BILL ANALYSIS Ó
AB 544
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Date of Hearing: May 27, 2015
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Jimmy Gomez, Chair
AB
544 (Mullin) - As Amended May 20, 2015
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|Policy |Revenue and Taxation |Vote:|9 - 0 |
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Urgency: Yes State Mandated Local Program: NoReimbursable: No
SUMMARY:
This bill conforms California tax law with respect to the
research and development credit, for taxable years beginning on
or after January 1, 2016, to January 1, 2021, to the federal
alternative simplified credit (ASC), and repeals the alternative
incremental credit, and conforms to recent federal changes
related to acquisitions, dispositions, and aggregations.
Specifically, the bill conforms to the federal law relating to
the alternative simplified credit, except as follows:
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1)The credit for incremental qualified research expenses over
50% of the average qualified research expenses for the
previous three years is 7% (instead of the federal 14%).
2)The credit for qualified research expenses where the taxpayer
does not have qualified research expenses in any of the
previous three years is 4.5% (instead of the federal 6%).
The bill provides that an election to use the ASC would apply to
all succeeding taxable years unless revoked with the consent of
the Franchise Tax Board (FTB); and conforms to federal law
relating to the inclusion of qualified research expenses and
gross receipts of an acquired person and aggregation of
expenditures.
FISCAL EFFECT:
1)Insignificant cost to FTB to implement the exclusion.
2)Estimated GF revenue decreases of $17 million, $60 million,
and $75 million in FY 2015-16, FY 2016-17, and FY 2017-18,
respectively.
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COMMENTS:
1)Purpose. According to the author, California has long been a
global leader in research and development (R&D), and to
safeguard the growth of R&D in this state, the tax code should
offer additional incentives for R&D investment. The author
asserts the current R&D tax credit dates to a 1987 federal
law, but since that time the federal law changed while the
California credit remained the same. The author believes
discrepancies between the two laws burdens research firms as
they must maintain different accounting for the two credits.
Supporters, including Hewlett-Packard, argue the ASC proposed
in this bill is a simpler and superior method of calculating
the R&D tax credit, and shifts the focus to R&D conducted in
relatively recent years. Supporters contend the current
method can result in unintended or strategic consequences,
such as significant disparities in credits among competitors
based on activity conducted decades ago, and increased credits
when revenue-generating activity is shifted out of state.
2)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 currently provides a strong incentive for
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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
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 the 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.
3)Alternative Simplified Credit. Unlike the incremental method,
which relies on a tiered system of average annual gross
receipts, the ASC allows a credit for a percentage of research
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expenses (14% under federal law) that exceed 50% of the
average research costs for the three preceding taxable years.
By conforming to the ASC, taxpayers will be less likely to
make mistakes and FTB will find it easier to conduct an audit.
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.
Given one of the primary justifications for a state R&D tax
credit is the creation of desirable jobs, the high cost of
increasing the R&D credit, and the ample opportunities to
invest in California's leading technology firms and
universities, it may be worth considering whether the amounts
spent by this bill would be better invested directly in R&D
activity instead of distributed via a tax credit.
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5)Related and Prior Legislation.
a) AB 437 (Atkins) of this session creates a $50 million
per year R&D grant program for small businesses. AB 437 is
currently awaits hearing on the Suspense File of this
committee.
b) AB 2330 (Mullin) of last year was nearly identical to
this bill, and was held on the Suspense File of this
committee.
Analysis Prepared by:Joel Tashjian / APPR. / (916)
319-2081
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