March 1, 2021

This is a good time for the Legislature to invest in California by taxing large, profitable corporations

[Cross-posted from CalMatters]

By Reuven S. Avi-Yonah, David Gamage and Darien Shanske

A year into the COVID-19 crisis, the gap between corporate profits and economic security for the average American is wider than ever. Since March 2020, 45 out of 50 of America’s largest companies have made a profit and in some cases the profit has been quite substantial

Meanwhile, unemployment in California increased dramatically in 2020, from 5.5% in March to 9% in December. Many more Californians have been thrown into housing instability, worsening an already urgent issue. 

Reversing the housing crisis and addressing homelessness in particular will require large and regular investments. Assembly Bill 71, introduced by Democratic Assemblymember Luz Rivas, is a bold step to making these investments and takes into consideration that California has a lot of needs, and its current budget surplus is not expected to last. Hence, AB 71 funds itself by means of a targeted tax increase that will be paid for only by the largest corporations best able to pay.

This is an appropriate revenue source, as corporations have paid an ever smaller share of their profits in taxes over the last several decades. Some of this decline was the result of deliberate decisions: Between 1980 and 1997 California lawmakers cut the corporate tax rate from 9.6% to 8.84% – and it hasn’t changed since then. 

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This decline in taxes paid by large corporations was also because the state failed to act as certain very profitable corporations got cannier about exploiting major loopholes that allow them to avoid paying taxes even further.  

Corporate tax avoidance is so rampant that even the 2017 tax bill, which was loaded with breaks for large corporations and the wealthy, included several provisions meant to combat these loopholes. In particular, the Trump tax bill established a methodology to both identify and tax income improperly shifted out of the U.S. tax base.  This income is known by the acronym “GILTI,” which stands for Global Intangible Low-Taxed Income.

Restoring California’s corporate tax rate to 9.6% on corporations making more than $5 million in profits per year, as well as taxing the shifted income known as GILTI, are two sensible tax reforms that on their own are projected to provide sufficient funds for AB 71’s robust approach to reversing the cycle of homelessness.  

Don’t buy the scare tactics of multinational corporations threatening to move their headquarters from California because of this bill. California’s corporate income tax is based on sales made in California and applies regardless of whether a corporation has its headquarters in California or elsewhere. Thus, bolstering California’s corporate income tax would not create any incentives for California-based corporations to move out of the state.

Even before the pandemic, it made excellent sense to ask our largest and most profitable corporations to pay as much as they did in the 1980s. Given the state’s current urgent needs, what was once a good idea is now vital for the future health of our state.