rests on sort of this faulty assumption that activity abroad is profit shifting. And that's just a very minor portion of the activity that actually takes place abroad, much of which is in company that have subsidiaries that simply are not doing any business in the United States.

Profit shifting itself is also far less of an issue. And here I would disagree with Professor Shanske that the changes both in the Tax Cuts and Jobs Act and in this current Reconciliation Act address this in a variety of ways, as do other policies. Now what they're not going after it in the sense of preventing it, but what they are doing is they're fundamentally changing the nature of how we treat some of that activity.

Also as he referenced, you have this worldwide effort, you have the Pillar 2 effort, you have the global base erosion rules, the 15% minimum tax that many countries have adopted. All of this fundamentally reduces the benefit of profit shifting.

It's much harder now to have your IP in another country and shift the profits to there because other countries do have the 15% gross up or they have a 15% minimum tax now. And in the United States under NCTI, there's also it functionally operates as about a 15% minimum tax. So a lot of this benefit of profit shifting has dramatically decreased. So this is focusing on something that is not the same issue as it was and under a very different regime than it was in the 1980s.

You know, we do have, you know, what was GILTI now NCTI. We have BEAT, which is the Base Erosion Anti Abuse Tax. As has been referenced in multiple presentations, California already does try to address some aspects of international income that looks pretty clearly like it should be part of California's income. There's the subpart F question.

For instance, you know, you have foreign dividends that are taxed in the United States. And you know, administratively trying to bring all of this in and taxing it on a worldwide basis can be a nightmare for some firms. And I think that it is more of a challenge for the FTB as well when you think about the different profiles of these firms.

So right now, I think I would suspect is roughly accurate that of your largest firms, about half of them are electing worldwide, or half of them are worldwide, half of them are electing Water's Edge. Where you're going to see a big difference though is this the foreign based multinationals.

Because if you are US based, no matter how many subsidiaries and affiliates you have abroad, if your parents here, you're doing GAAP accounting and you are filing a lot of forms with the federal government and you have a lot of information on a US accounting basis on the activity of all of your firms abroad.

If you are a foreign based parent, you're probably electing Water's Edge here for your subsidiaries and affiliates here. Because think about trying to define that unitary group, which you would have to do. This requires unitary analysis. You have to determine foreign governance, entity formation rules, ownership, flow of assets. All of this has to be determined.

It may not be documented in other countries because it's not required there. It would be under different accounting rules than we use. It would have, there'd be currency fluctuations you have to account for. Documentation that might suggest how much functional integration there is.

It may not be in English and may not comply with the requirements here. So there's already this significant filtering effect. The companies that can do this may be doing it. The companies that would find it the absolute hardest to do this are probably the ones that are taking that election now.

There's other reasons you may take an election as well, but your toughest cases are absolutely going to be the ones that are taking an election right now. And you would be bringing those in. Deferral rules differ, so many different things that you would have to do.

And the California FTB would have to become like this mini IRS for the entire world, which I think is a fairly challenging thing to do. It's been referenced that in the past reasonable approximation was an option and it was used extensively. So the US GAO did a study at the end of California's worldwide combined reporting period, the mandatory period, and they looked into how this had actually worked.

And what they concluded is that basically everything eventually fell to reasonable approximations, that the foreign based companies were not able to provide the documentation required, were not able to provide the information that was necessary, did not have the tax documents in a way that complied here and couldn't convert it, and that either they, or more often, you know, the FTB used reasonable approximations. And both sides rarely found them reasonable.

One thing the GAO found was that almost every one of them resulted in tax disputes, that the companies and the FTB were constantly in disagreement about whether the approximation was reasonable. There were negotiations, tax was indeed levied, but it was levied based on what the GAO referred to as very rough estimates, approximations, and guesses.

And this was one of the reasons why there was so much foreign pushback on this is that many foreign countries and their companies felt, I think legitimately, that they were not able to submit the information that California required. And therefore California substituted estimates that may not have particularly accurately reflected their actual tax situation.

If the question is did California collect taxes, it was a success. If the question is were they collecting the right taxes, it's less of a success. Again, this can result in gains to revenue or loss to revenue depending on the company.

And you will have companies that are less profitable for their affiliates abroad and bringing them in will dilute the factors and will result in less revenue. You have other companies that are more profitable. Might be because of profit shifting, it may well just be because they have a more profitable branch abroad that does completely different business abroad.

And that would generate revenue. But it's hard to determine exactly what this is. Several states have looked at worldwide combined reporting in recent years. It's been explored in Maryland, in Vermont, New Hampshire, Minnesota. All of those states rejected it. There were a variety of reasons.

Revenue uncertainty, litigation risk, the additional tax controversy that is certain to come from it, the pushback from foreign countries and concerns around that. I think those are all factors. I think the final thing I'll say before yielding for questions for both of us would be I agree with what both LAO and FTB said earlier.

That based on the fact that California, like most states, use a single sales factor apportionment, you can't really say this is going to reduce sales into California that much in the sense that companies probably are going to continue to sell into California no matter how heavy the taxes are and how much it brings in.

That's hard to avoid. But Professor Shanske cited someone earlier, Charles McClure, and I'll reference something that he talks about. He talks about how the use of the factors essentially breaks the corporate income tax into different parts. It's essentially, even though it's a tax on capital, is a tax sort of on the sales, the property, and the payroll, and which ones or which channels you use determines where some of that burden flows.

So if it becomes much more aggressive taxation in California for multinational businesses that are selling into California, McClure and many others suggest that one of the channels that that additional tax burden will flow through into is higher prices for Californians on those products. And of course, we're in a global market.

If you have companies that aren't affected by the selling into California, law of one price is probably going to prevail. But to the extent that lots of multinationals bear this burden, you may be taxing the multinational. Some of that feedback might come into California in higher prices. Thank you.

Thank you very much for your testimonies. Next we'll bring it back to the dais for any questions of these witnesses.

No questions. Okay. Chairman.

Well, hey, thanks. I really, I gotta say, very informative and I appreciate the testimony. A couple of things I'd like to drill down on. So you mentioned, Mr. Wolczak, that you thought that eliminating the water's edge wouldn't necessarily hurt, deter businesses from doing business in California, but it might raise prices for Californians. Any other ill effects that you would want to talk about.

Mr. Chair I think the other significant effects are the heavy compliance costs, the likelihood of double taxation, which does have real consequences, and the litigation that I am confident will result for this. I mean, we have two cases saying that the combined worldwide combined reporting is at least facially constitutional. That doesn't mean that it can't yield unconstitutional results.

And that's especially the case to the degree to which, you know, there would be a decision to be aggressive on what these assumptions would be where companies can't provide the adequate information, they may be prevented from providing that. For instance, in some cases there might be, you know, foreign secrets, foreign trade secrets, things like that.

There might be privacy rules in other countries that prevent them from sharing this. California has to step in there. That's a litigation risk. So there's a lot there in the litigation side, the lengthy tax disputes that will arise from this. But in the 80s, a very significant concern was a reduction in foreign direct investment into California.

And I would agree that that is less of an issue, maybe not a zero issue, but less of an issue with single sales factor, because whether you invest here or not, you're captured if you sell into the state.

So what? One of the things that the professor brought up was sufficiency. Do you think that the foreign entities are being paying sufficient revenue to California for the business they do here, for the harms they may bring on society and other purposes?

The corporate income tax used to be much more of a tax about the cost that a business actually imposed in a state, and it has ceased to be.

So with single sales factor apportionment, any of the costs, most of the costs that are associated with a business's activity in the state, where you definitely provide services to them, or there would be any cost the state bears are going to be where the employees are and where the property is.

And the choice to go to single sales factor, which made a certain amount of sense for states, completely obliterated that distinction where it is really no longer functionally attacks about the cost that any business imposes on California. So to some degree, the sufficiency argument gets a little more complex.

