BILL ANALYSIS Ó
AB 653
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Date of Hearing: April 23, 2013
ASSEMBLY COMMITTEE ON JOBS, ECONOMIC DEVELOPMENT AND THE ECONOMY
Jose Medina, Chair
AB 653 (V. Manuel Pérez) - As Amended: April 16, 2013
SUBJECT : State government.
SUMMARY : Establishes the California Innovation and Jobs Act, which
increases the maximum value of the research and development credit (R&D
Credit), eliminates state sales tax on manufacturing equipment,
authorizes a new tax credit for private investments in postsecondary
institutions, and codifies the California Innovation Hub (iHub)
Program. Specifically, this bill :
1)Makes findings and declarations including, but not limited to,
California's economy has declined over the past decade from being the
sixth largest to the ninth largest economy in the world, the state
has continued to experience budget deficits since the "dot com"
economic bubble burst in 2000, and the solution to California's
decline is not to simply cut budgets and raise taxes. The answer,
this bill states, is in developing a long-term economic plan that
envisions the state as becoming a better partner to attract private
sector capital in order to spur economic growth and create jobs.
2)Codifies and expands the iHub Program at the Governor's Office of
Business and Economic Development (GO-Biz) for the purpose of
designating regional iHubs to support collaborations and coordinate
federal, state and local innovation-supporting resources.
a) Establishes proposal criteria for applicants to the iHub
Program that includes a statement of purpose, business plan, and
list of goals and expectations for job development and business
creation; a statement of cooperation listing each entity involved
with the partnership and a description of their role; and an
explanation of the industry focus and geographic boundaries of the
proposed iHub.
b) Requires iHubs to include at least: one major university or
research center; one economic development organization; and four
of the following including: a business support organization; An
educational consortium; a venture capital network including angel
investors; a business foundation, science foundation, laboratory
research institution, federal laboratory, or research and
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development facility; a municipal economic division or department;
and/or a federal government partner such as a national laboratory.
c) Specifies that iHubs may, among other things:
i) Provide counseling and technical assistance in business
planning, management, financing, and marketing;
ii) Provide advice on starting a business and accessing
financing opportunities;
iii) Conduct business workshops, seminars, and conferences with
local partners; and
iv) Facilitate partnerships between start-ups and research
institutions with venture capitalists and financial
institutions.
d) Requires GO-Biz to collaborate with the Department of General
Services to identify unoccupied and underutilized state-owned or
leased property that could be used by the iHub Program for the
purpose of establishing proof of concept centers, incubators, and
demonstration sites. The value of the free use of
state-controlled property can be used in lieu of a cash match to
increase the likelihood of qualifying for federal funding.
3)Exempts the gross receipts on the sales of specified equipment from
specified state and local taxes, beginning on January 1, 2014.
a) Specifies that this exemption applies to manufacturers,
software publishers, biotechnology R&D, and electric power
generation facilities (not including hydroelectric, fossil fuel,
nuclear).
b) Provides that the equipment be used primarily in the
manufacturing, processing, refining, fabricating, or recycling of
tangible personal property including:
i) Machinery and equipment including components and
contrivances such as belts and shafts;
ii) All equipment or devises used to operate, control,
regulate, or maintain machinery;
iii) Tangible personal property used in pollution control that
meets or exceeds standards established by the state or any local
or regional government agency within the state;
iv) Special purpose buildings and foundations used as an
integral part of the manufacturing, processing, refining, or
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fabricating process, that constitute a research or storage
facility used in the manufacturing process. This does not
include warehousing; and
v) Tangible personal property used in recycling.
c) Requires the retailer to furnish the purchaser with the
exemption certificate, as specified;
d) Requires that the equipment remain in California and used for
an allowable purpose for at least one year in order to maintain
the tax exemption. If these requirements are not met, the
purchaser owes the taxes, plus interest.
e) Authorizes the exemption to apply to leases which are
classified as a "continuing sale" or a "continuing purchase."
f) Requires the Board of Equalization (BOE) to establish a process
for qualified persons interested in obtaining an exemption
certificate to electronically apply for and obtain a certificate,
once BOE has the appropriate information technology capability.
