Transparency Alone Won’t Fix California’s Corporate Tax Drain

California’s new disclosure rules for municipal corporate tax-sharing agreements are a step toward transparency. But without immediate plans to curtail revenue giveaways, they do little to stop the self-inflicted tax drain harming local governments. If the state wants to prevent more cities from giving away their future tax revenue, it needs to start capping these deals now.

For decades, major corporations have been able to exploit California’s fragmented approach to sales tax. A state and local split of generated revenue allows corporations to pit municipalities against each other in a bidding war where the prize is siphoned tax revenue, not growth.

Under state law, 1.25% of the 7.25% statewide sales tax is allocated to the local jurisdiction where a sale is made—or deemed to have been made, in the case of digital sales. That has the potential to provide a meaningful source of revenue for cities and counties, especially those without significant industry or tourism.

Everything from large retailers—such as Apple Inc., Amazon.com Inc., and Walmart Inc.—to car dealerships to cement companies have learned to weaponize the rule. Companies can strategically put warehouses, hubs, or satellite offices in municipalities that agree to give them back a portion of the local sales tax revenue they generate.

The more generous the split, the more likely the retailer is to route sales through that jurisdiction, regardless of where the product is sold or delivered. This creates a race to the bottom, where municipalities—especially smaller ones that may have few economic options—can overextend themselves and promise ever-increasing tax rebates to attract and preserve deals with major retailers.

However, the tax revenue they surrender in exchange could otherwise be used for schools, infrastructure, public safety, and other vital services. The net effect statewide is that owed and collected tax revenue leaks to corporations, resulting in an overall tax revenue loss.

Cities effectively end up subsidizing the operations and infrastructure use by some of the world’s wealthiest corporations, leaving taxpayers on the hook. Millions of dollars vanish from state coffers into these agreements annually, with little public scrutiny.

Even now, California officials admit they don’t know exactly how many of these tax-sharing deals exist or how much money is being diverted from local governments by them. That opacity is a feature, not a bug.

Palm trees stand around the Echo Park Lake at sunset in Los Angeles.

Photographer: Patrick T. Fallon/Bloomberg via Getty Images

Thanks to California’s new law, the curtain may be pulled back on these tax-sharing agreements starting in April This is a long-overdue step, but transparency alone won’t stop bad policy.

Requiring cities to report how much they’re giving away doesn’t prevent them from continuing to do so—especially if they can convince local taxpayers and voters that the benefits accruing to the municipality outweigh any detriments felt by the state as a whole. The disclosure law will give municipalities another year or more to sign new agreements and potentially lock in revenue losses for decades.

The fines for failing to report these agreements, which range from $1,000 to $4,000 per day, are a necessary enforcement tool but don’t address the root issue that many municipalities now rely on these funds. Many local officials likely will argue that full disclosure is the fix—it would make the system self-correcting and allow the public to hold cities accountable for bad deals.

But disclosure without immediate policy action risks turning the rule into little more than an expensive bureaucratic exercise, documenting an ongoing problem while doing nothing to stop it.

California faces two potential policy futures: watching municipalities hemorrhage tax revenue while lawmakers try to ascertain the extent of the wound or acting now to suture up the worst of it. The right move is obvious—setting limits on tax-sharing agreements immediately and then refining those rules as the extent of the problem comes into view.

The disclosure law should come with an attendant piece of legislation laying out a standardized framework for tax-sharing agreements.

At the outset, California should cap revenue-sharing percentages. No city should be allowed to give away an unlimited share of its tax base to land a company’s business. A reasonable ceiling, pegged to the jurisdiction’s overall budget or economic need, would ensure tax-sharing deals can be used as a tool for economic development but not corporate subsidy.

Further, if a company wants a share of local tax revenue, that money should be earmarked for investment directly into infrastructure, public services, or workforce development in that community. As it stands, these agreements can function as blank checks. Corporations and municipalities instead should be required to direct the funds toward tangible, local benefits that still provide value to the corporation.

Lawmakers don’t need years of reporting to justify action. They already know tax-sharing deals are draining public revenue. The data derived from the disclosure law can be used to fine-tune and adjust the policy but shouldn’t be an excuse to delay implementing guardrails today.

Opponents to tax-sharing caps will argue that limiting these agreements will make California less competitive for businesses. This isn’t about attracting companies to the state, but about determining the city they will allocate their sales to. Waiting risks locking in more bad deals as cities continue to ink new agreements, knowing the state is in data collection mode. By the time policymakers act, millions more in revenue will be lost.

Andrew Leahey is a tax and technology attorney, principal at Hunter Creek Consulting, and practice professor at Drexel Kline School of Law. Follow him on Mastodon at @andrew@esq.social

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