|
As deadly blazes engulf much of Los Angeles, a new report reveals that oil and gas companies have been using an obscure California tax loophole to avoid paying millions that could have helped the budget-strapped state combat climate change-fueled wildfires. Also: Rock the boat.
BUT FIRST Our friends at Drop Site News are a vital source of investigative journalism, and they’re facing threats from those who wish to suppress their reporting. That includes the military-backed government of Pakistan, which banned Drop Site’s reporting nationwide while issuing legal threats in response to their explosive investigations. Here in the United States, Drop Site, like The Lever, is bracing for the incoming Trump administration’s stated plans to pursue legal action against journalists and their sources. To follow and support Drop Site, use this 20% discount on a Drop Site paid subscription for Lever readers. You’ll be funding investigative journalism that makes the lives of the powerful miserable while gaining access to their exclusive Reddit AMAs, chats, and events. This is not a paid endorsement. We simply believe in supporting and amplifying Drop Site’s work.
How Big Oil Hindered The Fight Against L.A.’s Wildfires
By Freddy Brewster & Lucy Dean Stockton
[View in browser] Fossil fuel companies are profiting off an obscure state tax break depriving California of up to $146 million of annual tax revenue that could be used to combat climate change-fueled wildfires, according to a new report released amid an inferno tearing through Los Angeles. The tax break has persisted for decades in the Democrat-controlled state even as California has faced deficits and cuts to wildfire preparedness — including recent cuts to the Los Angeles Fire Department’s budget. During the first night of the fires, firefighters struggled to obtain water from fire hydrants in Pacific Palisades, a neighborhood that had been set ablaze in western Los Angeles. A city council member who represents the Palisades neighborhood blamed the lack of water on “chronic underinvestment.” The new report, released Wednesday by the Climate Center, a think tank focused on California climate solutions, details how oil and gas companies and their allies used campaign donations, lobbying dollars, and legal pressure to establish a tax loophole that allows corporations to reduce their taxable state taxable income by avoiding reporting foreign profits and losses, if the company elects to do so. This tax loophole, called the “water’s edge election,” is California’s largest business tax break. The loophole allows corporations to avoid paying more than $4.3 billion in state corporate tax revenue each year and specifically gives oil and gas companies upward of $146 million in annual tax breaks, researchers found. In 2023, ExxonMobil, Chevron, and Shell made more than $83 billion in profits. In 2024, Chevron announced that it would be moving its headquarters out of California, but will continue operating in the state. The oil company is also one of California’s largest greenhouse gas polluters. “California is in a climate crisis,” said Ryan Schleeter, communications director for the Climate Center. “We get reminder after reminder [about] these fires, and a wildfire happening in the middle of January is really unprecedented and quite scary. Investing now in climate solutions will save more lives and save more money down the road than if we wait.”
|
Learn All Our Investigative Tricks
|
|
Score a copy of our Citizens’ Guide to Following the Money and Holding the Powerful Accountable, free with a paid subscription. The e-book gives you all the tools and tricks our reporting team uses to scrutinize power. |
|
|
The report comes as fires devastated multiple neighborhoods in Southern California, prompting widespread evacuations and burning trees and structures all the way to the ocean’s edge. The report also comes as the state struggles with an estimated $46 billion budget deficit and $16 billion in spending cuts to wildfire preparedness, climate initiatives, and a slew of other state programs. On Wednesday, California Gov. Gavin Newsom, a prominent figure in the Democratic Party, proposed new spending cuts in the first draft of the state’s budget. These cuts could slash funding for wildfire preparedness, coastal resiliency projects, solar and wind projects, and other endeavors, nonprofit news outlet CalMatters reported. As the Midwest and East Coast are bombarded with snow this week, California is facing the opposite throes of climate change. California’s weather has become increasingly arid, causing the state’s May-through-October wildfire season to effectively morph into a year-round risk. Currently, more than 8,500 fire personnel are battling 35 wildfires burning more 5,700 acres across the state. “The water’s edge tax loophole allows multinational fossil fuel corporations to dodge paying their fair share of taxes that can help fund vital environmental projects, which could include wildfire preparedness,” California Assemblymember Damon Connolly (D) told The Lever in a statement. “It makes no sense to continue to subsidize these polluting corporations, which have been making record profits, while state and local governments face significant deficits and cuts to critical infrastructure.” California’s Big ShortfallFor decades, California has experienced a budget whiplash. While the state operates as the world’s fifth-largest economy, it has faced recurring budget shortfalls since the early 1990s, which some experts blame on tax cuts that undercut ambitious social programs. In 2023, the state faced an estimated $46.8 billion budget deficit, up from a $32 billion budget shortfall the year before. Currently, nearly a third of the state’s budget comes from federal funding, which could be cut if incoming President Donald Trump follows through on promises to cut spending. On Jan. 6, Newsom announced a $322 billion state budget that would likely include cuts to social programs to avoid another shortfall. The details of his final budget proposal will be released on Friday, Jan. 10. In 2019, after vowing to expand California’s firefighting initiatives during his gubernatorial campaign, Newsom’s budget allocated $355 million for wildfire prevention and resource management. But by 2021, Newsom had slashed that by more than 40 percent to $203 million. As wildfires consumed the state that year, Newsom changed course, announcing a $2 billion investment in wildfire prevention for 2022 following a budget surplus. But in early 2024, as California’s budget again fell short of its expected revenue, Newsom proposed major cuts to climate projects, including reducing funding for wildfire prevention and forest resilience by $100 million and cutting funding to all climate programs by about 7 percent. California’s fire prevention efforts, which experts consider the only way to meaningfully reduce the mounting fire risk, have repeatedly fallen victim to the state’s budget whiplash.