What is sufficiency when we're talking about ignoring any of the factors that reflect California. I would say the vast majority of the activity that would be subject to this tax is activity that is genuinely taking place abroad. And of course there's a dilution of factors in this. You'd be taxing a smaller share of a larger pie.

But when we think about what is owed to California, a lot of what we're talking about here is bringing in activity of subsidiaries and affiliates of entities that are doing full business, broad. They might be foreign based. They have some U.S. entities. They have some completely separate, not speaking to each other, foreign entities.

I don't believe that there is a sufficiency concern if those companies are not being brought into the unitary group.

Okay, thank you. I've heard. Well, let's talk about the IP issue a little bit. One story I heard was about a company that was looking for venture capital to open up a pharmaceutical business in California.

And basically the venture capitalist said, if you're going to open up a business in California, then we're not going to give you money. We want to give you money to open up a business outside of the country somewhere so we don't have to pay those taxes.

So I'd like a little discussion about ip, the value of IP that's created here in California, you know, and is that something that Water's Edge is going to be able to deal with? And from both witnesses.

Mr. Chairman, I agree that it is a concern that there are, and have been historically, companies that use profit shifting. The challenge is always one of balance. You want to avoid activity that clearly just looks like tax avoidance.

You also want to make sure that you're not dramatically overtaxing a much larger segment of activity to tax something that may be relatively modest. That is one reason why these different estimates of profit shifting are really important. If this is a $20 billion nationwide problem, it looks different than if it's a $300 billion nationwide problem.

In terms of how aggressive you would be at combating that. I think more importantly, we have a lot of changes now that help address this. Given that much of the world has gone to a 15% minimum tax. And if a country doesn't abide by that, a lot of countries will top up to 15%.

They'll do that through pillar two in the rest of the world. They'll do it through Nikti in the United States. That really undermines a lot of the benefit. It doesn't prevent a company from putting IP in Ireland or the Cayman Islands, but it takes away a lot of the benefit of doing that.

And therefore, I think it makes this far less of a concern. I'm not going to say zero concern, because no matter what design you create with the corporate income tax, you will have tax avoidance activity. And there's always just the balancing act of how much do you want to potentially double tax a lot of companies?

How much complexity do you want to bring in? How much do you want to have to rely on very rough approximations because data are not available to tackle an issue that may be much, much smaller than what the, what the broader measure is? I think the measure is disproportionate to a concern that I agree is valid.

Thank you, Professor.

Gosh. So going back, let's say, to the Duke study, the $20 billion study which I cited in my testimony, they note, first of all that they are swimming against the current. That's not the consensus view. But they point out as to that 20 billion, that they do find it is overwhelmingly concentrated in super aggressive firms.

And so for the integrity of the tax system, they would still recommend reform in order to prevent that. In terms of putting IP abroad, that move is something that would help you because of separate reporting at the international and national level, where you treat different companies as separate from each other.

And it helps you from California's perspective because you also put it beyond the water's edge. Now, one question is, well, maybe the national government will help us. I'm here to tell you the IRS is not going to help us.

And even before the Federal Government stopped, there was the additional issue that this separate reporting regime was such a spectacular consensus failure that the world combined in OECD to agree on pillar one. Now pillar one is dead. That's not going to happen.

But the point about pillar one was that it was going to essentially move to a worldwide combined reporting concept in order to deal with transactions between companies because of the failure of separate reporting. So the idea that we can rely on national efforts to prevent income shifting won't happen. Similarly, I hope pillar two succeeds.

But it's worth noting, aside from the fact that it itself has all sorts of complicated gaps and games that these companies will probe. It's a 15% tax. Our national tax is 21%. California's tax is over 8%.

That, you know, when you're talking tens of billions of dollars of profits, that's more than enough to pay lawyers a few million to get your stuff abroad. So I don't think it would be justified for you to be optimistic that the current reforms are going to change the overall trend towards income shifting.

Is there anything else that you disagree with in. In Mr. Wozczak's testimony that you did? Is there anything specific that you'd like to talk about?

Well, I mean, I like Jared and respect him, so I guess I will say one thing which I omitted to say is that right now California with the water's edge election, has the worst of all possible systems. Why?

Because if you're a taxpayer who would benefit from worldwide combined reporting because you had losses abroad, you just go with the default. If you would benefit from income shifting, you take the water's edge election. So we lose both ways. Other states have the water's edge election required, so at least we don't lose on the other side.

So right now, yes, there is a selection issue, but right now we're selecting the worst possible scenario. And it is, as I understand it, practice for these big corporations to figure out whether it makes sense to do worldwide combined importing or not, because they could elect one way or the other.

And so the idea that an expense that they're taking upon themselves in order to figure out whether they can save money is too onerous, I don't think is that plausible. I will say one other thing relating to Minnesota. A few years ago, Minnesota almost became the first state to go back to worldwide combined reporting.

Among other reasons, it backed away, as I understand it, was concern about some of these compliance issues. So two things about that. Well, I guess three things. One is, I think that was a mistake for all the reasons we talked about. Compliance wouldn't have been a big deal.

Number two, no state is better positioned than California to move back to worldwide combiner pointing, because we still do it. Yes. Maybe we should hire a few more auditors to be trained by the current auditors using the current manual as to how to do that's perfectly reasonable.

But the idea that we don't know how to do it doesn't make any sense. And the third point is that Minnesota in the end conformed to this federal tax provision now known as ncti, then known as Gilti, on the perception that it was easier bracket whether it was easier or not.

But it is totally a backup option that this Committee can consider, and I don't think an unreasonable one.

Thank you. Before I yield the the podium, Mr. Wozczek, final words.

I certainly agree with the professor that there is a choice here and you would expect companies to make the choice that is best for them. And that is not something you experience in most states. I would say that there's two channels for that choice.

One of them may be that especially a US based multinational is saying which system is best for us for tax purposes. And by having that election rather than just choosing what most states would be is just pure water's edge, you are providing, providing that advantage.

The other is companies for whom compliance would be incredibly onerous regardless of what the tax liability would be for them. That it would be incredibly difficult for them to do. And that's probably especially true of your foreign based multinationals.

So some of this may be a company saying we could file either way, but we prefer to file worldwide. Some of this is companies who are saying we would struggle immensely to be able to do this.

We would not be able to provide all the information which would mean we'd be back into the FCB making reasonable assumptions field. So that, So I just want to make clear that it's not the only reason that companies aren't all running the numbers.

Some of them feel that there is a challenge that they would not be able to run the numbers and that's why they are electing water's edge. I'm going to yield back.

Thank you very much. I think Senator Becker.

Yes, thank you. And apologize a little in and out with another meeting. Just in your written testimony, I just want to go over that you said that the corporation would not reduce its corporate tax by moving facilities out of California. It can only do that by choosing to make fewer profitable sales in California. So in your view doing this would not be a reason for companies to leave the state?

Yes. That's terrific. And I guess I would say two things, right? The basic idea is that companies are already in a competitive marketplace and in many cases also have enormous market power and they are charging everything they can. And so the idea that they're going to charge more as a result of this is unlikely.

Number one, I mean, number two, if they did charge a little bit more, then yeah, that would be borne by consumers and it would be a somewhat regressive tax. But the way to think about this from a tax policy perspective perspective is the other comparison.

The other option is leaving a million people to lose their health care or the other option is increasing the sales tax. And those are going to be much more aggressive measures. And the final thing, which is sort of a, I don't want to say fun. Tax policy is never fun. But one curious thing about the location. Of.

Real economic activity is that right now California's corporate income tax is so porous for the biggest corporations that they don't have to pay very much to begin with.

And our R and D credit is so generous that when you combine those two, they're not paying anything and the R and D credit is not creating any incentives for them.

If we actually had a corporate income tax system that worked, that actually imposed taxation on the basis of making profitable sales here, now those corporations would be like, Oh, you're going to give us an RD credit if we locate a new factory in California. Now it's worth something.

So there's a connection actually between encouraging economic activity in California and having a corporate income tax that actually doesn't have gigantic holes in it.

