State Budget

Half of Assembly Signs Letter Urging Rejection of Governor’s Proposals to Suspend NOL Deduction and Limit Tax Credits

Sacramento Capitol

A bipartisan group of 40 state Assembly members – half of the house’s membership – signed a May 22 letter asking leadership to reject Governor Gavin Newsom’s proposal to suspend the net operating loss deduction and limit tax credits for research and development.

The letter by Assembly Member Cottie Petrie-Norris, a Democrat from Irvine, was signed by 32 of the Assembly’s 62 Democrats – including Assembly Member Jacqui Irwin, who chairs the Assembly Revenue and Taxation Committee – and eight of the house’s 18 Republicans.

If the lawmakers remain opposed, the governor’s proposed NOL suspension and tax credit limitation would fall far short of the 54 votes needed to clear the Assembly.

CalTax is leading a coalition opposing the tax increases, noting that the tax increases would harm the economy, lead to job losses, and have long-term negative impacts on the economy and tax revenue.

The lawmakers’ letter, addressed to Assembly Speaker Robert Rivas and Assembly Member Jesse Gabriel, who chairs the Assembly Budget Committee, states:

“Recognizing the challenging budgetary outlook confronting our state, we respectfully urge you to help ensure the economic health of California’s innovation economy in the upcoming 2024-25 budget by maintaining the Net Operating Loss Deduction (NOL) and the existing Research and Development (R&D) Tax Credit. These tax incentives are some of the most important policy levers we can pull to encourage investment and growth in California’s innovation economy.

“We understand the challenges of the state budget and appreciate your partnership in taking early action to reduce the budget shortfall. From an economic perspective, we not only see the benefits of the R&D tax incentive and NOL deduction as far outweighing the costs to the state, but in these fiscally challenging times, these tax incentives provide a pathway for the state to recover more quickly due to the economic multiplier effect of R&D tax incentives.

“We want to underscore how vital California’s NOL and R&D tax credit policies have been for our state’s innovation economy – across the information technology, clean energy, life sciences, advanced manufacturing and many other sectors. A 2021 Milken Institute Study (‘Sustaining California’s Innovation Economy Through Investment in R&D’) found that the benefits of the R&D tax credit are spread throughout the state. Four of the top U.S. Metro areas for R&D investment are in California: San Jose-Sunnyvale-Santa Clara (No.1); San Francisco-Oakland-Berkeley (No.2), Los Angeles-Long Beach-Anaheim (No. 7) and San Diego-Chula Vista-Carlsbad (No. 8).

“Further, the study found that R&D investment is critical to maintaining employment in the state’s manufacturing sector. For instance, in 2018 manufacturing activities accounted for 52 percent of overall R&D spending statewide.

“California’s R&D credit has been vital for the growth of our state’s thriving Life Sciences sector. The Life Sciences sector alone is anticipated to generate approximately $500 billion in annual GDP for California’s economy. California’s Life Sciences industry currently employs over 469,000 people directly (and over a million people indirectly), at an average annual income of over $131,000 – ranging from small, young start-ups spun off from university research, to established titans that were born in California decades ago.

“The Franchise Tax Board estimated the cost of the R&D tax credit and the NOL deduction for biotechnology companies to be approximately $180 million in 2021-22 and $85 million in 2022-23. However, the benefits of the offsetting tax revenue and workforce development from these companies investing in California and those who live here far outweigh the costs.

“California has been the birthplace for the breakthroughs and innovations that have shaped the modern world and have, as a consequence, built California into the world’s fifth largest economy. We strongly urge you to preserve the R&D tax credits and NOL deductions that will help fuel innovation, create great jobs, and deliver continued economic growth and prosperity for the Golden State.”