California businesses struggle to survive under the weight of chaotic federal trade policies, high taxes and increasing costs, and some state lawmakers are threatening a tax hike that would make things worse – an idea so ill-conceived that it would renew a trade war with California’s international partners at the worst possible time.

The multibillion-dollar tax hike would be imposed by repealing the “water’s-edge election,” a policy that keeps California from taxing income earned by businesses that have activities outside of California.

The issue is simultaneously complex and simple. Complex because it involves taxes and international trade, and simple because the passage of California’s bipartisan water’s-edge reform in the 1980s achieved a straightforward, desired result: Corporations pay their fair share without being subject to unfair double taxation.

A 1984 story in the New York Times explained how things worked under the “unitary tax,” prior to the reform: “If a subsidiary represented 10 percent of a corporation’s activities, the state would tax the corporation 10 percent of its overall profits, even if the California operation showed no profit that year.”

A letter to California lawmakers from the Kingdom of the Netherlands summarizes how things work now: “The water’s-edge election provides assurance that the affiliates of foreign-based companies filing on a water’s-edge basis in California will not be taxed on the same income both in a foreign country in which they are doing business and in California.”

The reform helps “facilitate a positive environment for California-European trade,” the 2010 letter from the Netherlands notes.

Given this history – and the current need to improve trade relations and protect California’s economy – it is shocking that anyone would want to go back to a system that made California an international outcast.

We know exactly what will happen if the water’s-edge election is repealed, and it isn’t pretty. In the 1970s and 1980s, California’s method of taxation created major international tension.

“In my tenure at the State Department, few issues have provoked so broad and intense a reaction from foreign nations,” then Secretary of State George Shultz told theTimes in 1984.

That same year, a task force studied the issue and reported that 14 member countries of the Organization for Economic Cooperation and Development, representing almost 90 percent of foreign direct investment in the United States, blasted California’s system.

Britain and Japan were the most vocal critics, but Australia, Belgium, Canada, Denmark, France, Greece, Ireland, Italy, Luxemburg, the Netherlands, Switzerland, and West Germany also objected.

The British government did more than just complain.

“On July 9, 1985, the British Parliament passed legislation enabling the British Treasury to retaliate against United States corporations because California, as well as five other states, impose a worldwide unitary tax on multinational corporations,” researcher Robert Wallingford noted in 1986.

Governor Jerry Brown famously traveled to Japan in the early 1980s to recruit business investment in California and returned with reports of Japanese officials complaining about the attempt to tax income beyond the state’s legal authority.

After many debates, more threats of retaliatory measures against California businesses, discussions of federal trade agreements, and input from all parties, the water’s-edge election was signed into law.

In addition to stopping a destructive trade war, the legislation minimized compliance problems – including currency conversions and differences in international accounting standards – and ensured that California’s tax auditors don’t have to travel the globe reviewing records of multinational taxpayers with affiliated entities in every corner of the world.

Since the problem was solved, much of this history has been forgotten, giving pro-tax activists an opening to try to fool people into thinking this intentional, logical reform was a “loophole” – something that slipped through the cracks, rather than being vetted for years by experts and elected officials from across the political spectrum.

Without the water’s-edge election, California would be the only state to replicate the old, discredited system of taxation, and our state would suffer.

California already has the third-worst business tax climate among the 50 states, according to the Washington, D.C.-based Tax Foundation, and the list of recent business relocations to other states is long and diverse. The last thing we need is a tax hike that would exacerbate the problems.

The Legislature should dismiss the proposal to repeal the water’s-edge election and instead focus on policies that preserve jobs, encourage investments, and foster economic growth.

Robert Gutierrez is president of the California Taxpayers Association