Carl Guardino and Lezlee Westine: R&D tax credit worth more to state than its cost
By Carl Guardino and Lezlee Westine - Special to The Sacramento Bee
Sacramento Bee
April 18, 2008
Once again, California finds itself scratching for dollars to balance the state budget. Once again, legislators and the governor face distasteful choices. Cut schools or hospitals? Raise college fees or the cost of license plates?
While the crisis in the finance markets and the general economic slowdown make the dilemma especially acute this year, the frequency with which California finds itself in the budget badlands, even when the economy is healthy, offers a cautionary lesson about assembling the next budget.
California cannot afford to undercut the incentives it provides for employers to grow and expand here. It cannot stop investing in the future. If it does, it will only ensure more years in which the state finds itself unable to meet critical needs in educating students, healing the sick, getting commuters to work and keeping people safe.
Unfortunately, Legislative Analyst Elizabeth Hill has proposed just such a shortsighted solution. She has recommended that the Legislature reduce the research and development tax credit. That is the last credit the Legislature should scale back.
Research and development animate the California economy. Scientific breakthroughs, technological innovation and path-breaking products make California companies the world leaders in fields from health care to clean energy to entertainment.
Research and development may conjure an image of stacks of computer servers. Instead, it ought to summon a human face. More than 80 percent of the benefits of the credit are attributable to salaries – salaries to match the high skills required for research jobs.
Spansion, for instance, is a Silicon Valley company that makes flash memory used to store data in portable devices such as cell phones. It spends about $225 million annually and employs 560 people in R&D in California. Flash memory holds great potential to reduce power use in computing devices. Along with alternative sources of energy, conservation will enable California to meet its ambitious plan to reduce greenhouse gases. Our high-tech employers can make the state a worldwide clean and green energy leader, but not without intensive research and development.
The legislative analyst asserts the state would collect $335 million more in revenue if it scaled back the R&D credit. That's reading only one side of the ledger. The number doesn't reflect the money the state collects from the personal income tax on researchers' salaries, or the sales tax from clothes they buy, or the property tax from their houses. It doesn't include all the goods and services – groceries, gardening, dinner out – through which they feed money into the local economy.
The R&D tax credit is less a tax break for companies than a decision by the state to receive less money in one account in order to receive more money in others. Highlighting only one side is like scoring a sacrifice fly in baseball as an out, without also noting that it enabled a runner to score from third.
Research and development is so essential, critics of the credit argue, that companies will do it without an incentive. To some extent, they will. For this reason, the credit applies only to research above a pre-established level – it exists to encourage more research in California.
Note the "in California." There is a federal R&D credit, but nothing about the federal credit favors California as a location. Other states are on the hunt for research facilities. California can't pretend it's not in a competition.
The Legislative Analyst's Office proposes to scale back the credit temporarily and let companies stockpile credits to claim later. So what's the harm? The risk is that companies will be less likely to contemplate millions of dollars of additional research, often a multi-year undertaking, if the credit is a now-you-see-it, now-you-don't line on the tax form.
Budget decisions are decisions about the kind of state California wants to be. We want a knowledge-based, environmentally sustainable economy that spins out employment opportunities for all. The research and development tax credit shines the light on the path that takes us there.