Right. Well, I appreciate a couple of things you said. I mean, on the choice, we do have a wide range of other ways to raise revenue or, you know, cuts, for example. But the, but, but I appreciate your point. I do like that point about, you're saying about making our current incentives more valuable.

But if, is there incentive then for a company to choose another state that doesn't have this, if we went to this system, would there be incentive to choose headquarter another state that doesn't have this?

I think that Jared and I agree, I take another step back. California is going to tax an apportioned share of the income of a multinational enterprise. Let's say generously, that's 5%. And then we'll just say our tax rate is 9%. We'll round up. So we're talking 8% times 9%.

And so the question is, if you have reason to locate a factory here or a headquarters here, why would you not do it for such a small number? It doesn't make a lot of sense just to begin with. But on top of that, our corporate income tax is based on how many.

First of all, you have nexus based on making sales into the state, and then corporate income taxes apportioned based on sales into the state. So now the idea would be you wouldn't make profitable sales into the state. The connection with having a factory or a headquarters or a lab here is, you know, super attenuated. And so the odds of that actually happening is very, very low.

Okay, thank you. We'll think about that. Just a last point on the. Go back to the chair's question about the intellectual property. And again, apologies some of that discussion. So the belief is that, let's just say moving to end Water's edge would tamp down on any incentive to. On the intellectual, to shift intellectual property. Is that the feeling? your belief?

Yes. Right. The idea is that that chart showed, wow, look at all those super profitable lawyers In Ireland, worldwide combined reporting says your Irish subsidiary is part of the one big business. So it doesn't matter if you ship the money from one pocket to your Irish pocket, it's still in the pie.

And California would divide the pie more narrowly because it's including the worldwide, but that income would still be in the base. And so yes, it's supposed to. It should combat income shifting. Okay, a lot to consider. Thank you.

Thank you. I have a few questions and I'll just go back and forth. Mr. Walzack, can you give me. You talked about double taxation. Can you give me an example about double taxation? I'm sorry, Mr. Chair, could you. About what Taxation? Double taxation.

Double taxation. Yes. Yes, Mr. Chairman. Sorry. So essentially we would be overlaying completely different systems in the United States. We of course for state purposes have formulary apportionment where states can can use some combination of sales, payroll and property in the states. Most states like California have now primarily or exclusively gone to sales factor.

So when you determine, let's say just a fully US based company, when you're determining what percentage to allocate for to apportion for tax purposes to California, if they have 10% of their sales in California, you apportion 10% of their profits to California and you tax it. But the rest of the world world doesn't do that.

They are using separate entity systems. So they are taxing based on the activity in their country. If the entity is taxed in multiple countries, has profits in multiple countries as a single entity, then they're going to get credits for taxes paid to other jurisdictions, much like states provide credits for taxes paid to other states for individuals.

And that's how that system works. So these two systems don't speak to each other. You could have activity fully abroad that has significant tax liability abroad, and California would then go superimpose a tax on it based on factor apportionment. They're just fundamentally different systems. In the US that would not be legal.

The Supreme Court has said that states have a lot of leeway in how we apportion income. But all the systems have to be internally consistent. Basically, if every state adopted the system, same thing, it wouldn't lead to double taxation. These systems are just fundamentally different systems and they really can't speak to each other.

Got it. Okay, thank you very much for that example. Staying with you. Why should any taxpayers be given a choice between two methods for how they should be taxed? And won't they always just choose the method that that results in paying less?

Mr. Chairman, I'll answer that both parts, starting with the second, because the answer to the second is they won't always choose that because there are going to be many corporations that just functionally find it incredibly difficult to comply with this.

Whether it's that they're using different international accounting rules, that they have limitations on how the different affiliates and substitutes subsidiaries speak to each other, it may simply be incredibly hard for them to calculate across a new worldwide unitary group what their tax liability is.

So they may be electing water's edge because they basically don't think that they can do this. That said, yes, there are absolutely companies that are electing based on what is the most preferential to them, and that is an option that you have given them. I'm sure there's companies that wouldn't like this.

But a solution to that is to be fully water's edge, as most states are.

Okay, from a fairness perspective, what is the strongest argument against moving to a mandatory worldwide reporting that it taxes the.

Wrong income in the wrong places? Corporate income taxation is already very complex, and I think there's already an argument that it doesn't quite tax exactly where activity is taking place.

But if you have companies abroad that have no business with California, in fact, probably have no business with anyone in the United States, but they simply are part of the same foreign parent that also has subsidiaries here, combining their income, combining their profits and losses, bringing that into California, from a fairness perspective, there's a question of why are we doing that?

That activity is fully separate from California. California. Does it make sense? It may bring revenue to California, may lose revenue for California depending on how profitable those other entities are. But also from the fairness perspective, the compliance costs can be extraordinary. And if a company is prevented by laws abroad or by.

Or finds it incredibly difficult from an accounting standpoint to provide this information, or if some of those individual companies just refuse to do it because they're not connected to California, but the California entity would essentially obligate them to, then it falls back on potentially very rough estimates that I don't think accurately reflect the actual tax position.

Professor, do you have a different thought with that question?

Yes, please share. So in the abstract, the notion that these two different systems could result in double taxation, Totally possible. In the abstract, could a reform like this lose money because we're bringing in more company, more companies with foreign losses relative to their us to their foreign income?

Yes, it turns out that those are very, very, very unlikely scenarios. So to go to the separate reporting concept or then the double taxation at the international level, the international tax system using separate reporting and credits for taxes paid. Right. It is a failure. Particularly IP heavy companies are paying very little.

That is why we have pillar one. That is why we have pillar two. That is why the whole. So the notion that they're paying a reasonable amount and now California is going to layer on top of it is highly improbable.

And it's very improbable that Pillar 2 is going to change that very much, though I absolutely would like it to. So there's that. Wait, so it was a double taxation. What was the second question? I apologize. Assemblymember.

The second question was from a fairness perspective, is it the strongest argument against moving for mandatory worldwide reporting?

So I mean, I'm not going to offer you the strongest argument against it. I think the fairness argument for, for it would be right now the companies that benefit from the water's edge election are benefiting from aggressive tax maneuvers. They tend to be bigger and so they're not paying retail that all those smaller taxpayers are paying.

They're paying their 8%. These bigger taxpayers are not. And so we are rewarding aggressive income, shifting to the tune of three or 4,000,000,000 dollars and leaving the burden to be paid for either by all of us as consumers or as purchasers or just as people purchasing health care. And that is the fairness argument for asking.

Again, this isn't a tax increase. It's just saying, hey, we've been forced to blow this hole through our income tax system by the Reagan Administration. Let's just plug it and have you pay the same as the smaller companies.

So I wanted you to go with me for a moment. I understand the United States Supreme Court has upheld the worldwide reporting, but with this Supreme Court in place, do you think that they would rule a different ruling. Zero boy. Or take a different position than previous?

Well, let's just say that I understand and I appreciate your question as to some of the more incomprehensible, putting it nicely, decisions of the current Supreme Court. So I recognize that.

On the other hand, I would also emphasize that these decisions are, are grounded not just in common sense, in terms of letting states pursue their own tax systems, but on federalism grounds that these decisions are grounded on the idea that if, look at the opposite, right?

If you say California can't have worldwide combined reporting because it's too different from what the federal system is, then what are you saying? You're saying states have to resemble the federal system. Now if you want a tax that really doesn't resemble, resemble a federal system. Look at Texas margin tax.

That tax is nothing like the federal corporate income tax, personal income tax or anything and it falls on businesses and they hate it.

How does the Supreme Court write a decision that says California can't have worldwide combined reporting which is basically just a twist on the corporate income tax which the Federal Government already has but Texas is allowed to have its margin tax? I'm not sure how they write that despite decision.

So I would say that we have precedent and common sense in our favor and federalism principles that even the current Supreme Court seems to think are important and that therefore the precedents are relatively.

