BILL ANALYSIS
SENATE REVENUE & TAXATION COMMITTEE
Senator Lois Wolk, Chair
SB 1073 - Ashburn
Amended: May 3, 2010
Hearing: May 12, 2010 Tax Levy Fiscal: Yes
SUMMARY: Increases the Research and Development Tax
Credit from 15% to 20% for green technology and
renewable energy research and development costs.
EXISTING LAW provides various tax credits designed to
provide incentives for taxpayers that incur certain
expenses, such as child adoption, or to influence behavior,
including business practices and decisions, such as
research and development credits and Geographically
Targeted Economic Development Area credits. The
Legislature typically enacts such tax incentives to
encourage taxpayers to do something but for the tax credit,
they would otherwise not do.
EXISTING FEDERAL LAW provides research and development
tax credits to encourage companies to increase their
research and development (R & D) activities. Research
expenses must qualify as an expense, be incurred in the
United States, and be paid by the taxpayer. Additionally,
research must discover information technological in nature,
involves experimentation, and is intended to develop a new
or improved business component, among other requirements.
The research credit for personal income tax (PIT)
taxpayers is determined as the sum of:
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1. 20 percent of the qualified research expenses
incurred during the taxable year that exceeds the base
amount, as defined, and
2. 20 percent of the amount paid or incurred during
the taxable year on research undertaken by an energy
research consortium.
In addition to the two components listed above,
corporate taxpayers are allowed a credit of 20 percent of
expenses paid to fund basic research at universities and
certain nonprofit scientific research organizations.
Prior to January 1, 2009, federal law allowed a
taxpayer to elect the alternative incremental credit (AIC)
method to determine their research credit.
California conforms to the federal credit with the
following modifications:
The state credit is not combined with other business
credits.
Research must be conducted in California.
The credit percentage for qualified research in
California is 15 percent versus the 20 percent federal
credit.
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The credit percentage for basic research in
California is limited to corporations (other than S
Corporations, personal holding companies, and service
organizations) and is 24 percent versus the 20 percent
federal credit.
The percentages for the alternative incremental
research portion of the credit vary from the federal
credit.
THIS BILL would increase the percentage of increased
qualified research expenses included in the research credit
from 15 percent to 20 percent for green technology and
renewable energy research and development as defined,
beginning January 1, 2010.
Provides that this increased credit is allowed only
against the taxes imposed for tax years beginning on or
after January 1, 2014. This means that taxpayers can earn
this credit starting in the 2010 tax year, but can't claim
the credit until tax years starting in 2014.
Defines "green technology and renewable energy
research and development" as research and development that
is any of the following:
Consistent with meeting the goals and objectives of
compliance with greenhouse gas emissions standards as set
forth in the Health and Safety Code;
Promotes the reduction of wasteful, inefficient,
unnecessary, or uneconomic uses of energy;
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Provides for the utilization of cost-effective water use
efficiency practices to curtail the waste of water and
ensure that water use does not exceed reasonable needs;
Provides for the utilization of recycled or reusable
materials in the manufacturing process;
Provides for the application of cogeneration technology,
as defined in the Public Resources Code; or
Provides for the conservation of energy or the use of
solar, biomass, wind, geothermal, hydroelectricity under 30
megawatts, or any other source of energy, the efficient use
of which will reduce the use of fossil and nuclear fuels.
FISCAL EFFECT:
The Franchise Tax Board (FTB) expects the costs of
this bill to be minor.
FTB's revenue estimate for SB 1073 is pending. The
revenue impact resulting from this bill will be delayed
until 2014, when qualified taxpayers can claim 5 years of
accrued tax credits. Therefore in fiscal year 2014-15, the
revenue loss resulting from this bill would likely be at
least in the low hundreds of millions of dollars.
COMMENTS:
A. Purpose of the Bill
According to the author, "as the green and alternative
energy industries expand, new and existing companies are in
the process of selecting to locate or expand in the best
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business environment possible. This industry growth marks
an opportunity for California to broaden the economy and in
doing so advance the states economic health. These emerging
industries will provide a number of well-paying jobs and
generate revenue the state needs for schools, public safety
and other services. An expansion of the Research and
Development Tax Credit for green and alternative energy
industries is a soundly directed incentive that benefits
businesses, residents, the economy and the state as a
whole."
