An update on California Competes

The California Competes Tax Credit was created in 2013 with several innovative features. Its objective is to attract and retain high-value employers in California in industries with high economic multipliers and that provide their employees good wage and benefits. What has happened since the first credits were awarded in 2014?

Tax Credit Use

Credit awards are capped each year for a total allocation up to $780 million over five years. Unused amounts from earlier years can be allocated in later years. In 2016-17 $243.4 million in tax credits were allocated.

$528 million in credits were awarded as of June 2017 out of $590 million available. 

  • Over 3,000 applications were received from the start of the program through June 2017. The number of applications did not increase significantly as the funding allocation grew. 
  • As of July 2017, 775 agreements were approved
    • approximately 35% manufacturing
    • approximately 25% professional, scientific and technical services
    • approximately 10% information sector 

Tax credit claims data are only available for tax years 2014 and 2015. According to the California Franchise Tax Board:

  • Of $28.9 million in approved tax credit agreements in 2014, $10.3 million was eligible to be claimed on a 2014 return. As of January 2017, $4.3 million in credits were claimed on 87 returns for 2014.
  • $39.8 million in credits was eligible to be claimed in 2015. As of January 2017, $11.4 million in credits were claimed on 290 returns for 2015.

We note that the ratio of credits claimed to the total approved credits is similar to that found in a recent analysis of Oklahoma's Quality Jobs Program. A 2016 analysis of Tennessee tax credits found jobs tax credits claimed (taken) relative to total awarded (eligible to take the credit based on performance) ranged from about 40-60% depending on year and jobs tax credit variant. 

Tax Credit Effectiveness

Companies that claimed the tax credit were deemed to have met the hiring and/or investment targets associated with the terms and commitments from their performance agreements. 

However, we have not seen any data reporting on the total hiring or investment associated with the firms that have claimed their eligible credits. A recent article stated that California can't "say for sure how many of the administration’s 83,414 projected jobs over five years have actually been created." Given the program's multi-year agreements, the Franchise Tax Board explained that publishing a job-creation tally now “wouldn’t necessarily capture all the successful milestones of the program.”

A report from California's Legislative Analyst's Office recommends that the program not be continued because it has not been found effective. The method of determining effectiveness focused on a review of credits provided to tradable versus non-tradable firms, as determined by industry classification and "the specific project when possible." The report found: 

  • 35% of agreements and 15% of the dollar value of the credits were found to be with non-tradable businesses. The assumption is that credits provided to non-tradable (locally serving) businesses harm the economy by providing windfall benefits that do not lead to new economic activity and may hurt competing companies. The extent of the overlap between non-tradable businesses and those participating as part of the required 25% small business set-aside is not clear.

  • 85% of the dollar value of the credits were provided to tradable businesses. The report explains that new economic activity might have occurred but still finds the effect unknown because it is not clear whether investment activity would or would not have happened in the absence of the tax credit. The report states that this means “it will always be difficult – if not impossible – to assess the effectiveness of California Competes.”

Nevertheless, the report concludes by recommending the program be allowed to end given problems inherent in tax credit programs and general skepticism of targeted tax programs. If the program is allowed to continue, the report suggests “more narrowly targeting the program” and eliminating the 25% set-aside for small businesses.

 

Sources:

Review of the California Competes Tax Credit, Legislative Analyst's Office, October 2017.

California Competes Tax Credit Frequently Asked Questions, October 2017.

California Competes Credit Report, State of California Franchise Tax Board, March 2017.

What new jobs? California program to entice new hiring falls short. CALMatters, November 2017.

 

 

No Comments

Leave a comment




Comments have to be approved before showing up..