California holds a unique position among the world’s innovation-driven economies. The state has diverse technology industries, strong research institutions, an entrepreneurial culture aided by a deep pool of immigrants with startup experience and the investment capital to bring innovations to market.
However, some indicators suggest the state’s long-term innovative capacity is declining, or will unless steps are taken. This means paying attention to a few key research areas as well as cost and regulatory concerns.
To maintain its leadership in innovation, California must provide a competitive business environment and identify key decision-making moments for companies in the state that are looking to make new investments.
A firm looking at investing or expanding examines federal and state policies. While California can’t directly affect national policies, it can reduce the cost of capital and aggressively use state research and development tax credits. We’re holding a forum in San Jose on Wednesday to discuss these issues.
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The state’s research tax credit is currently at 15 percent. We suggest four changes to improve it.
Introduce tradeable credits. The credit can be carried forward for use in future years if firms do not have sufficient tax liability in the year in which the credit was earned. However, many startup firms have little earnings, so it may be many years before they can use credits, diminishing their value. We suggest allowing firms to transfer credits to another corporation with enough tax liability to use them.
Refund credits for small businesses. Some states have created programs that specifically encourage research at small firms. In Maryland, small businesses with assets of less than $5 million can receive a refund for any credits that exceed their income tax. This gives an incentive to startup companies by lowering their costs before they generate profits. California could introduce a program that refunds a fixed percentage of unused research credits to qualifying small businesses.
Increase credits for funding university research. Now, firms funding basic research at qualifying institutions can receive a tax credit equal to 24 percent of spending above a base amount. Boosting the credit to 40 percent of basic research spending would further decrease the cost of funding this work at universities.
Double the tax credit. Increasing the credit to 30 percent from 15 percent – by 3 percentage points a year over five years – would send a strong signal that California values research and development. We estimate that 10 years after the policy is implemented, $700 million in additional research credits would stimulate up to $6.8 billion in additional research and development. That would translate to as many as 84,000 high-wage jobs and $10.5 billion in additional gross domestic product in California in a decade.
California’s policymakers can’t afford complacency about its innovation economy. These four policy alternatives are good ways to preserve it. While some might criticize them as corporate favoritism, such steps would benefit workers as much as firms.
Ross DeVol is chief research officer of the Milken Institute, a think tank in Santa Monica, and can be contacted at firstname.lastname@example.org. Kevin Klowden is executive director of the institute’s California Center and can be contacted at email@example.com.