"It is evident that California must do more to attract
and keep businesses given the increasingly competitive
domestic market. The increase to the research and
development tax incentive will help California to stop the
exodus of important industry. This credit is important to
keeping the companies we have and enabling new companies to
locate in the golden state."
B. Background
California's research and development tax credit (RDC)
allows taxpayers filing under both the corporation tax (CT)
and in most cases, the personal income tax (PIT) to reduce
their tax liabilities to the extent that they engage in a
particular types of research and development activities.
The RDC was established in 1987, (Chapter 1138, Statutes of
1987, AB 53 Klehs) and is generally tailored after a
similar federal credit.
The RDC is available only for certain types of
qualified research activities that take place in California
and exceed a certain base level of R&D expenditures (as
determined by the level of R&D expenditures undertaken by
the taxpayer in prior years). The credit may be used to
both offset current-year tax liabilities and "carried
forward" to offset tax liabilities in future years, but may
not be "carried back" to offset past years' liabilities.
C. Recent Federal Energy Tax Incentives
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An April, 2009 Tax Notes column points out that The
American Recovery and Reinvestment Act (ARRA) of 2009
provided $20 billion in energy tax incentives plus $60
billion in various energy spending programs. This is on top
of the $17 billion energy tax title enacted as part of the
Emergency Economic Stabilization Act (EESA) in October
2008.
The ARRA creates two distinct programs that offer
significant advantages to taxpayers. The first is a grant
program that operates in lieu of existing tax credits, and
the second is a credit for the manufacture of advanced
energy property.
Grants in lieu of credits. The ARRA establishes a new
grant program option in lieu of the energy production
credit or the energy property investment credit for
taxpayers that place in service eligible energy property.
The grant amount is 30 percent of qualified tangible energy
property that is used to create electricity. The grant
amount is 10 percent in the case of qualified heat and
power property. The grant program essentially allows a
taxpayer to monetize the energy credits, providing an
attractive option to taxpayers in loss positions.
Advanced energy manufacturing investment credit. The
ARRA creates a 30 percent investment credit for qualified
property used in a qualified advanced energy manufacturing
project. The credit is designed to encourage the
re-equipment, expansion, or establishment of a
manufacturing facility for production property, as
specified.
In addition to the two programs mentioned above, the ARRA
makes several other extensions and modifications to
existing energy related credits and tax-advantaged
financing options.
D. Arguments for the RDC
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Generally, research credits are enacted because of
positive externalities and spillovers from research
activity, such as reducing the costs for other firms'
activity, and providing, new, better, and less expensive
products for consumers, according to Bronwyn Hall and Marta
Wosinka, of the University of California at Berkeley, in
their paper, "The California R&D Tax Credit: Description,
History, and Economic Analysis" (June 1999). However,
because all U.S. firms are eligible for the federal credit,
and research activities would result regardless of state
credits, California's high percentage credit seeks to
influence firm decision-making and confine more research
and development, as well as the positive spillover effects,
to this state. Additionally, research often leads to
production so a firm that takes a research credit may also
cite manufacturing in the same state that provides the
research incentive.
In a tax system often criticized as unfriendly to
business, California's research credit builds on its
competitive advantages of a highly educated workforce and a
world-class public higher education system. In can be
argued that California's research and development tax
credit provides a powerful incentive for firms to conduct
research and development in California, with high research
credit percentages that exceed other states' similar
credit. The credit is quite popular, with over 5,000
returns claiming more than $550 million in credits in 2003.
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E. Arguments against the RDC
California conforms to many aspects of the federal
research credit, albeit at lower percentages and with a few
more rules. And, California recently allowed taxpayers to
assign R&D credits within the unitary group. However,
given the current high levels of investment in research and
development in California, its highly educated workforce,
and the research infrastructure currently operating in the
state, will increasing credit percentages result in a
substantive increase in research activities in the state,
or merely serve as a reward for work companies are doing
regardless? The Committee may wish to consider what
marginal increase in research, and the commensurate
positive spillovers, will result from increasing research
credit percentages, especially when fiscal realities may
necessitate reduced state funding for public services
resulting from the revenue loss.
Moreover, given the positive impact of the credit and the
generous federal credits, it is unclear whether an increase
in the state credit would produce any additional benefits.
Support and Opposition
Support:None received.
Oppose: California Tax Reform Association
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Consultant: Meg Svoboda
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