Stable with that same with that. In that same along the same lines, do you think there's a risk that the Federal Government could enact legislation prohibiting California going in this direction? I know you don't have a crystal ball and it's a hypothetical, but this is the era and the atmosphere we're in.

Well, I appreciate that and my crystal ball is definitely broken. So let me so I would say this again. A law like that would have to be presumably past the Senate filibuster.

There would have to be a Republican majority and Republican significant Members of the Republican caucus themselves emphasize their concerns about federalism and would take and so I cannot confidently predict that that would not happen. I recognize the things that you recognize in terms of the world. On the other hand, it would be a significant undertaking.

And you know, the other side which I again would suggest to you is, you know, sort of preemptive surrender. You know, we should do the right thing and let the chips fall.

That's saying we're just not, we're just going to let these multinationals continue to shift income and not, you know, take care of our people in light of these giant cuts because what the Republican majority might do I would urge against that. But I can't promise you my last.

And final question that we'll ask the third panel to prepare themselves to come up. Last and final question, if you can answer this in a minute would be great. And this is for both of you. If we move in this way for water's edge election, how long should we give taxpayers to keep filing using this method?

Two years or five years longer.

Mr. Chair, firstly again thank you for the opportunity to present the Committee. I appreciate it and I'm happy to take follow up questions at any time to this question. Obviously I would hope that this would not be the direction that the Legislature would take.

But I would also note that election have been made over for a seven year period and that shifting as of 2028 is a pretty rapid shift, especially when you're talking about companies that may find this to be a very high compliance burden.

That's not all of them but for a significant percentage that sort of shift, especially when they made a seven year election seems very rapid.

So first of all just again also reiterate my thanks to people here and again my willingness to answer any possible questions. First, of course I just emphasize that there is no vested right in the tax system. You can eliminate the election. The question is prudential. I think two years is reasonable. I would not be offended by three.

I mean there are different compromises in terms of what kind of transition you want to give these taxpayers as well as the FTB to put potentially staff up.

And furthermore though, I would urge that you tinker with the water's edge election so that in that intervening period we bring in for water's edge taxpayers some share of NICD so that a certain amount of shifted income is brought back into the tax base at a time when we really need it.

Well, thank you very much. We appreciate you both. I'm going to turn it over to the Senator.

I don't have any additional questions. Again, I thank you guys, panelists, gentlemen, professors, for your work. And it's been informative, I can tell you that. Thank you. Thank you. Okay, next panel.

We have Kayla Kitson, Senior Policy Fellow, California Budget and Policy Center Dan Kostenbauder, Vice President of Tax Policy for General Counsel, Silicon Valley Leadership Group; Marilyn Wethekam Council, Council on State Taxation, and Terry Brennan of Director of Revenue, Budget and Pensions, SEIU California. So this should be an interesting panel.

Thank you panelists for agreeing to testify this morning. And would you please proceed? Kristin? Oh, Kaylan. Excuse me.

Oh, Good morning, Chair McNerney. Looks like Chair Gipson had to step out. Members, I want to thank you for the opportunity to be here today. I'm Kayla Kitson. I'm a senior Policy Fellow at the California Budget and Policy Center.

The Budget center is a nonprofit, nonpartisan research and analysis organization committed to advancing policies that improve the lives and expand opportunities and promote well being for all Californians. Again, I want to thank you for the opportunity to testify on why it's critical for policymakers to address the Water's Edge loophole.

And I'll just note that I referred to it as a loophole because it does reward aggressive tax planning by some global corporations, which I don't believe was the intent of legislators when they created the Water's Edge election in the 1980s.

This is also a policy that deprives the state of billions of dollars in revenues each year that could be used to improve the lives of everyday Californians.

And this is especially critical now when millions of Californians are facing deep harms as a result of the federal cuts to health care, food assistance and other services that federal policymakers made through HR1 last July. And those are cuts that were made to help pay for massive federal tax cuts that primarily benefit corporations and wealthy individuals.

These recent tax cuts, of course, are in addition to the tax cuts provided by the 2017 federal tax law, which, among other policy changes benefiting corporations and high income households, slashed the federal corporate tax rate by 40%.

Researchers that studied that 2017 federal corporate tax cut estimated that about three quarters of the benefits of those cuts go to the top 10% of earners. And that's primarily firm owners, executives and highly paid employees who. Sorry.

Corporate tax breaks also entrench existing disparities by further benefiting those firm owners and highly paid employees who happen to be disproportionately white.

The continued existence of the water's edge loophole in California has cost the state billions of dollars over the years by allowing corporations to shift profits into offshore tax havens and then ignore those profits for the purposes of California taxes, thus reducing their state tax bills.

These are dollars that could have gone a long way in supporting the health and well being of vulnerable Californians small struggling with the state's affordability crisis. The loophole also gives large corporations a tax advantage over smaller domestic businesses which don't have the opportunity to use these types of profit shifting strategies to minimize their tax bills.

So in that way, closing the loophole would put global corporations and small California owned businesses on a more level playing field.

The most comprehensive way that we talked about is to address this loophole is to eliminate the water's edge election and require corporations use the worldwide combined reporting method that was discussed earlier, at least for the for the largest global corporations. It was discussed earlier that worldwide combined reporting is not new in California.

We've heard that the state's tax administrators can easily support the transition and because the method is already the default for corporations and corporations will use the worldwide method when it does benefit them, the argument that compliance would be too complex should be viewed with some skepticism, especially in light of the other reporting that corporations are required to do at the federal and international level.

As Professor Shansky noted, I also want to reiterate that the frequent claim that corporations will flee the state if California enacts policy changes that closes loopholes or asks corporations to pay more of their fair share is really overblown.

As it was explained in the previous two panels, because we use the single sales factor method to apportion corporate profits, relocating employees or property out of state is not going to result in corporate tax savings as long as corporations are continuing to make sales to California's large customer base.

I'll finish up by noting we're in a really important moment in history when it comes to state level investments. As we've seen the Federal Government shred the safety net for people in California and across the nation.

We know state leaders are facing difficult budget decisions now and in the future, but it should not be a difficult decision to prioritize services that keep California healthy and economically secure over maintaining tax breaks for large corporations that stash profits and tax havens. Thank you for the opportunity to testify and happy to answer any questions very much.

Next witness.

Chairman and Members of the Committee. My name is Dan Kostenbauder. I'm the Vice President for Tax Policy and General Counsel for Silicon Valley Leadership Group it's very important to understand the history of how California came to have water's edge legislation.

I'm going to focus my remarks on some of those circumstances, particularly those that still have relevance today although 40 years later. So in early 1980s California was one of 12 states with worldwide unitary taxation. 1983 in the summer the United States Supreme Court in a container upheld the constitutionality of California's water's edge applying to US multinationals.

It also that decision also prompted efforts to get President Reagan to support federal action to prohibit or limit worldwide unitary taxation. He didn't do that.

Instead, that September 1983 Treasury Secretary Regan announced the formation of a working group to address issues related to federal to worldwide unitary and there were Members of the Federal Government, state government, including Governor Duke Magian who were tasked with recommending some responses to how to deal with worldwide unitary. A year later the report was finished.

Treasury Secretary Regan delivered a Chairman's report with supplemental views. One of the primary recommendations conclusions was that there was consensus that water's edge unitary combination was appropriate for both US and foreign based multinationals. The business community and the state governments had separate statements. They included with certain provisos for accepting that.

But the upshot of it was that would be something that the states could work out at a state level. And there were also some additional major questions that were specifically allocated for further state deliberation.

One of the other statements came from one of the working group Members who was the US Under Secretary of State for Economic Affairs and he noted a large number of inputs from trading partners that were strongly opposed to worldwide unitary and they included three Prime Ministers of different countries who directly reached out to President Reagan to complain.

And so the opposition to major trading partners to worldwide unitary taxation was a critical factor because President Reagan, former Governor of California was a strong proponent of federalism but he also had to manage and deal with international relations and international trade.

