A group of 23 Democratic state lawmakers is urging Governor Gavin Newsom to reinstate the research-and-development tax credit and net operating loss deduction, both of which were suspended last year.
Assembly Member Mike Gipson, who chairs the Assembly Revenue and Taxation Committee, is among the lawmakers calling for the restoration of the tax policies.
In a letter dated May 13 – the day before Newsom released his revised budget proposal that does not reinstate the R&D credit or NOL deduction – the lawmakers wrote:
“Given that California has officially overtaken Japan to become the world’s fourth largest economy, according to newly released data from the International Monetary Fund (IMF) and the U.S. Bureau of Economic Analysis, we are writing to encourage you to take critical steps to protect our present and future economic growth by restoring the Research and Development (R&D) Tax Credit and Net Operating Loss (NOL) deductions that were suspended in the 2024-2025 State Budget. This tax credit is crucial to nurture innovative businesses that generate good-paying jobs, create a circle of related economic activity in the broader R&D community, enhance productivity, and attract investment to the Golden State.
“We understand that 2024 was a challenging budget year which required tough choices to address the budget shortfall. One of those tough choices was to prohibit businesses from using the R&D Tax Credit to reduce their taxes by more than $5 million for three years. Although there is the ability for businesses to recoup those dollars after the suspension, it is in the state’s best interest to reinstate these tax incentives earlier rather than later if the budget outlook is positive.
“California’s innovation economy depends on these tax credits. There is an entire ecosystem of business activity built on R&D investment – in fact, over 700,000 jobs were directly related to R&D activities in California in 2021, including roles like researchers, technicians, and support staff. And the state’s universities, think tanks, and government agencies all benefit from their collaboration with R&D facilities across the state. The R&D Tax Credit generates much more revenue flowing into state than it costs due to the economic multiplier effect of the R&D tax incentives.
“A recent Milken Institute study found that the availability of the R&D Tax Credits made a significant impact on business’ investment decisions in California. With these tax credits in place, California’s total employment in scientific R&D services grew substantially in the last decade – rising almost 34 percent. These trends show that the state’s targeted support for R&D in the life sciences has had a substantial positive impact on both job creation and wage increases.
“For these reasons, we strongly encourage you to reinstate the R&D Tax Credit and NOL deductions in the 2025-26 State Budget. It is these investment incentives that are a crucial strategy for protecting and growing our economic future, and ensuring that the state will remain a hub of unmatched innovation for decades to come.”
In addition to Gipson, the signatories were Assembly Members Patrick Ahrens, Marc Berman, Tasha Boerner, Juan Carrillo, Mark Gonzalez, Jacqui Irwin, Stephanie Nguyen, Blanca Pacheco, Diane Papan, Darshana Patel, Gail Pellerin, Cottie Petrie-Norris, Blanca Rubio, Jose Luis Solache, Avelino Valencia, Christopher Ward, and Lori Wilson; and Senators Jesse Arreguin, Josh Becker, Catherine Blakespear, Tom Umberg, and Akilah Weber Pierson.
The letter is similar to those signed by large groups of lawmakers in 2020 and 2024 seeking to preserve the R&D credit and NOL deduction. Had the lawmakers opposed the tax changes during floor votes, the NOL suspension and tax credit limitation would have fallen short of the 54 votes needed to clear the Assembly, but the coalitions did not maintain their opposition during the final budget votes.