After months of behind-the-scenes meetings, progressive lawmakers in the California Assembly this week introduced what is likely to be their signature revenue raising proposal for 2026 — a bill targeting large global corporations who they say have shifted profits offshore to lower their tax bills for decades.

The effort, which would rewrite tax law for multinational corporations crafted during Gov. Ronald Reagan’s tenure, could raise \$3 billion to $4 billion annually at a time when the Legislature faces a budget deficit and federal cuts threaten social service programs.

“As we see California taxpayers and small business owners continue to subsidize the record profits of these huge multinational corporations, and unprecedented tax breaks at the federal level for these same corporations,” bill sponsor Assemblymember Damon Connolly, D-San Rafael, said at a Tuesday news conference, “it is time we stop the rigging of California’s tax system by corporate interests.”

But critics of the tax proposal said the current system was designed purposefully, after foreign governments and businesses pressured California to stop taxing assets it didn’t have a right to.

“California businesses are struggling to stay afloat under the weight of chaotic federal trade policies, high taxes and increasing costs, and this legislation would throw them an anvil by reigniting a trade war with important foreign partners,” California Taxpayers Association President Robert Gutierrez said in a statement. “The bipartisan water’s-edge policy was carefully crafted to reform the state’s old tax structure.”

It remains to be seen if the bill Connolly introduced Tuesday will gain traction with more moderate Democrats. A tax-raising bill requires two-thirds of both chambers to vote in favor of the measure, and Republican lawmakers are likely to oppose it.

“The state is currently sitting on a multibillion-dollar deficit and needs to more closely examine the amount of tax dollars being wasted on fraud and other forms of waste, not inventing new ways to tax the companies that are still willing to stay and do business in California,” said Assembly Republican Leader Heath Flora, R-Ripon.

On Wednesday, lawmakers heard testimony from a panel of tax experts for and against the tax at a joint meeting of the Assembly and Senate Revenue and Taxation committees. That hearing was planned before Connolly’s bill introduction this week, indicating legislative interest in examining the corporate income tax system is growing.

How does water’s edge taxing work?

California has taxed corporate income since 1929. But beginning in 1986, the Legislature chose to allow companies to choose to separate out their foreign-based corporate entities when calculating their income, according to a report from legislative staff. Corporations can choose to enact that exception and become what’s called a “water’s edge” filer. The change came under pressure from, among other players, the governments of the United Kingdom and Japan, who argued California was unfairly targeting their industries. Other states followed California’s example, according to the report.

Advocates for reform argue corporations exploit the system by creating shell companies in low-tax countries like Ireland or the Cayman Islands to lower their tax bills in California. Opponents say that California would run into constitutional concerns if it starts to tax income derived in other countries and also stray into the federal government’s role regulating foreign commerce.

Several lawmakers at Wednesday’s hearing said arguments about trade stability were undercut by the Trump administration, which has roiled global trade through frequently changing tariffs.

Though reform advocates say oil and gas companies also lobbied heavily to create the water’s edge system, today a range of multinationals, including some of California’s tech giants, are believed to use the water’s edge system. The exact companies who choose to file income taxes under that system is not public knowledge, proponents said. At Wednesday’s hearing, analysts estimated only 6% of corporations operating in the state may be water’s edge filers but also said they’re likely to be among the biggest and highest-earning players.

Billionaire tax looms outside statehouse

Connolly, whose Marin and Sonoma county district is reliably liberal leaning, was joined Tuesday for the bill’s introduction by a group of progressive lawmakers including Progressive Assembly Caucus Chairman Assemblymember Alex Lee, D-San Jose, and Assemblymember Mia Bonta, D-Alameda, the health committee chairwoman who has called for a unified response by California policymakers to federal cuts to Medi-Cal.

All are among a group of Assembly progressives who have been meeting for months about how to raise new revenue to avoid funding cuts, Assemblymember Sade Elhawary, D-Los Angeles, said.

Momentum for some kind of tax measure aimed at the ultra-wealthy or corporations is also building among the state’s powerful labor unions. Lawmakers are working in the shadow of a ballot measure, pushed by SEIU-UHW and Teamsters California, that would impose a one-time wealth tax on the state’s billionaire residents.

That proposal has become a point of national political contention and drawn heated opposition from the state’s wealthy as well as Gov. Gavin Newsom. But it may gain footing with voters, and in a sign of the increasing attention on the measure, Vermont senator and progressive folk hero Bernie Sanders, an independent who caucuses with Democrats, announced this week he would appear at a rally for the measure in Los Angeles next week.

Connolly stopped short of saying his bill would serve as a more politically palatable alternative to the billionaire’s tax. “We felt the timing was right, under all the circumstances, to look at a common sense revenue solution,” he said when asked if the billionaire tax created leverage for floating his measure.

The two proposals would raise vastly different amounts of revenue. Proponents of the billionaire tax proposal estimate it would bring in as much as $100 billion over five years. The estimated $3 billion from Connolly’s proposal, however, would neatly fill the deficit in this year’s budget proposal from Newsom. The Legislative Analyst’s Office has calculated a much larger deficit for the state of more than $18 billion.

State Democratic leaders have yet to weigh in on Connolly’s proposal, but they didn’t speak against it, either, on Tuesday. Assembly Speaker Robert Rivas, D-Hollister, expressed a willingness to consider a variety of proposals to confront California’s budget woes.

“There is real uncertainty, so it’s important to understand all the tools on the table, and the speaker appreciates members putting in the work to do that,” his spokesperson, Nick Miller, said Tuesday.

Two key senators, Senate President pro Tem Monique Limón, D-Santa Barbara, and Senate Revenue and Taxation Committee Chairman Jerry McNerney, D-Pleasanton, declined to comment on the legislation before it reached their chamber.

Newsom told reporters Tuesday he hadn’t had any conversations about the proposal yet. But at a separate legislative committee hearing Wednesday, a member of his finance team told lawmakers the governor is not interested in any revenue increases. “If the Legislature would like to propose something we’re happy to hear any ideas,” Laura Ayala, an analyst with the Department of Finance, said. “But the governor has stated multiple times that he’s not interested in pursuing any new taxes or revenue proposals.”

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(The Sacramento Bee Capitol Bureau’s Kate Wolffe contributed reporting.)

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