So by October of 1985, 5 states had adopted had adopted a water's edge approach and left seven, including California, with worldwide unitary system. That year 85, the California Legislature worked on this issue very strenuously. Was a journey without a conclusion. In July of 1985 the UK Parliament passed anti unitary legislation to allow retaliation against US multinational companies.

The UK Chancellor the Exchequer reached out to our Secretary treasury and stated that he would be under pressure to implement those retaliatory measures if the US Federal government did not express its opposition to worldwide unitary.

Secretary of the Treasury Baker at that time was very concerned and he recommended to President Reagan that the Administration would publicly support federal legislation to require all states to use a water's edge approach.

So in 1986, the California Legislature and led by Senator Alquist who was at that point chairing the Finance Committee, and Assemblymember Vascon Salis, who chaired the Ways and Means Committee, they were the leaders of the effort. And so repealing the Water's Edge election could put us right back to where we were in the early 1980s.

Foreign governments would put great pressure on the US government to impose water's edge treatment through federal legislation. And there would be a lot of businesses in the US as well that would be interested in avoiding the prospects of retaliation.

So the alternative, subjecting only US multinationals to mandatory water's edge would certainly put US based companies at a competitive disadvantage to foreign competitors. So thank you.

Thank you very much. Next witness.

Thank you. Good morning everyone and thank you very much for the opportunity to be here. My name is Marilyn Wethekam. I am of Council to the Council on State Taxation. Cost is a not for profit trade organization that was founded in 1969.

We are headquartered in Washington D.C. and we represent approximately 500 multi jurisdictional multinational corporations, most of whom who do business in the state of California. Our mission is to promote the equitable and non discriminatory state taxation of multi jurisdictional businesses. We are not a no tax organization by any stretch of the imagination.

In the short time I have, I really have just two points to make. One to follow up on some earlier. Both of them follow up a little bit on the earlier conversations that we've had here today. One dealing with revenue and one dealing with what my co panelist is referring to as a loophole.

I would think that the goal is to have a steady stream of revenue which you guys can build a budget off of and which you can fund your state programs off of. For the last 40 years we've heard that there's been a water's edge election in place here.

But you've had a tax scheme with Water's Edge and with Worldwide which you have had the ability to estimate your revenue stream and utilize that revenue stream. The adoption of mandatory worldwide combined reporting is going to put you somewhat at the mercy of a global economy.

I think it's important to point out that multinational companies do not just do business with two companies, one a domestic and one which we've been using Ireland today based in Ireland. They do business through hundreds of affiliates and subsidiaries. There's going to be winners and losers in that group and in any given year, they may flip.

You may have a winner in one year and a loser in the next. Those losses are going to come into the base in California. And why do you have losses? Look at the mix of your businesses. Where are they doing business? Not everyone's doing business in a first world country.

You have industries in this state that do business in countries that are maybe economically challenged or have some political volatility that is going to impact how that income is earned, if there is any income. Additionally, you also have somewhat of a shrinking global economy.

And if anything that we should have learned from COVID was that all economies do not recover at the same time. So should we ever have another God forbid pandemic, we could. You're going to have a different recovery period for the economy.

But also additionally, I think what you have to take into consideration, you may have a larger pie of income, but as we've been discussing today, California is a single sales factor. State gross receipts in California to total gross receipts.

Every one of those entities in this multinational group of companies, whether they have income or not, have gross receipts. Those receipts are going to go into the factor, not into the numerator, but into the denominator of that computation and that percentage is going to be diluted.

So while you may have a larger income pie, you're going to have a much smaller slice of that pie and that can change year to year with respect to how you handle your revenue stream. So bottom line, there's no guarantee that mandatory worldwide combined reporting is going to give you a stable revenue stream.

One year it may, the next year it may not. My co panelists in press, obviously worldwide or water's edge elections have been labeled loopholes. Well, in the tax world, a loophole means an exploitation of some unintended ambiguity in the statute or a gap in a statute. Water's Edge election is anything but a gap in the California statute.

It's been in place for 40 years. It was certainly done in 1984, though it's been changed over a couple years. But throughout the years it certainly was done with a conscious effort on a tax policy decision by this state. So it doesn't fall into the definition of a loophole by any stretch of the imagination.

But more importantly, if you look at the election itself, the statutory election, that election is made for 84 months. That's seven years. I don't know if anyone here has ever had to estimate corporate income of a multinational, but it is extremely difficult to hit the mark for seven years.

So when we talk about would you elect this because you're going to save taxes. You may in one year, you may not in the next. You're doing this for seven years. But more importantly, when this statute was enacted, there are guidelines or guide rails that the Franchise Tax Board has.

When you make this election, you as a multinational taxpayer agree to do a number of things.

One, you agree to present your key individuals, as it says in the statutes, which I would take would be officers to explain to the Franchise Tax Board or anyone else how you're structured and what the benefits are going back and forth and what your transactions are intercompany transactions are. You agree to do that.

You also agree to provide documentation to support and allow any adjustments to that income or to your expenses and to support how you have these intercompany transactions between those that are in your unitary group, water's edge group, and those that are outside your water's edge group because they're located outside the United States.

Last but not least, you're agreeing that any dividends that are paid by these foreign entities are automatically apportionable income and in your base. So when we talk about a taxpayer following this isn't a loophole.

What you have is taxpayers that are following a definite statutory regime and they're not exploiting that basically, they're just taking, they're following the statute, they're doing what we have said here for 40 years.

So with that, I thank you very much for your time and I'd be happy to answer any questions that you may have at the appropriate time.

Thank you for your testimony.

Next witness. Mr. Chairman, Members Terry Brennan, on behalf of SEIU California. First let me thank you and your staff. This is quite the gray hair is an indication I've been doing this a long time, so quite possibly most informative conversation I've ever heard about this subject.

In my many years here, I actually learned some things, not all of them good. So good morning. I'm proud to be here on behalf of 750,000 SEIU workers in California.

The people who keep our transit running, serve patients in our hospitals, even clean our office buildings, the office buildings of the corporations who are taking taking advantage of this tax consequence and keep families connected to health care and food assistance.

Our members in every part of California are scraping by putting together their last dollars to buy enough gas to get to work. Every month it gets harder for caregivers, fast food workers, ride share drivers, and all working people to pay rent, medical bills, groceries, childcare.

And if we don't take some action here to address what's going on in Washington and the looming deficits ahead of us, it's just going to get worse, much worse. Trump and the most recent budget are snatching health care, home care, food assistance from millions and handing the corporations hundreds of millions of dollars in tax breaks.

While my working Californians may be struggling to make ends meet, they can sure connect the dots. Corporations are getting more and more wealthy and they're struggling more and more. This conversation about unrigging California and ending the abuse of corporate global tax havens is just the start.

With health care for more than 2 million people, Californians in jeopardy, another 5 million at risk of being forced into Hungary. Hunger. There's zero justification for letting corporations continue to shift profits on paper and put the burden back on working Californians. I'm. Well, we'll skip that part.

The lucky part about going last, I got to redact a lot. I'll try not to trod through already plowed ground here, but consider this. Corporate profits are at all time record high. In 2024, they're $1.87 trillion. That's with a T. And yet the worker share of this vast wealth has decreased to the lowest point since 1947.

And that's probably only because that's the first year they started collecting this data. Legislators. Well, let me rephrase here in California, letting corporations get away with rigging the rules like this is a contributory factor to our ongoing deficit projections in the out years. I don't envy the legislators. You have a hard task ahead of you.

You've got to make a lot of difficult decisions in these budgetary times. There's going to be a very easy one and it's whether you're on the side of big tech, big pharma, big oil or working Californians in America. I look forward to that debate going forward. Thank you.

Well, thank the witnesses. My colleague, chairman Gipson is going to be leaving town so I will have to take over. Hope you can suffer through that. At any rate, I'd like to turn to the other Members on the Committee and ask for comments or questions. Yes, thank you.

