Incentives Watch: California Pays, California Competes?


 

California StatehouseOn June 19, 2018, the California Governor’s Office of Business and Economic Development (GO-Biz) announced that they had approved $57 million in California Competes tax credits for 29 companies, including $10 million to motion picture company DreamWorks Animation LLC. This move comes in the wake of other states scaling back on their tax credit programs, such as West Virginia’s elimination of its film production tax credit. 

The California Competes tax credit was created in 2013 as part of a deal that eliminated the state’s Enterprise Zone program. The credits are negotiated between businesses and GO-Biz and must be approved by the California Competes Tax Credit Committee. The credit is authorized through 2018, with final applications due March 26, 2018.

To date, $759 million in tax credits have been allocated to 957 companies, including Northrop Grumman Systems Corporation, Red Bull North America, Inc., and General Motors Company. The expected outcome of these credits is almost 100,000 new jobs for the state. Despite these numbers, analysis from the California Legislative Analyst’s Office (LAO) published in 2017 suggests that the benefits of the credits are uncertain, and, as structured, may have a negative impact on the economy in the state.

The report highlighted some of the potential negative consequences of the credit and recommended that the incentive program not be reauthorized for future years. In support of this recommendation the LAO cited the economic inefficiency of the credit, the unequal treatment of similarly situated taxpayers, and the fact that there is no way to prove that development by businesses would not have occurred but for the tax credit. The LAO report recommended adopting broad-based policies that would impact the overall business climate in the state, such as lowering the corporate tax rate.

Despite the LOA’s recommendations, California Gov. Jerry Brown (D) proposed that the credit be reauthorized for an additional five years with $180 million in credits available per year.

California is currently in the process of developing their 2018-2019 budget, and a signed budget is expected sometime this summer. Be sure to tune into Bloomberg Tax for updates on the future of the California Competes program.

Continue the discussion on Bloomberg Tax's State Tax Group on LinkedIn: Do you think that the cost of the California Competes tax credit program is offset by the jobs created? Should the credit be reauthorized for future years?

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