The Milken Institute released a new report that looks at the impact of federal and state tax credit policy on California’s economy. Their research estimates that changes to the research and development (R&D) tax credit could generate as much as $10 billion in additional GDP and more than 80,000 new jobs for California.
“California’s Innovation-Based Economy: Policies to Maintain and Enhance It,” examines the Golden State’s dominance in the high-tech industry and the role of federal and state policies in contributing to the establishment of innovation clusters across the state, such as Silicon Valley in San Francisco, media and entertainment technology in Los Angeles, and Biotech Beach in San Diego.
The Milken Institute paid particular attention to the federal and state R&D tax credits and their influence in inducing R&D investment and luring businesses to locate within the state. The convergence of high-tech industries, strong research institutions, an entrepreneurial culture, and a veritable fountain of venture capital has created a curiously unique environment that has allowed companies like Apple, HP, Facebook, and countless others to become the giants of the innovation industrial complex.
However, they note that California is at risk of losing innovative edge due to competing incentives from other states. They also identify a decline in educational progress needed to equip a new generation of workers as a challenge to the state’s growth.
The report suggests that changes to the California R&D tax credit could bolster the state’s ability to maintain its position as a global innovation leader. Among the Institute’s ideas are implementing a tradable tax credit, providing refundable credits for small businesses, and increasing tax credits for businesses investing in basic research.
The most interesting and sweeping recommendation is doubling the R&D tax credit for all qualifying firms. California’s current rate of 15% of qualified research expenses is one of the most generous state R&D tax credit programs in the country. The Milken Institute assessed the impact of doubling this rate to 30% and found that after one decade, California would:
- Generate between $7.7 billion and $10.5 billion in additional development and research activity.
- Create between 60,000 and 84,000 additional jobs.
- Increase personal income by $7.3 billion to $10.2 billion.
- Boost indirect impacts in sectors such as real estate, construction, retail trade and wholesale trade.
What’s important to note is that the high tech industry is not the only sector that would benefit. All types of firms that currently qualify for the R&D tax credit – engineering, architectural, a wide array of manufacturing companies – would gain from increasing tax credits, reducing capital costs, incentivizing growth, and attracting more of these types of businesses to reconsider California as a place to call home.
California is now ranked as the world’s 7th largest economy. Changing state tax policies to encourage further growth and investment in innovation not only benefits the state, but also bolsters the nation and the global economy as well. Lawmakers would be wise to consider the recommendations set forth by the Milken Institute and increase the benefits offered by the R&D tax credit.
