Do you operate a business in California? Have you taken advantage of the state’s tax credits offered through the California Competes program? The truth is, this program is showing itself to be very difficult for companies to actually receive benefits from.
As Susan Shelley, columnist for the Los Angeles Daily News, explains:
How does a business qualify for the California Competes tax credit and how much money can it save on taxes? There doesn’t seem to be a clear answer. “Tax credit agreements will be negotiated,” the [Governor’s Office of Business and Economic Development] website states.
The negotiating is done by the governor’s appointees at GO-Biz, then approved by the California Competes Tax Credit Committee. The CCTC committee is made up of the state treasurer, the director of the Department of Finance, the director of GO-Biz, one person appointed by the Assembly Speaker, and one person appointed by the Senate Rules Committee.
They meet several times a year to consider applications…one after another, company representatives are brought before the committee to be grilled about their application for a tax credit.
Shelley goes on to explain that the questions asked are harsh – so harsh that California Compete’s legal counsel was brought in to tell the committee they are limited regarding types of data they collect, especially when it comes to company demographics. However, the Assembly’s political appointee hired their own legal counsel to insist that the tax credit program could be used for the state legislature to, “pursue other ‘underlying goals.’”
I don’t know about you, but I’d like to see the program be more objective, less subjective, and more transparent. Companies applying for the credit currently receive little guidance on how to draft a success application, and while 25% of the funds are supposed to go directly to small businesses, they are precisely the types of companies that often don’t have the wherewithal to apply.
My Take on the California Competes Tax Credit Program
The truth is, I’ve always been a little skeptical about the California Competes Tax Credit Program. For starters, the program was hastily created in 2013 as part of a three-prong “tax benefit program” when the California legislature (in the span of just 3 days at the end of the legislative session) brought about the end of the state’s decades-long Enterprise Zone (“EZ”) program – which had provided tax benefits to a wide variety of businesses across the state. In order to abolish the EZ program without a 2/3 majority vote (eliminating a tax credit is viewed as a tax increase requiring the supermajority), the powers that be enacted three “benefits” to keep that action “tax neutral,” including:
- A new hiring credit that is almost impossible to qualify for;
- A sales tax benefit for manufacturers (which is a good one for Silicon Valley companies); and
- The California Competes Credit (which sets aside $200 million annually for companies “expanding” in the state)
Although 25% of the Competes tax credits are earmarked for small businesses, it’s a very subjective process with very little transparency.
As you can tell, like Susan Shelley I’m not the biggest fan of this tax program. To summarize my main objections:
- Readers of this blog will remember that our firm was heavily involved in the EZ Program; in addition to helping many companies claim the tax credits, I was involved with focus groups to improve it and to work with legislators to educate them about its value. Then, within three days the program was disbanded and replaced by the California Competes program, which my clients have yet to benefit from.
- I’m still very skeptical of the California Competes process. In addition to the subjectivity and lack of transparency, the companies that seem to be benefitting from it the most are large businesses that already have a presence in the state and would most likely expand here anyway.
Do you agree? What are you thoughts on the California Competes Tax Credit Program?
Miles Consulting Group, Inc. is a professional service firm in San Jose, California specializing in multi-state tax solutions. Our firm addresses state and local tax issues for our clients, including general state tax consulting, nexus reviews, tax credit and tax incentive maximization, income tax and sales/use tax planning and other special projects. To learn more, contact us today at www.MilesConsultingGroup.com.
