Jarrell Cook

Legislative Analyst’s Office report recommends ending California Competes program

By Jarrell Cook, Associate Policy Director

Capitol Update, Nov. 3, 2017 Share this on FacebookTweet thisEmail this to a friend

On October 31, the Legislative Analyst’s Office (LAO) released a report evaluating the effectiveness of the California Competes tax credit. Established in 2013 as part of a deal restructuring California’s Enterprise Zone program into other strategies for economic development, the California Competes program awards tax credits through the Governor’s Office of Business and Economic Development (GO-Biz). The program is set to expire in 2018. The LAO recommends allowing the California Competes to end and suggests either broad-based tax relief to all California businesses or revising and narrowly tailoring the program.

The LAO’s recommendation is based on the effect the tax credits have on the economy when awarded to non-tradable businesses, which they describe as those enterprises that effectively cannot leave California to provide services or sell the goods they produce out of state. Because these businesses were never at risk of leaving the state, awarding them a tax credit neither increases nor prevents a decrease in economic output. Instead, according to the LAO, when these firms obtain these credits they are truly obtaining a competitive advantage over their peers, which are fellow similarly anchored California businesses. This results in an overall negative impact to the economy.

The LAO does acknowledge that tradable businesses – which are those, like manufacturing, that provide services and produce goods exported outside of the state – do spur economic growth and receive the vast majority of California Competes awards (approximately 85%). However, the LAO asserts that these credits may still have negative impacts on the economy if awarded to a business that had already intended to expand to California for its own benefit, irrespective of the incentive. CMTA has supported the California Competes program, and other similar tax incentives, because of its direct benefit to manufacturers as well as its indirect benefit of attracting investment by signaling that the state is receptive to the concerns of the business community.

The LAO’s recommendation to narrow the California Competes program to tradable businesses and provide further assistance to small businesses would still likely benefit manufacturers. However, CMTA has also supported the programs that the LAO recommends the legislature adopt if it does not extend the California Competes program: reducing the corporate tax rate, reducing the minimum tax, as well as other economic development measures to make California’s business climate more competitive when compared to other states. These policies would also benefit manufacturers and spur economic development.

For more information on the California Competes program and other tax issues facing manufacturers, please contact Jarrell Cook, Associate Policy Director at jcook@cmta.net or by phone 916-498-3356.

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