4)Increases the value of the qualified and basic R&D Credit:
a) Under the Personal Income Tax Law (PIT), incrementally
increases the credit percentage applied to qualified research
expenses in excess of the base amount from 15% to 30% over the
five-year period beginning with taxable year 2014 and ending with
taxable year 2018;
b) Under the Corporate Tax Law (CT), incrementally increases the
credit percentage applied to qualified research expenses in excess
of the base amount from 15% to 40% over the five year period
beginning with taxable year 2014 and ending with taxable year
2018; and
c) Under the CT, incrementally increases the credit percentage
applied to basic research payments from the current 24% to 40% at
a rate of 5% for four years and 1% in the fifth year over the five
taxable years 2014 through 2018.
5)Authorizes a credit under both the PIT and the CT against net taxes
worth 25% of the qualified contribution by a business entity to a
postsecondary educational institution.
a) Requires the contribution be used for curriculum or research
leading to job opportunities in the private sector or consultation
services associated with the establishment of curriculum or
research leading to job opportunities in the private sector;
b) Requires that the curriculum be in an area where there is
substantial potential for the future employment of students as a
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result of the contribution; and
c) Allows for the carry forward of the credit until the value of
the credit is exhausted.
6)Specifies that the Economic Development Fund is continuously
appropriated.
7)Provides no reimbursement for loss of local sales tax.
8)Specifies that provisions of the bill are severable.
9)Includes an urgency clause.
EXISTING LAW
1)Establishes GO-Biz within the Governor's Office for the purpose of
serving as the lead state entity for economic strategy and marketing
of California on issues relating to business development, private
sector investment and economic growth. GO-Biz also serves as the
administrative oversight for the California Business Investment
Service and the Office of the Small Business Advocate.
2)Imposes a sales tax on retailers for the opportunity to sell tangible
personal property, absent a specific exemption.
3)Imposes a use tax on the storage, use, or consumption of tangible
personal property purchased from any retailer.
4)Allows a credit against the taxes imposed under the PIT and the CT
for increasing research expenses over a base amount. The credit
allowed under the PIT and the CT is equal to 15% of the excess
qualified research expenses over the base year amount for the taxable
year and, under the CT, 24% for payments to qualified research
organizations for basic research. Qualified research expenses must
be related to research conducted in California and include amounts
paid or incurred for wages and supplies in the conduct of qualified
research as well as contract research expenses. Qualified research
expenses also include payments made to qualified organizations
(including educational institutions and certain scientific research
organizations) for basic research.
5)Provides for an alternative research credit calculation under the PIT
and the CT. A taxpayer may elect to compute the research credit
using the alternative incremental credit calculation. The
alternative incremental credit is equal to the sum of three tiers of
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the qualified research expenses in excess of a base amount; each tier
calculated using an increasing percentage. The first tier is 1.49%
of the total qualified research expenses for the taxable year that
exceeds 1% but not more than 1.5% of the average annual gross
receipts; the second tier is 1.98% of the total qualified research
expenses for the taxable year that exceeds 1.5% but not 2% of the
average annual gross receipts; tier three is 2.48% of the total
qualified research expenses for the taxable year that exceeds 2% of
the average annual gross receipts.
FISCAL EFFECT : Unknown
COMMENTS :
1)Framing the Policy Issue : This measure proposes the addition and
enhancement of existing business incentives. These incentives are
designed to foster California's long-term economic growth in
innovation-based industries. Historically, this has been an area in
which California has enjoyed a comparative advantage, not only
relative to other states but also to other regions of the world. In
the last decade, however, other states, such as Massachusetts, and
other countries, such as Singapore, have begun to implement more
targeted economic development activities to attract innovation-based
industries.
These changes are a cause for concern and suggest that California
cannot be passive or assume that what was true in 1990 will continue
to be true in the 21st century. This bill proposes a significant and
comprehensive economic development agenda to affirmatively focus the
states activities into attracting and growing innovation-based
businesses. This analysis includes information on the development of
the bill, the drivers and challenges of the California economy,
background on GO-Biz and related legislation. Suggested amendments
are included in comment 7.