Thank you. Senator. My first question is what measurable economic benefit has wateredge produced for California taxpayers?

That started one. It's avoided a lot of litigation, a lot of consternation with particularly with our non-US-based companies. And if I can take just one moment, the question was raised a few times earlier about double taxation. And if I can give you a very quick example to show you how double taxation can occur.

Sorry, sir, I understand, but benefits what benefits does the water edge give to California taxpayers?

Well, the point I was trying to get there is avoiding double taxation is important. If you have double taxation, you're going to generate a lot of litigation and a lot of uncertainty in the tax system.

And again, very briefly, if you have just imagine a company, a US Company, it's got an operation in State A, it's got half its sales in state A, it's got all its employees, all its assets in state A, but it uses three factor formula different than California. It's got half its sales in California.

The California factor is going to be 50% of profits. But the three factor formula, state is going to have 50% plus 100 plus 100. So you're going to take an average of that. So you're going to have about 85% of the revenue is going to be taxed in State A.

So the total tax is going to be 135% rather than 100%, which is what you would normally hope for.

So the point is, when you have two different tax systems, and again, this is just a simple, this is the US System, when you have other tax systems, international systems, laid on top of California's single sales factor, you have a real possibility of double taxation, which is an unfortunate result.

And you can also have some distortion, which is sort of another, another situation. So I think that's one example. California can have a very predictable or much more predictable tax system. And again, in today's single sales factor world, it's a little different.

But when you have a three factor formula type of approach where you're measuring tax based on a variety of factors, you can definitely get a much different kind of impact on California. But still the predictability is, I think, a very, very significant benefit.

Okay. Given that California's market size drives corporate presence, what evidence shows that eliminated watersheds would trigger relocation for this young lady?

I will try to attempt the answer to that. I think prior panels have established that there probably is not going to be a significant amount of relocation because you're still going to have a market here. And since you're on a single sales factor, that market is not going to shrink.

I don't think that's the issue that you're going to have relocation.

Couple more questions. Why should multinational corporations be allowed to exclude foreign profits while domestic only businesses cannot?

Anybody feel free?

Well, I mean if you're a domestic only business, you don't. A couple things here I think maybe need to be taken into consideration. If you're a wholly California business or a wholly domestic business, you don't really have any foreign operations.

But one of the things that small business in California and elsewhere can't avail themselves of that major corporations can't as they can be function, they can be structured as a pass through entity. And that's a whole different tax regime when you get there.

So there's some give and take here that with respect to taxation of foreign source income, I mean you have a domestic business with no foreign source income.

Last question. The reason why we're here is we're having a very tough budget year. We all know that. We know that Californians are suffering. So the year where we're considering cuts to healthcare, education and housing, why should maintaining this election take priority over protecting our public services? It's open to

It shouldn't. You're making my testimony very easy. Simplicity here.

I'll tackle that. I mean, I think there's just a tremendous danger that if California goes to worldwide unitary again, foreign governments are going to step in.

Their participants in their economies are not going to like the fact that they've got 40 years now where they've been operating in a water's edge world. They're going to have very strong objections to California imposing this new regime.

And you could very well end up with pressure at the Federal Government level, which was forestalled in 1980s because the various states with worldwide unitary did adopt a water's edge approach.

You could very well have the Federal Government now again, you don't have President Reagan who was, you know, at least on part of his brain, was worried about, you know, US national trade issues, but also was very strong believer in federalism.

You know, he's not here at this point and you have a, you know, a Federal Government that, you know, who knows what they're going to do? I mean, we don't.

It's hard to predict exactly how Congress would approach this, but certainly there would be that same pressure to have federal legislation that would say to the states, you must have a water's edge.

And that would be, I think, very detrimental, certainly eliminate a lot of flexibility that California would have to be in complete control of its tax system. I think that's the danger.

Assemblymember McKinnor. I defer that question to the last panel. I thought they did a great job of answering that. And there was agreement that the international tax world now is not 1980, it's not Ronald Reagan's world. It's very different, much improved, much more complex.

And there was, at least on Professor Shanske's opinion, very little chance that there'd be the same pushback we saw and the threats that we saw in the 1980s.

Thank you, thank you, thank you. Oh, just, just one last one. Sorry, you guys. Should administrative simplicity outweigh tax based integrity when billions of dollars may be at stake? Because I hear about how complicated this is going to be and how complicated so should we be? Just leave it alone because we're looking for administrative simplicity.

I'll take a shot at that one. I think the FTB testified that it's not complicated from their end. And to suggest that 6,000 of the largest corporations in America with the most lawyers and tax lawyers on the planet can't figure out a way to report this is kind of absurd.

Well, I'll take a shot at explaining why it is extremely complex. I mean we're not in 1983 for container. And you're absolutely correct, the world has changed dramatically. But putting a worldwide return together when you have never had to do it is complex for a number of reasons.

A lot of entities do business through pass through entities where your partner or your joint venture may not be, is not in the group. And depending on the industry you're talking about that joint venture, that partner may be a foreign government or an entity that's owned by a foreign government.

So now you have to get information from areas which you normally would not normally have to get if you were within the U.S. you know, confines of the United States. You have different accounting systems.

And while, yes, reasonable approximation which came out of the 1983 container case, things were a lot easier in 1983 if you look how corporations were structured than how you look at it today. You're asking me, can it be done? The answer is yes, can it be done Easily. The answer is no.

It is very complex and it, it's much more complicated. And the franchise Tax board is sophisticated and knows how to audit it, but they also have to have the documents to audit. So that's the problem depending on the industry and the nature of what you do.

Okay, does Mr. Becker have a question?

First of all, I want to thank all the panelists. I wanted to just ask a question. I was reviewing the background paper and there was a. One of the options was a tax haven option that referred to number of states adopting that where corporations must then include income from foreign subsidiaries in designated jurisdictions defined as tax haven. How the states who've implemented those policies fared in recent years. Any of you have a thought on that?

I don't know. I mean, I know the states that have enacted tax havens. If you're asking me how their revenue stream has, I don't know the answer to that. I do know there are issues with respect to tax havens and including getting the income and including that within the combined return. Colorado, Alaska also has it.

I think part of the definition of tax haven is a difficult definition as to how you define it and there's various ways to define it. I would also point out that what is now been labeled as tax havens and an earlier panel talked about this, the global minimum tax, that's part of pillar two.

Most of those countries have adopted, if not all of them have adopted at least the 15% minimum tax. The question is whether they really are a tax haven.

Yeah, it says here the six states have adopted it. But this is an interesting point around the 15%. If they've adopted that, how that changes things.

I don't have any data in front of me about how those states are doing, but just want to make the comment that although some states have taken that approach, there are concerns about the consistently changing nature of what's considered a tax haven.

And it's basically, you know, it's a valiant effort, but it's still more of a piecemeal approach versus something like implementing worldwide combined reporting where you're not having to look at which jurisdictions are really tax havens on a year to year basis.

Okay, thank you. And I guess just to wrap up the. When you mentioned that litigation risk is that. That's litigation. That'd be national litigation. That's litigation that would result here or from other. Yeah, you think it would come from these other countries or you think it would be from companies here that are.

Well, I, yeah, I could certainly see a lot of foreign based multinationals litigating.

And if you just think back to my example about the business in two states, let's say one of those businesses is outside the United States where most of its manufacturing or all of its manufacturing is outside the US all of its R and D and intellectual property is rightfully in its home country.

A lot of its sales are in its home country and only California sales are here.

Well, to apply a single sales factor when all of that other true economic value add is outside the U.S. such a company could very well claim that is unconstitutional because you're taxing way disproportionate using Just sales factor versus all these other value add factors that we have. So that could inspire litigation.

It could certainly, you know, lead to disputes, but it would be with the Franchise Tax Board that would be doing those audits and would be confronted with that sort of fact pattern. And again, you know, who knows where that would come out.

