(December 13, 2006) In a move that will help California remain competitive in the global economy, Congress passed a two-year extension of the federal research and development (R&D) tax credit on the last day of the 109th Congress, which came to a close in the early morning hours of December 9.
The federal R&D tax credit was allowed to expire on December 31, 2005. As a result, many U.S. companies would have experienced increased R&D costs in the form of higher taxes. As the nation's leader in R&D, California's economy could have been hit especially hard if the lapse in the federal credit had been allowed to continue.
Governor Arnold Schwarzenegger recently urged the extension and strengthening of the R&D credit with a letter to Congressional leaders. In his letter, Governor Schwarzenegger explained that the added cost of R&D, combined with the current uncertainty of when and how long the credit will be extended, could make R&D too expensive to conduct in the United States. The Governor requested that Congress extend the credit for as long as possible.
In terms of R&D performance, California ranks first among all 50 states. California alone accounts for more than one-fifth of total U.S. R&D. California industry ranked first in R&D expenditures, accounting for $47.1 million in 2003. California universities rank number five in U.S. R&D among universities. Over half the R&D performed in the United States by computer and electronics products manufacturers is located in California, Massachusetts and Texas.
California is also the national leader in R&D knowledge capital. It leads the rest of the country by a large margin in percentages of doctoral scientists, doctoral engineers, and science and engineering doctorates awarded. In 2004, California received more utility patents than any other state, three times more than those issued to second-place Texas.
The December 31, 2005 expiration of the federal R&D credit was the 12th such lapse in the 25-year history of the credit. Earlier efforts this year by Congress to provide a seamless renewal of the credit had failed. The President, various members of Congress, and the business community had requested the adoption of a permanent federal R&D credit. The two-year extension passed by Congress on December 9, 2006 is retroactive to the beginning of the year and will continue through 2007. Passage of the legislation clears the way for the President to sign the R&D credit extension into law.
California, along with a number of other states, has a state-level R&D credit. California's R&D credit was enacted in 1986 as a permanent credit. It provides a state income and corporate tax credit for certain types of R&D expenditures. California's R&D credit helps the state compete nationally and globally for investments and high-paying jobs.
Recognizing the need to maintain the state’s leading edge in R&D and to retain California's rich talent pool with R&D jobs, earlier in 2006, AB 2032 (Lieu; D-Torrance) proposed to strengthen California’s R&D credit. The bill proposed to increase the credit for qualified research expenses from 15 percent to 20 percent to conform to the federal R&D credit, as well as increase other aspects of the credit to conform to federal law. The bill failed in policy committee, never making it to the floor for a vote by the full Assembly.
The CalChamber will continue to strongly support a permanent federal R&D credit and the strengthening of the credit at both federal and state levels.
Staff Contact: Kyla Christoffersen