BILL ANALYSIS Ó
AB 1564
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Date of Hearing: May 14, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1564 (V. Manuel Perez) - As Amended: May 6, 2014
Policy Committee: Revenue &
TaxationVote:9-0
Jobs, Economic Development & the Economy8-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill increases the rates of the research and development
tax credits (R&D Credits) for general research and university
"basic research" on an incremental basis over a five year period
in the amounts shown in the table below:
----------------------------------------------------------------
|Tax Year | General Research | University "Basic |
| | Credit | Research" Credit |
----------------------------------------------------------------
|------------------+-----------+-----------+-----------+-----------|
| | Current | AB 1564 | Current | AB 1564 |
|------------------+-----------+-----------+-----------+-----------|
|2014 | 15% | 18% | 24% | 27% |
| | | | | |
|------------------+-----------+-----------+-----------+-----------|
|2015 | 15% | 21% | 24% | 30% |
| | | | | |
|------------------+-----------+-----------+-----------+-----------|
|2016 | 15% | 24% | 24% | 33% |
| | | | | |
|------------------+-----------+-----------+-----------+-----------|
|2017 | 15% | 27% | 24% | 36% |
| | | | | |
|------------------+-----------+-----------+-----------+-----------|
|2018 | 15% | 30% | 24% | 39% |
| | | | | |
|------------------+-----------+-----------+-----------+-----------|
|2019 | 15% | 15% | 24% |24% |
AB 1564
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| | | | | |
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FISCAL EFFECT
Estimated GF revenue losses of $65 million, $110 million, $150
million, $190 million, and $130 million in each of FY 2014-15,
FY 2015-16, FY 2016-17, FY 2017-18, and FY 2018-19,
respectively.
COMMENTS
1) Purpose. According to the author, as California emerges from
the recession, it needs an economic strategy that focuses on
R&D to help develop new products and services and create jobs.
Supporters argue the bill will incentivize more companies to
engage in R&D in California and encourage the location of R&D
jobs in this state.
2) Opposition. Opponents of this bill, including the American
Federation of State, County and Municipal Employees, argue it
would raise R&D Credits to unjustifiably high levels. They
assert that California already has the nation's highest R&D
Credits, one which eliminates a substantial amount of tax
liability for profitable companies.
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 currently 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
in other industries. One of the advantages to the state, as
explained by the Franchise Tax Board, 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
AB 1564
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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.
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.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081