|
Hold Them Accountable With A Donation
|
Give a one-time donation in any amount to fund The Lever‘s mission to hold the powerful accountable through reader-supported investigative journalism. Every cent helps. |
|
|
In 2024, the state allocated $4 billion to support California’s Department of Forestry and Fire Protection (Cal Fire), nearly double the state budget for the department 10 years ago. The budget increase allowed Cal Fire to nearly double its personnel from the previous decade. Los Angeles, where the blaze has ripped through the city’s outer neighborhoods as hurricane-force winds exacerbate drought conditions, is facing its own budget crisis. In January 2024, the Los Angeles Controller’s Office found the city was on track to overspend its budget by $297 million, and the city’s general fund — which pays for many city services like firefighting — was about $158 million short of what Los Angeles expected to collect in tax revenues. Los Angeles Mayor Karen Bass (D), meanwhile, is facing backlash for the cuts she made to Los Angeles’s firefighting force. In April of last year, her proposed budget included more than $23 million in cuts to the department. Those cuts were eventually whittled down to $17.6 million in the city council’s budget process. Separately, Bass’s budget also called for the elimination of positions within the city’s emergency management agency, which responds to crises like wildfires. These proposed cuts came as Los Angeles increased funding for the city’s police department by $123 million. While fire risk in the region reaches an all-time high, crime remains relatively low. Critics of the increased law enforcement spending say much of it will be allocated to positions that will likely remain vacant amid department-wide recruitment struggles. Much of the city’s current budget shortfall is connected to the four-year contract the police union representing members of the Los Angeles Police Department reached with the city in 2023. City Controller Kenneth Mejia has also blamed excessive payouts for police liability claims. As firefighters battle the blazes in Los Angeles, the city’s fire department has called on all off-duty firefighters in the area and in neighboring cities like San Diego and others statewide to join the efforts to fight the inferno. “The chronic underinvestment in the city of Los Angeles in our public infrastructure and our public safety partners was evident and on full display over the last 24 hours,” said City Councilmember Traci Park, who represents the burning Pacific Palisades neighborhood, during a news conference on Wednesday. “I am extremely concerned about this. I’m already working with my team to take a closer look at this, and I think we’ve got more questions than answers at this point.” Los Angeles Department of Water and Power officials said the lack of water could be due to an increased demand to fight fires in lower elevations that prevented water storage tanks in hillside neighborhoods from refilling. Water’s Edge Is Draining The Budget As California has fought both drought and budget cuts, the 1986 “water’s edge” law might be in part to blame. The law, which enables multinational corporations to avoid taxes from earnings they designate as beyond the “water’s edge” of the borders of a state in which they operate, has cost California potentially billions of dollars in revenue each year. The law was first discussed in 1978 and was immediately criticized by state officials, with the state controller at the time calling it “a king-size loophole… for the giant multinational corporations — specifically the big oil operators,” researchers found in the new Climate Center report. At the time, state lawmakers and officials successfully blocked industry pressure to implement the loophole. Then, in 1983, the California Franchise Tax Board, a state agency tasked with collecting income tax, won a Supreme Court case that upheld states’ ability to tax multinational corporations as a single entity — meaning that states could earn tax revenue from corporations’ foreign profits. This high court decision led executives from Exxon to join a 1984 working group spearheaded by the Ronald Reagan administration to create ways to get around the new ruling and to adopt water’s edge tax loopholes. Climate Center researchers found that the Shell Corporation and Exxon funded multiple groups that focused on enacting the loophole in California. The water’s edge legislation finally passed in 1986 and has been a core staple of California tax loopholes ever since. “The water’s edge [tax policy] has become seemingly embedded in the California tax system at a time when use of separate accounting for transactions with foreign affiliates has become the subject of much controversy at the federal level,” a California Franchise Tax Board report states.
|
They can't scam who they can't find.
|
|
|
|
|
California lawmakers have taken steps to eliminate the loophole, but oil and gas interests have fought back. In 2024, California lawmakers passed a bill prohibiting oil and gas companies from removing foreign subsidiary dividend income from state tax reporting, generating an estimated $17 million in tax revenue for the state. But the California Taxpayers Association — a low-tax advocacy group whose board of directors features representatives from Chevron, Koch Industries, Marathon Petroleum, BlackRock, and other businesses — filed a lawsuit in August challenging the constitutionality of the new bill. The lawsuit is still pending. New Mexico rolled back some of its water’s edge tax loopholes last year, but the state’s new legislation does not apply to U.S.-based corporations such as Chevron and ExxonMobil, Climate Center researchers found. Vermont and Minnesota legislatures have considered legislation that would roll back the loophole or authorize a study looking into the economic impact of removing the water’s edge exceptions. Alaska, where oil and gas industry taxes provide up to 85 percent of the state’s revenue, prohibits oil and gas companies from using a water’s edge loophole. For California, rolling back such loopholes could dramatically improve the state’s volatile budget situation. “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, in a press release on the new report. “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.”
Help us spread the word! Please forward this email to family and friends. Was this email forwarded to you? Sign up for free to receive original reporting like this in your inbox every day.
|
