BILL ANALYSIS �
AB 2330
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Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2330 (Mullin) - As Amended: May 15, 2014
Policy Committee: Revenue &
Taxation Vote: 9-0
Urgency: No State Mandated Local Program:
No Reimbursable: 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, 2015 to January 1, 2022, 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:
1)The credit for incremental qualified research expenses over
50% of the average qualified research expenses for the
previous three years is 10.5% (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 the Franchise Tax Board (FTB) to
implement the exclusion.
2)Estimated decreases to GF revenue of approximately $80 million
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annually over the duration of the bill.
COMMENTS
1) Purpose. According to the author, California has long been a
national and global leader in research and development (R&D),
and the tax code should offer effective incentives for R&D
investment. The author contends the current differences
between the state and federal credit calculation have become
burdensome on R&D firms, leading to separate bookkeeping for
the two systems. This bill conforms the calculation methods,
replacing California's current method with the federal
simplified method, which the author asserts is generally
easier to calculate and encourages greater R&D activity. The
bill also includes conformity provisions for several recent
federal modifications to acquisitions, dispositions, and
aggregations of expenditures.
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
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
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"
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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
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 for FTB 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.
5) Related Legislation. AB 1564 (V. Manuel P�rez) of 2014
temporarily increases the rates of the R&D credit and allows
taxpayers to sell and purchase those credits. AB 1564 is
currently on the Suspense File of this Committee.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081
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