2)Legislative Hearing and Research Contributed to Bill : The Innovation
and Jobs Creation Act was developed in response to testimony and
research from an August 2012 hearing of the Assembly Committee on
Jobs, Economic Development and the Economy, (JEDE) chaired by the
author of AB 653. One of the key hearing findings was the growing
importance of publicly advancing a coordinated economic
revitalization blueprint.
The hearing was held jointly with the Assembly Select Committees on
High Technology, chaired by Assemblymember Paul Fong, and the
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Assembly Select Committee on Government Efficiently, Technology, and
Innovation, chaired by Assemblymember Buchanan. Central to the
Member's deliberations was the importance of how California must
retain its competitive edge and historic position as a "first mover"
among nations. Key recommendations from the hearing include:
1. Enhancing the state's R&D capacity;
2. Incentivizing businesses to invest in our higher education
system;
3. Creating an equal playing field for manufacturing; and
4. Supporting industrial innovation through government reforms.
Follow-up to the hearing also resulted in the establishment of a
nonprofit sponsored "Innovation State" web-platform to help Members
of the Legislature and the public keep abreast of innovation issues,
connect with business and industry leaders, and to facilitate a
high-level statewide dialogue on California's innovation future.
3)Drivers in California's Future Economy : For decades, California has
been known as a place where innovation and creativity flourishes. A
2007 study on California's global competitiveness identified eight
key dominant and emerging industry clusters including high-tech
manufacturing, biotech and clean technologies. In 2011, California
remained the number one state in the U.S. for attracting foreign
direct investment and venture capital (51% of total dollars). Over
931,000 Californians are employed in high tech jobs, and biotech
continues to be a dominant industry sector in both Northern and
Southern California providing $115 billion in annual revenues and
employing 267,271 individuals.
While research shows that the state is uniquely positioned to be a
preferred global partner in the areas of innovation, science, and
technology, the state also needs to adapt to the reality of a growing
talent pool in other countries and the global redistribution of
manufacturing abroad. Emerging economies around the world are
striving to become leaders in innovation and not merely "copycat"
economies of the U.S.
Although these dynamics may pose challenges to current leading
technology centers, for California they offer new opportunities for
collaboration and cooperation. With its diverse population and
access to world-class research universities and national
laboratories, the state is a highly prized academic and research
partnership. As early as 2004, the state had bi-national research
initiatives with Canada and Iceland on renewable energy and other
technologies. The University of California at San Diego has a
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multi-year manufacturing initiative with Mexico, supporting economic
growth on both sides of the border. AB 653 proposes to take the
state's commitment to innovation and technology-based industries to
another level by formally codifying the state's iHub Program,
enhancing and creating innovation inducing tax provisions, and having
the state directly engage in the testing and demonstration of new
products, services and processes.
4)Challenges to California's Competitiveness : A consensus of research
recognizes that innovation-based industries are primary drivers of
economic competitiveness in today's global economy. California is a
leader in many cutting-edge industries and home to many world-leading
businesses; however, California's business climate is a cause of
concern.
JEDE tracks a variety of surveys, indexes, and reports that assess
California's business climate, and the general consensus is that
California's biggest weakness in attracting and retaining businesses
is that California is a high cost state. Business climate indexes
that focus on taxes and costs consistently score California poorly.
California has the 2nd highest income tax burden in the nation, and
the 11th highest sales tax burden. Relative to the cost of doing
business, California has the 8th highest average retail cost of
electricity. Even among high cost states, California have challenges
as seen by the state's ranking as 16th in the nation relative
educational attainment of residents age 25 or older. Other state
rankings: Massachusetts (1st) and New York (9th).
