California Should Reinstate Suspended Tax Credits with Another Historic Budget Surplus Coming

It’s hard to believe, but a little more than a year-and-a-half ago California’s financial prognosticators thought the state was barreling into a $54 billion deficit. However, we know how the story ended – the state actually experienced a once-in-a-generation surplus in 2021.

Thankfully, and not too surprisingly, in late October Governor Newsom said California will have another “historic budget surplus” next year. Considering the state’s rosy economic outlook, it begs a question: Why are 2020’s emergency tax increases still in place?

AB 85, 2020’s budget bill, suspended net operating loss (NOL) deductions and capped business incentive tax credits, including the research and development (R&D) tax credit, at $5 million to address a looming fiscal emergency. The estimated $9 billion tax increase wasn’t permanent and was put into place for a period of three years with a carryback provision. California was borrowing the money interest-free to assist in closing the deficit with the intention of paying it back, in full, after three years.

While this deficit never came into existence the temporary tax increases did.

CalChamber and a number of other organizations advocated for the sunset of AB 85’s provisions during last year’s budget cycle but were unsuccessful. CalChamber is again requesting these emergency tax increases come to an end since they are not serving their designated purpose.

Most importantly, the business incentive tax credit cap of $5 million must be lifted. R&D is the backbone of the California economy and the credit cap is stifling innovation and high paying job growth. A recent study by the Milken Institute shows that the R&D tax credit creates high paying jobs throughout California and in industries beyond just technology and healthcare. The study also highlights the importance of certainty in the State’s tax structure for companies who utilize this credit and their decision to grow jobs in the state.

Additionally, the NOL suspension is causing even greater financial strain for employers who have suffered staggering losses over the past year and have no way to offset their revenue declines. This includes employers in the tourism, hospitality, and restaurant industries. Struggling businesses need help now – not in several years when the 2020 budget’s carryback provisions take effect.

California’s innovation-based economy thrives in large part because of the R&D tax credit. Also, companies who suffered losses due to COVID-19 should be able to claim those losses now to help with their recovery. With the expected budget surplus, lifting the tax credit cap and reinstating the NOL deduction this year will provide the stability that employers need to recover and continue to grow.

Preston Young, Policy Advocate