And maybe the Franchise Tax board would take, you know, a reasonable approach and say that, you know, adjusting single sales factor in a situation like that where you know, the sales are not really reflecting the true total value or the profitability of the, of the activity within California versus versus globally.

So that's where I think the litigation could very well come up if, if there weren't, you know, some ways to moderate the, the outcome because California has a single sales factor. So single sales factor is good.

If you're here, if you're in adding more employees, adding more assets in the state, your tax doesn't go up, which is one reason we moved a single sales factor.

But on the other hand, it does lead to the possibility of distortion if, you know, California is taking kind of a disproportionate share of the total profits and taxing that.

And that could lead to just double taxation generally and especially with more likely to occur with I think multinational companies that have a lot of their actual assets and employees outside of California.

Okay, thank you gentleman needles and I'll make some comments. First of all, I want to thank all the panelists. Every single panelist this morning had a unique perspective and those are all appreciated and are taking into account in our decision making. So again, I thank you. High quality presentations.

One question I have or a comment I have, was there the. There was a lot of talk about international backlash if we eliminate water's edge. But just as an observation, with the tariff regime that we're seeing now, I think the international backlash on California's water edge elimination would be relatively minor compared to what's happening with the tariffs.

So one observation. Secondly, I have to learn a little bit more about the, the pillar two and the other tax methods overseas that were referred to that don't mesh with what we're trying to accomplish to help guide in decision making.

What I've learned is the benefits of eliminating the water's edge would be more revenue would be likely for California and would help with IP retention in this state, IP value retention and also would reduce profit shifting and it would be introduce more fairness to the small businesses. Now this is all repeatedly low confidence predictions.

So again we're working with a lot of unknowns and a Lot of lack of real information of predictability and then the detriments to water's edge elimination. A lot of additional litigation seems likely possible.

International and federal backlash against the state again which I just talked about with regard to with tariffs, additional volatility which we don't need here in California. Additional complexity and is the FTB capable of handling the change? So that's the things I've learned this morning.

If I'm lacking on some of those things, I please would like ask folks that have testified to disabuse me and I'll take that into consideration. At this point I'd like to release this panel and ask for public comment.

So if you have a comment, please approach the microphone and you'll have one minute to make your comments and you can let things settle down for a minute. We're about to begin public comments so please keep the noise down while to show respect respect to the commenters. Thank you. Go ahead.

Good afternoon Senator McNerney and the panel. I'm Dr. Christopher Anderson. I'm President of the Stockton Teachers Association and proud Member of the California Teachers Association. Despite recent gains in funding in education, schools like the district I represent are still struggling to meet the educational needs of our students. Teachers pay more taxes than Tesla. Tesla paid zero.

And taxes yet benefits from the California infrastructure and the educational institutions that we have. We're the fourth largest economy in the world, but yet we're in the bottom third for per pupil spending in this nation. This would bring 1.2 to $1.6 billion for education. California needs to be a leader in investing in our children.

An investment that will pay dividends for our state. I urge the panel to recommend closing this egregious loophole to ensure California's children have the world class education they deserve. Change may be difficult, but it's needed. Thank you.

Thank you.

Hello. Thank you Chair McNerney and Chair Gibson and to the staff for hosting this important conversation. My name is Loyal Terry and I'm here on behalf of Economic Security California Action.

Among many things that our organization does, we convene a national affordability coalition with over 60 partners began affordability tours in many of your districts and and have engaged with community based organizations, small businesses and statewide partners throughout California who are experiencing real hardship due to the federal administration's conduct and incompetence.

As many of you did, we also rang this alarm when we saw the shift in the federal administrations. We are hopeful that there will be strong legislative vehicles this year to address our state's revenue shortfalls. And we appreciate this conversation as a start. However, we.

We need this to be just the beginning, one that leads to swift action. Our communities, partners and state cannot wait for longer relief. Thank you.

Thank you for the comment.

Good morning. Good afternoon. Chair Members Gabriella Chavez with UDW AFSCME Local 3930, representing 225,000 IHSs and child care providers statewide. Our Members are the backbone of California's economy, supporting citizens, seniors, people with disabilities and working families. Yet this program remains chronically underfunded.

The LAO has indicated that the California budget deficit is structural now it's not just a downtown downturn. So we invite legislators and the Administration to find equitable, sustainable revenue solutions to ensure IHSs and childcare are fully funded for the long term. Thank you.

Thank you.

Good afternoon. My name is Krystal Coles. I actually work for Housing and Community Development with the state of California. I'm also on the board of directors for Local 1000. There's no better time than now to end these corporate tax loopholes and bring much needed revenue back to California.

I'm urging you guys to use your voices and your power to do the right thing and unreal unrig this system. Thank you.

Thank you.

Technically, two minutes before. Good afternoon. So good morning. Chair Xong Lor with the California Teachers Association. We really appreciate the Senate Assembly Reven Tax Committee highlighting this very important issue. We heard that water's edge loophole cost the state anywhere between 3 to 4 billion dollars in lost revenues.

And so I want to emphasize what this means for public education. For every dollar that comes into the State's General Fund, $0.40 of that should have gone to public education, to our classrooms to educate our students.

Had we gotten that 40 cents of every dollar, that would have meant smaller class sizes, more mental and behavioral health support for our students as well as well staff, class classrooms and schools.

And so we also very much believe in the fairness of our tax system, which means, you know, we want to see corporations pay their fair share instead of.

You've been a minute. Please wrap up quickly.

Okay. Instead of burdening our students and working families. So we look forward to continuing engagement. Thank you.

Thank you.

Chelsea Jones, High school history teacher in Rockland, California. A proud union Member, a taxpayer and a mom. Corporations who operate in our beautiful state use legal loopholes and robber communities, families and students of public goods. Closing the water's edge loophole is projected to bring in $3 billion to our state.

Additional funding in my school would go directly, would directly support student literacy goals. And we know how Important that is to a functioning democracy. Mental health, special needs and career and technical job planning all important and growing concerns for our youth. As we heard here today, our society has changed drastically in the last 440 years.

And many of those life changing companies develop their intellectual property and their business here in our state and benefit from the public school systems that contributed to their learning and the learning of their employees and their families. We are the fourth largest economy in the world.

We should be more than capable to require large companies to pay their fair share, just like our families, small and local businesses do. California is an amazing place to work and live. And increasing our state budget and fully funding our public schools is paramount to maintaining our state's greatness. Thank you.

One minute. Nice work. Thank you.

Hi, my name is Elizabeth Wolf. I'm a proud special education teacher and I work for the San Juan Unified School District. I've spent the last 14 years working with students with extensive support needs in special day classrooms.

And every day I see how much our children and our families rely on well funded public education and how deeply cuts are felt when funding falls short. In my classroom, the impact of public education funding is not abstract. It's deeply personal and profoundly human. I teach preschoolers with severe level 3 autism.

They're young children at the very beginning of their educational journey and they're working every single day to find their voices, regulate their emotions, communicate their needs and to connect with the world around them. For many of them, school is not simply a place to learn letters and numbers.

It's where they learn how to exist safely, confidently and meaningfully in their communities. Quality special education is not an optional expense and it's an investment in our human potential. Closing the water's edge loophole is a choice to invest in our children, particularly those with special needs, our schools and our communities. And I urge you to make that choice. Thank you.

Hello, my name is Odalist Torres. I'm an in home caretaker in Yolo County and I'm acting as a translator for these two providers. Hi, my name is Patricia Ornega. I'm also an m home house taker from Yolo County. Please, from seiu 2015. Please. No, Please do not put HR1 in the state of California.

Sorry. Really sorry. Corporations should pair their fair share. While our safety net is under the knife of from the Federal Government. California should end corporate tax havens and urge to take action on this measure. Stop global corporations from abusing tax havens to avoid paying what they owe. Thank you. Thank you.

Good afternoon Mr. Chair and staff Ivan Hernandez with the California Federation of Labor Unions. Today we heard that only 6% of corporate filers choose to use the water's edge, and yet they make up nearly half of the state's tax liability.