A recent survey of manufacturers illuminates several of the
deficiencies of California's business climate. Of the 18% of
manufacturers that considered expanding in California in 2011, only
2.2% chose California. This compares poorly with other major states
such as Ohio (12% consideration rate, capturing 11.3% of national
manufacturer expansion/relocations), Texas (11% consideration rate,
capturing 6.9% expansions/relocations), and North Carolina (10%
consideration rate, capturing 7.2% expansions/relocations). The
reasons most commonly cited for not expanding in California were the
costly regulatory environment, high taxes, high labor costs, and
insufficient incentives and credits.
According to the sponsor, the California Hispanic Chambers of
Commerce, AB 653 is strategically designed to address these
challenges. Leading the strategy is the 40% credit on increases in
California research, which the sponsor expects could increase state
R&D investments by an additional $5.2 billion. The iHub Program will
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further drive regional collaboration and commercialization of new
products. Access to these new technologies will give California
manufactures an advantage, as will the sales tax exclusion on
manufacturing related equipment. Being one of the few states that
still charge sales tax on manufacturing equipment is generally
identified as a competitive disadvantage to the state.
In order to support advanced manufacturing and other innovation-based
businesses, the bill proposes a 40% credit to encourage businesses to
contribute to development of relevant curricula and training programs
at post-secondary institutions. A 2011 report by McKinsey & Company
reported that over the next decade, the U.S. will face a shortfall of
approximately 1.9 million technical and analytical workers. This
education institution credit is designed to provide a ready supply of
trained technicians during the R&D phase, high-skill manufacturing
personnel and trained employees to support small and medium size
businesses within the supply chain.
5)Costly Package : AB 653 enhances two and creates a new business
incentive related to innovation based industries. The exact cost of
these incentives has yet to be estimated by the Franchise Tax Board
and the Board of Equalization. Unfortunately when these estimates
are completed there will be no dynamic analysis of what the
incentives might bring to California nor the impact of not responding
to the changing global economy will mean to California workers,
businesses and tax base.
6)Governor's Office of Business and Economic Development : In April
2010, the Governor's Office of Economic Development was established
to provide a One-Stop-Shop for serving the needs of businesses and
economic developers. While initially established through Executive
Order S-01-10, the office was later codified and renamed as the
Governor's Office of Business and Economic Development (GO-Biz), in
AB 29, Chapter 475, Statues of 2010. In 2012, GO-Biz directly
assisted 5,308 companies, resulting in the creation and/or retention
of 9,050 jobs and $1.45 billion in investments.
Among other programs, GO-Biz provides permit and other technical
assistance for new and expanding businesses, as well as administering
the iHUB Program in partnership with the statewide network of 12
regional economic development partnerships. The iHub Program is
designed to improve the state's national and global competitiveness
by stimulating regional collaborations around specific
innovation-based industry clusters. Key assets and partners of the
initiative include technology incubators, research parks,
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universities, federal laboratories, economic development
organizations, business groups, and venture capitalists.
In 2012, the Governor initiated, and the Legislature approved, a
comprehensive reorganization of the state's administrative structure.
Key changes included the dismantling of the Business, Transportation
and Housing Agency (BTH) and further consolidating GO-Biz' position
as the state's lead in economic development. Effective July 1, 2013,
GO-Biz will have administrative authority for more economic
development related programs and services including the Small
Business Loan Guarantee Program and the Infrastructure and Economic
Development Bank. AB 653 codifies an existing program at GO-Biz.
7)Technical Issues : Putting forth a comprehensive innovation package
can be challenging from a technical standpoint. Below are a list of
issues that the author may wish to address to clarify its purposes
and ensure its successful implementation.
a) iHUB : AB 653 includes language substantively similar to AB 250
(Holden and V. Manuel Pérez). When AB 250 passed the JEDE
committee on April 9, 2013, the committee approved a series of
amendments, which include the following:
i) Authorize joint applications;
ii) Revise the definition of iHubs to more accurately capture
all the expected innovation partners including private sector
firms and industries, academic institutions, economic
development organizations, and local governments;
iii) Set a 5-year term of the designation and a mechanism for
the de-designation of an iHub;
iv) Specify that iHubs are designated through an memorandum of
understand that includes the goals and performance standards set
out in the application;
v) Allow for more than one iHub in a region to the extent that
industry focuses are different;
vi) Require GO-Biz to annually aggregate outcomes from the
iHubs; and
vii) Identify two additional technical assistance stakeholders -
Small Business Development Centers and the microenterprise
development organizations.
