Incentives Watch: Will California Be Able to ‘Compete’ With Other States As a Result of New Tax Credit?

In this interview, Kish Rajan, Director of the California Governor’s Office of Business and Economic Development (GO-Biz), discusses the new California Competes Tax Credit program, which is available for tax years starting on or after Jan. 1, 2014.  While the program is open to all businesses interested in expanding or relocating to California, the program highlights certain key industries in the state.

In 2013, California revamped its economic development program by repealing certain tax credits for businesses located in economic development areas and replacing those credits with new incentives, including the California Competes Tax Credit Program.  The program offers a nonrefundable tax credit to businesses in an amount that is based on numerous factors such as job creation and amount of investment in the state.

Bloomberg BNA:  What is the purpose of the new California Competes Tax Credit Program?
GO-Biz has an agenda, which is to increase California’s competitiveness and target investments to the state.  GO-Biz believes the program will create a greater number of jobs, lead to more positive economic activity and make California an even better place in which to invest and operate a business.  GO-Biz is being more focused and targeted in regards to tax incentives, and this program is the result of those efforts.

Bloomberg BNA:  What will be the impact of the program?
GO-Biz has already been getting feedback from businesses and it has been good so far.  The reaction from the community is that the program will indeed help businesses in California that are considering expanding or modernizing, and businesses that are considering California as a location to establish and grow their business.  The program rounds out a business’s case to make the commitment to move to California. 

In addition, the program will lead to more jobs and a bigger economic contribution to the community at large.

Bloomberg BNA:  What effect will the program have on California’s economy?
As mentioned earlier, the program will lead to increased job creation.  For instance, California has the largest economic output, from a manufacturing perspective, in the country, but it needs to remain competitive in terms of the global economy as well. 

The key thing to remember is that California starts from a position of strength, but the state doesn’t take that position for granted.  California will continue to be aggressive and continue to increase its economic output over time.

Bloomberg BNA:  Who will benefit from the program?
All businesses have the potential to benefit.  The California Competes program includes over $780 million in available tax credits in the next five years and is available statewide.  Furthermore, the state just enacted a sales tax exemption provided for certain machinery and equipment used in manufacturing and biotechnology research.  [The exemption is available starting July 1, 2014.]  The exemption is specifically targeted to the manufacturing and biotechnology industries, as well as research and development companies related to biotechnology.  These programs combined provide opportunities to a broad cross section of industries.

Manufacturing and biotechnology are key sectors of California’s economy that have been highlighted by the program.  These sectors already make up large segments of California’s economy, so the state is taking those areas and reinforcing and bolstering those industries.  The program isn’t exclusively focused on those industries, but they are two prominent ones that California paid attention to as part of the program.

Bloomberg BNA:  Do you think businesses from outside California will relocate to the state based on this program, or do you think the program will mostly drive businesses already located in California to seek the tax credit, or both? 
It’s hard to say right now because we need time to see how the program plays out.  California has a very large base of businesses - it has a $2 trillion economy that includes manufacturing, biotechnology, agriculture, and information technology.  In fact, California has the largest economy in the U.S. for those particular sectors.  California has a healthy, well-established base of businesses and, with this program, GO-Biz hopes to reinforce and grow that base.

Bloomberg BNA:  Have any businesses entered into a written agreement yet with the Governor's Office of Business and Economic Development (GO-Biz) to take advantage of this new tax credit?
GO-Biz will open the first application period in March of this year and will allocate $30 million in tax credits before the fiscal year ends in July.  After July, GO-Biz will have an additional $150 million to allocate in the following year.

Bloomberg BNA:  Emergency regulations for the tax credit were recently filed with the Office of Administrative Law.  What is the most important thing that businesses seeking the tax credit need to know about these regulations?
There isn’t really one thing in particular in the emergency regulations to point out to businesses.  The regulations look at a range of factors when determining whether a business should receive a tax credit, such as the number of jobs created, the wages paid, the investment made as part of the project, and how strategic the business initiative is overall.  There are a multitude of factors to look at – not just one specific item to pinpoint.

California welcomes businesses to come forward and reach out to the program.  GO-Biz will then evaluate the business opportunities presented.

Bloomberg BNA:  Are there any downsides to the California Competes Tax Credit Program? 
I don’t see any downsides.  The program is a great opportunity for California to partner with various businesses and show that the state is committed to businesses investing in California.

Bloomberg BNA:  Do you have any other comments about the program?
  GO-Biz expects the program to have a positive impact on the economy overall.

*Continue the discussion on LinkedIn at Bloomberg BNA’s State Tax Group:  Do you think California’s overhaul of its economic development incentives will lead to more businesses investing in the state?

For more information about California’s tax credits, check out Bloomberg BNA’s Credits and Incentives Portfolios.


Interviewed By: Kathleen Caggiano

Follow me on Twitter at:  @katcaggiano .

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