SACRAMENTO — Global oil majors played a pivotal role in orchestrating a multibillion-dollar tax dodge that shields corporate profits from California taxes, according to new, in-depth historical research and analysis by The Climate Center.
The Water’s Edge tax election, established in the state in 1986 after a decade-long fight, enables multinational corporations to avoid taxes from earnings they choose to designate as coming from beyond the “water’s edge” of California’s borders. The report reveals how oil majors used lobbying, campaign contributions, industry association funding, and legal pressure to establish Water’s Edge, which now costs Californians more than $3 billion per year.
As the state grapples with a $2 billion deficit expected to grow to $30 billion the following year, groups are urging lawmakers to eliminate this tax loophole for fossil fuel corporations and end additional fossil fuel subsidies in order to raise revenue and invest in climate and social programs.
“There’s no excuse to continue subsidizing fossil fuel giants like Chevron, which rake in massive profits while polluting our climate and communities. Every dollar lost to this tax giveaway is a dollar that could be invested in climate solutions that save lives and dollars,” said Barry Vesser, Chief Operating Officer at The Climate Center. “Eliminating all fossil fuel tax breaks and subsidies would not only align with California’s climate goals but also free up hundreds of millions to address the state’s dual climate and affordability crises.”
The report, Water’s Edge Tax Haven and California’s Budget Shortfall: How Oil and Gas Majors Crafted a Tax Avoidance Policy Contributing to Ongoing Budget Woes, highlights the instrumental role ExxonMobil, Chevron, and Shell Oil played in establishing Water’s Edge. According to the analysis, eliminating this loophole for fossil fuel companies alone could reclaim between $75 million to $146 million annually — funds urgently needed for social programs, climate equity solutions, and cost-of-living relief for vulnerable communities.
Key findings:
- Warnings ignored: For years, watchdogs, unions, and government officials sounded alarms that Water’s Edge would create “a king-size loophole … for the giant multinational corporations — specifically the big oil operators” who lobbied for its passage. The outspoken head of the California Franchise Tax Board at the time, Martin Huff, condemned the proposal as “an outrageous swindle on every California taxpayer,” a stance that ultimately led to his removal. Even after his departure, the agency he once led continued to warn that the policy would allow “corporate taxpayers [to] manipulate tax results” to their advantage.
- Water’s Edge was Big Oil’s blueprint: The report reveals ExxonMobil and other oil giants were instrumental in shaping Water’s Edge legislation. After losing a pivotal 1983 U.S. Supreme Court case affirming states’ rights to tax multinationals as unified entities, ExxonMobil pushed back hard, calling for federal and state legislative action. The Reagan Administration convened a task force, with ExxonMobil representatives at the table, that promoted Water’s Edge policies across the United States. California followed suit, enshrining the loophole in state law in 1986.
The report’s findings come at a time when oil companies are raking in record-breaking profits while Californians struggle with high energy costs and cuts to critical programs. In 2023, ExxonMobil, Chevron, and Shell made over $83 billion in profits, with CEOs pocketing tens of millions in compensation. Meanwhile, families across the state face rising utility bills, cuts to climate and clean air programs, and underfunded social services that leave vulnerable communities without the support they need.
“This report demonstrates that eliminating the Water’s Edge tax break for multinational oil and gas corporations is a common sense solution to make polluting industries pay their fair share to fix the environmental and health problems they have created,” said Assemblymember Damon Connolly. “At a time when the state budget is constrained, this straightforward policy will help the state save taxpayer money, instead of providing corporate tax breaks, and protect important investments that create a better quality of life for all Californians.”
California joins a growing list of states questioning the fairness and costs of Water’s Edge. New Mexico recently became the first state to begin peeling back the loophole with targeted tax reforms. The oil-friendly state of Alaska already has a law on the books prohibiting the oil industry’s use of Water’s Edge; the oil industry makes up about 75% of Alaska income tax collections.
California has taken steps that could lead to unwinding Water’s Edge. In 2024, the legislature passed SB 167, which chips away at the blanket use of the Water’s Edge election by prohibiting companies from removing foreign subsidiary dividend income as state taxes owed under Water’s Edge. The California Taxpayers Association — with a board that includes representatives from oil companies such as Chevron, Aera Energy, Marathon Petroleum, and Koch Industries — has filed a state lawsuit challenging SB 167’s constitutionality, and that case remains open.
Advocates believe California — home to some of the world’s largest oil corporations — should lead the charge in eliminating fossil fuel tax breaks.
ENDS
Contact:
Ryan Schleeter, Communications Director, The Climate Center: ryan@theclimatecenter.org, (415) 342-2386
About The Climate Center:
The Climate Center is a climate and energy policy nonprofit working to rapidly reduce climate pollution at scale, starting in California. We are a think-tank, do-tank working to turn bold ideas into action for a climate-safe future. Our flagship Climate-Safe California campaign is a unique and comprehensive effort to make California the first state in the nation to reach carbon negative. www.theclimatecenter.org