b) Sales Tax Exemption : Providing a sales tax exemption on
manufacturing equipment is consistently identified as a top
priority among economic developers. Below are amendment
suggestions:
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i) Remove the local sales tax component in order to allow
local communities have the option of waiving the local portion
of sales tax;
ii) Remove the limitation on pollution control equipment or
clarify that the limitation only applies if the manufacturer is
purchasing a self-contained piece of equipment; and
iii) Require the taxpayer to notify the BOE that the equipment
is being taken out of California or its use no longer meets the
requirements of the exemption.
c) Postsecondary Education Credit : There is a worldwide shortage
of medium an high skilled workers making a trained workforce a key
competitive advantage.
i) Define a postsecondary education facility to only include
accredited institutions including career technology;
ii) Limit the carry forward to 10 years;
iii) Require the postsecondary education facility to issue the
taxpayer a tax credit certificate and to annually report to the
FTB the names and taxpayer IDs of qualified contributors;
iv) Require the postsecondary education facility to maintain
the records of the certificates;
8)Related Legislation : Below is a list of related legislation.
a) AB 250 (Holden and V. Manuel Pérez) California Innovation Hub
Program : This bill codifies and expands the California Innovation
Hub (iHub) Program at the Governor's Office of Business and
Economic Development (GO-Biz) for the purpose of stimulating
economic development and job creation through the coordination of
federal, state and local innovation-supporting resources. Status:
Pending in the Assembly Committee on Appropriations.
b) AB 699 (Portantino and V. Manuel Pérez) State Economic and
Innovation Strategy : This bill would have updated the
requirements for the development of a State Economic Development
Strategy, especially in the areas of technology and innovation,
and requires it be submitted to the Legislature by May 1, 2010.
Status: Held in Assembly Appropriations Committee in 2009.
c) AB 744 (John A. Pérez) Office of Intellectual Property : This
bill required the Department of General Services to assist state
agencies in the management and development of intellectual
property that was developed by state employees or with state
funding. Among other duties, the department is required to
develop a database of state-owned intellectual property starting
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January 1, 2015. Status: Signed by the Governor, Chapter 463,
Statutes of 2012.
d) AB 894 (V. Manuel Pérez) California Manufacturing
Competitiveness Act of 2011 : This bill would have established a
loan and loan guarantee program to enable the state to draw down
federal dollars to support the retooling and expansion of
manufacturing in California. Status: Vetoed by the Governor,
2011
e) AB 2506 (V. Manuel Pérez) California Innovation and Jobs Act :
This bill would have increased the state R&D credit from 15% to
40%, eliminated sales tax on manufacturing equipment, authorized a
new tax credit for private investments in postsecondary
institutions, required state agencies to submit regulatory actions
to the Legislature 60 days prior to submitting those actions to
the Office of the Administrative Law, and authorized the creation
of regional innovation boards. Status: Held in the Assembly
Committee on Business, Professions, and Consumer Protection in
2012.
f) AB 2711 (Portantino, Arambula, Price and Salas) State
Technology and Innovation Strategy : This bill would have required
the Secretary of the Business, Transportation and Housing Agency
to develop a comprehensive state technology and innovation
strategy to guide future state expenditures and activities.
Status: Held under submission in the Assembly Committee on
Appropriations in 2008.
9)Double Referral : This measure has been double referred by the
Assembly Committee on Rules to two policy committees. Should AB 653
pass JEDE, it will be referred to the Assembly Committee on Revenue
and Taxation for further policy review.
REGISTERED SUPPORT / OPPOSITION :
Support
California Hispanic Chamber of Commerce (sponsor)
BIOCOM
Opposition
None received
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Analysis Prepared by : Toni Symonds and Zachary Hutsell / J., E.D. &
E. / (916) 319-2090