Allowing big corporations to flee to international tax havens is a disservice to the working class taxpayers who are working to make ends meet and often trying to support their families. The issue of affordability is often mentioned throughout the legislative year.

And today it has become clear that one solution would be to address the gaps in our tax structure that allow corporations to avoid paying their fair, their fair share of taxes. The labor federation is supportive of ways of generating revenue and holding corporations accountable. Thank you. Thank you.

Good afternoon. My name is Pamela Smith. I'm with IHSS Caregiver, also with seiu. I'm also a senior. And I'm just here to say that these cuts are deplorable. The cuts to Medicaid, the cuts to SNAP program. We're talking about the most vulnerable people in our society.

And what are we going to do with all this money we're going to save, Mr. Politician? What are we going to do with that money? And these tax, these tax loopholes for the corporations, I was appalled to find out that they only paid $800. I paid a quarter of that myself, and I'm on a fixed income. It's despicable, it's deplorable, and it's downright evil.

Thank you.

Hi, good afternoon. My name is Erin Rivera. I'm with SEIU Local 2015, and I'm also a proud home care provider for IHSS Sacramento. I'm here today because, and I'm here on behalf of all of my fellow brothers and sister caregivers, but also on behalf of our recipients.

When we look at California, when we look at the budget, every year, we're on the. We're the first ones on the chopping block. While corporations are able to haven things in other countries, other states. Right.

And they don't pay the same tax burden that we do, but they can do a lot more just because of the size of their bank account. But we're always under attack as providers, and I say this with love. We save California money every time we go into the home. We make $19.25 in Sacramento.

But if you go into a nursing facility, you cannot pay a certified nursing assistant the wage that I make doing a lot more than they're doing in that facility. And I know this for a fact because in 2005, I was a certified nursing assistant in Davis, California.

Thank you. You've taken a minute.

Thank you very much. Have a great day.

Thank you.

Thank you, Mr. Chair. Annalee Augustine here on behalf of the Family Business Association of California respectfully expressing opposition to eliminating the water's edge election ability for businesses echoing concerns such as double taxation. Thank you.

Thank you.

Thank you Chair and Members. My name is JP Hanna and I'm representing the California Nurses Association National Nurses United and It's more than 100,000 registered nurses Members who provide direct patient care in hospitals and other health care facilities across the state. We appreciate today's discussion on finding an equitable tax structure that benefits everyone in California.

It is past time for our state to require billionaires and multi billionaire corporations to pay taxes proportional to the profits generated by California's workforce. They're providing hands on care to California patients. Nurses see the impacts of corporate profiteering on patients. One in five Californians experiences poverty and food hardship.

More than half of California's renters face unaffordable housing costs. And four out of every 10 California's struggle with medical debt. Nurses witness firsthand how public support programs like food, housing and housing assistance medi cal help patients and their families to stay afloat and how when these benefits are cut off, patients and their families struggle to survive.

These cuts to federal public health care programs jeopardize California's access to these life saving supports last year. California, .

Thank you Taking a minute. Please wrap up

In the face of cool cuts to public health care funding from the Trump Administration. The time for action is now. Closed corporate tax loopholes like Water's edge to increase the state budget for the programs that patients truly lean on to survive. Thank you.

Thank you.

Hello. Bryant Miramontes with the American Federation of State County Municipal Employees. I first just want to say thank you to the chair and as chair on the Assembly side for holding this hearing today. And thank you to the consultants for your work on the background materials.

The corporations benefiting from the water's edge election are avoiding tax liability from revenues raised inside of California as they benefit from our public infrastructure, our market and our services that are public sector public workforce provides. Particularly with HR1. Working families are hurting while these exact companies achieve record profits.

Closing this loophole will ensure our system works for everyone. And we look forward to working with your committees to ensure all corporations avoiding tax liability pay their fair share. Thank you.

Thank you. Hi, I'm Nathan Davidson. I'm a music teacher in Stockton, California. I'm with Lincoln Unified School District and I would love to See this tax loophole closed so we can increase education funding, especially in the arts. Three years ago, Prop 28 gave us arts at the middle school level.

And you can just see the difference in the students with more buy in, more fun, more self expression and just another reason to come to school. And I think if we can close this tax loophole, increase the funding, we could bring that all the way down to kindergarten and tk. Thank you very much. Thank you.

Hi, my name is Katie Collett. I am a Title 1 reading specialist in Stockton, California at Lincoln Unified School District. I'm also the President of the Lincoln Unified Teachers Association. Every day I see the moment that a child unlocks that code of learning how to read.

But I also see children that we're leaving behind because of a math problem that we haven't figured out how to solve yet. The gap between student need and the number of teachers we have for students who need them.

Currently, the number of students requiring intensive reading and math intervention has surged to a level that a single certificated teacher per school site can no longer manage. More state revenue isn't just a line item. It is the difference between a student falling through the cracks or catching up to their peers.

If we had the funding to put more specialists like me in our schools, we wouldn't just be managing a crisis. We would be providing the education our students actually deserve.

Thank you.

Hello, I'm Brooke Sims, a first grade teacher from Stockton, California. I'm also the secretary of Lincoln Unified Teachers Association. Closing a loophole in tax from corporations like Water's Edge and investing it in teachers pay would help the many teachers. Excuse me.

Many teachers in California are unable to purchase or rent a home in the areas or cities they teach in. Many young families. Families. Teachers with young families are paying upwards of $1,600 a month or more out of pocket for health care. This is crushing our ability to recruit and retain highly qualified educators that our students deserve. So please stop this. Thank you.

My name is Peter Perez and I'm a CTA Member and a high school math teacher at a highly diverse high school in Stockton. We live in a state which is the fourth largest economy in the world, just ahead of Japan. Increasing school funding directly supports our students.

In Lincoln High we have approximately 3,000 students and we have only eight counselors serving our diverse student population. Additional counselors are needed to help our students navigate what is often the most challenging, confusing and consequential times of their lives, both academically and on a personal level.

Counselors support our students as they navigate their next steps and as they pursue their college and career futures. Helping students with understanding their options and the implications of their decisions is a vital role that our counselors hold in our students lives. This is in addition to our counselors role in supporting our students social and emotional well being.

Additional funding would help properly staff our counseling Department and the services at high high schools up and down the state. Thank you for your time.

Good afternoon and thanks for the opportunity to speak. My name is Victor Lagunas. I'm a teacher in Davis, a Member of Davis Teachers association. And I think that, you know, the start of this should really talk about. While Water's Edge itself is not a loophole, the ability to profit shift is.

And the end result of that could be up to some of the estimates that we heard today. Three4,000,000,000 dollars. Which through Prop 98 portion of it would be a really great change for public education. I talked to my students, my 8th grade students about civics and whether our government is fair.

And I believe that what you have the opportunity to do is create a more fair system to provide funding to all to our General Fund, but also to schools themselves. I hope you make the right decision on that. Thank you.

Thank you.

Good afternoon. My name is Amanda Rales and I am a first grade teacher as well as the President of the Davis Teachers Association. Additional funds toward public education will directly impact our students.

Additional funding could result in smaller class sizes which means the ability to spend more time with each of my students while teaching them how to read and write. It allows for me to further differentiate my instruction to better meet their academic needs.

This funding could also bring the much needed additional resources such as full time nurses, counselors and mental health clinicians to to assist in addressing the ever growing needs of our students. Classroom teachers are doing our best, but it is becoming increasingly difficult. We need to invest in our students because our students deserve the best. Thank you.

Alexis Rodriguez with the California Chamber of Commerce here in respectful opposition to eliminating the Water's Edge election. Thank you.

Thank you, Alexis. Any other Members of the public wish to comment? Well, with that I think it was a productive hearing. Again, I want to thank the witnesses, my colleagues, the staff have put this together and Members of the public spoke up today and this hearing is now adjourned.