BILL ANALYSIS Ó
AB 437
Page 1
Date of Hearing: May 20, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
437 (Atkins) - As Amended May 5, 2015
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|Policy |Revenue and Taxation |Vote:|9 - 0 |
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Urgency: No State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill establishes, beginning on January 1, 2016 and ending
January 1, 2021, a $50 million per year research and development
grant program for small businesses, businesses with annual gross
receipts of $5 million or less and certified by the Governor's
Office of Business and Economic Development (GO-Biz). In
summary, this bill:
1)Allows a qualifying business to apply for a one-time grant
equal to 10% of the excess research and development credit
amount attributable to tax years beginning on or after January
1, 2014 and before January 1, 2016, and available for
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carryover into tax years beginning on or after January 1,
2016.
2)Allows a qualifying business to annually apply for grants
equal to 15% of the excess credit amount attributable to tax
years beginning on or after January 1, 2016 and before January
1, 2021.
3)Limits the aggregate amount that may be certified for grants
to $50 million for each taxable year beginning January 1, 2014
and 2015, and each calendar year beginning January 1, 2016
until January 1, 2021, regardless of the taxable year to which
the grant relates.
4)Requires the qualifying business to apply for the grant on a
timely and electronically filed original tax return, and
requires the Franchise Tax Board (FTB) to provide a
certificate within 90 days of receiving the return, allocating
grants on a first come, first served basis.
5)Excludes the value of the grant from gross income of the
taxpayer; requires any excess credit amount for a taxpayer or
any pass-through entity to be reduced by the amount provided
on a grant certificate; excludes any affiliated businesses of
a combined reporting group that does not, as a group, qualify
as a small business; and prohibits the award of any grant with
respect to credits that may otherwise be assigned.
6)Requires the Controller, upon receipt of a certificate, to pay
the grant amount, provides that grants are continuously
appropriated from the General Fund, and requires the
Controller to issue an annual report to the legislature on the
program, including a list of grant recipients and amounts
received.
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FISCAL EFFECT:
1)One-time GF costs of approximately $225,000 and ongoing annual
costs of approximately $525,000 to GO-Biz to develop program
and regulations, and ongoing administration; significant GF
costs to FTB and Controller to administer changes to systems
and procedures.
2)Estimated GF revenue decreases of $22 million, $27 million,
and $27 million in FY 2015-16, FY 2016-17, and FY 2017-18,
respectively.
COMMENTS:
1)Purpose. According to the author, the research and
development (R&D) tax credit was created in 1987 to
incentivize innovative businesses and create new jobs, yet
data from FTB shows small and medium sized businesses are
frequently unable to monetize the value of their R&D credits
because they don't have sufficient tax liabilities. AB 437
allows these small businesses to receive a grant for a portion
of the amount of R&D tax credits they have earned. The bill
provides a grant for 15% of unused R&D credits beginning in
2016, and includes a two-year look back period that allows
businesses to receive grants for 10% of any unused R&D credits
from 2014 and 2015, subject to an aggregate cap of $50 million
in grants per year.
Supporters, led by the National Federation of Independent
Businesses, believe this bill is an important step to
reenergize entrepreneurism in California, encouraging small
businesses to continue taking risks and developing creative
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ideas.
2)Refundable Credit? The author contends AB 437 is not a
refundable tax credit, but instead uses the R&D tax credit to
determine the level of investment the state will make in small
businesses. Indeed, unlike most refundable credits, the bill
limits the aggregate amount of grants to $50 million per
calendar year. However, the grants are determined based
solely on businesses revenue and unmonetizable R&D credit,
similar to typical refundable credits. The program does not
require GO-Biz or any other state agency to evaluate the
merits of the R&D activity, or the likelihood of eventual
success.
In opposition, the California Tax Reform Association believes
the structure of this program is therefore inappropriate,
arguing the existing R&D tax credit can be carried forward for
20 years. The opposition argues the long carry-forward period
serves to incentivize R&D activities that may take years, but
ensures California taxpayers invest only in those R&D
activities that eventually yield future value.
3)The R&D Tax Credit. The R&D tax credit is designed to achieve
two goals: (i) increase the total amount of R&D activity,
which results in enhanced productivity and economic growth,
and (ii) encourage taxpayers to conduct R&D in the location
where the credit is given. California's high and permanent
R&D tax credit provides a strong incentive for private
businesses to conduct R&D in this state. Unlike many other
tax incentives, the R&D tax credit does not reward past
behavior, but can only be claimed for incremental increases in
the taxpayer's research activity.
The California R&D tax credit leads to increased R&D activity
and jobs in this state, which may be more desirable than jobs
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in other industries. One of the advantages to the state, as
explained by FTB, comes through economies of agglomeration -
the benefits that inure to several firms located in close
proximity. This agglomeration facilitates production and
development efficiencies by allowing greater specialization
among firms. Businesses not directly engaged in R&D
activities may also benefit from the presence of firms with
extensive R&D activities.
Unlike the federal R&D tax credit, however, the benefits of
enhanced productivity and technology cannot be confined to the
state of California, and in this way the California R&D tax
credit subsidizes advances and efficiencies that help people
and firms outside this state. In effect, the "public good"
created through increased R&D is shared throughout the world,
but paid for by California taxpayers.
4)Tax Credit vs. Direct Subsidy. Several scholars have
suggested that direct investment in R&D activities can
stimulate a greater amount of activity, and can help create
equally high, if not higher, numbers of R&D related jobs in
the relevant geographic area than tax credits. Direct
investment also has the advantage of potentially benefitting
all firms, particularly smaller firms, since the R&D credit is
only useful to firms that have or will have taxable profits
with which to offset against the credit. On the other hand,
direct R&D subsidies can have the unintended effect of
increasing the cost of R&D inputs - primarily highly-skilled
labor - causing the overall increase in R&D expenditure to
produce higher wages instead of increased productivity and
technology.
This bill seeks to strike a balance that achieves some of the
benefits of direct investment, particularly with respect to
small businesses that cannot otherwise realize the value of
their R&D credits, without changing the program for other
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businesses. Given the state's already high investment in R&D
activities through its current credit, and the shortcomings of
that credit addressed by this bill, the author and Committee
may wish to consider whether the state ought to pay for this
grant program through reductions in the existing R&D tax
credit, ensuring a better mix of incentives are achieved
without expanding overall state investment in R&D.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081