The proposal, included in the governor’s budget plan, would cap business tax credits beginning in the 2027 tax year. State finance officials say the change is intended to ensure that large corporations pay a minimum amount of tax while avoiding harm to small businesses. The cap is projected to bring in significant revenue for California as the state works through ongoing budget pressures.

But leaders in biotechnology, pharmaceuticals, medical devices and other research-heavy industries warn that the move could weaken one of California’s most important economic engines.

California’s life sciences industry says it generates nearly $400 billion in annual economic impact. In Southern California, the sector is especially important in San Diego, Los Angeles and Orange County, which together account for tens of thousands of direct industry jobs. According to a 2026 report by California Life Sciences, San Diego and Los Angeles each had about 54,000 direct life sciences jobs in 2025, while Orange County had about 47,000. The Bay Area led the state with 107,000.

At issue is California’s research and development tax credit, a benefit used by companies that invest heavily in developing new products, medicines and technologies. A tax credit directly lowers a company’s final tax bill, unlike a deduction, which reduces taxable income.

The Newsom administration’s proposal would not eliminate the credit. Instead, it would limit how much large companies can claim each year. Under the plan, a business could use credits up to $5 million or 50% of its tax liability, whichever is greater. The cap would not apply to net operating losses.

The Legislative Analyst’s Office estimates the proposal would primarily affect fewer than 100 of the state’s largest corporate taxpayers. The May budget revision projects the cap would raise $850 million in 2026-27 and between $1.7 billion and $1.8 billion annually from 2027-28 through 2029-30.

Supporters argue the state’s R&D credit has become one of California’s largest corporate tax breaks and that major companies can afford to pay more. Darien Shanske, a UC Davis law professor who helped draft a proposed billionaire tax and has suggested a similar limit on business tax credits, said some companies have accumulated credits from research conducted years earlier, allowing them to greatly reduce or avoid state taxes.

Shanske said the state is effectively forgoing about $3.5 billion a year under the current structure of the R&D tax credit, according to the Legislative Analyst’s Office analysis.

Industry representatives strongly disagree with the administration’s approach. They say research and development credits help keep high-paying jobs, laboratories and investment in California at a time when other states and countries are aggressively competing for biotech and technology companies.

Sam Chung, senior vice president for government relations at California Life Sciences, said California remains a leader in biomedical innovation but should not assume that position is permanent. He said drug development is costly, uncertain and time-consuming, and companies may look to states with more favorable tax policies if California reduces long-standing incentives.

Chung also raised concerns about international competition, particularly from China, as well as other proposed state policies that he said could affect the industry. He argued that large and small companies are closely connected in life sciences, with startups often depending on major pharmaceutical or biotech firms to help bring discoveries to market.

“Scientists who develop something need big companies’ backing,” Chung told CalMatters. “It’s a very symbiotic relationship. Everyone needs to work together to get to the finish line.”

The debate comes as California’s life sciences sector is also facing uncertainty over federal research funding. Industry leaders have pointed to cuts or threatened reductions in National Institutes of Health grants under the Trump administration as another source of pressure on research organizations.

Tim Scott, president and chief executive of Biocom, said reducing the state tax credit while federal support is in question would compound the strain on companies. He said the life sciences sector directly employs more than 336,000 people statewide and supports about 1 million jobs directly and indirectly, including in biotech, pharmaceuticals, medical devices and medical equipment.

“That R&D tax credit keeps those jobs here, it keeps the facilities being built here,” Scott told CalMatters, warning that without it, keeping investment in California becomes more difficult.

The proposal is also drawing concern from other innovation industries, including semiconductors, software, clean technology, aerospace, advanced manufacturing and artificial intelligence. Business groups have noted that the R&D credit has already been temporarily limited to $5 million for tax years 2024 through 2026 because of budget concerns.

In a letter to Assembly Speaker Robert Rivas and Senate President Pro Tem Monique Limón, 50 Assembly members — 33 Democrats and 17 Republicans — urged legislative leaders to reject the permanent cap. They wrote that limiting research and development incentives may help the state budget in the short term but could carry long-term economic risks.

“The answer to the state’s long-term budget challenges is not to weaken the sectors driving California’s economy and generating state revenues,” the lawmakers wrote.

California’s corporate tax rate is currently 8.84%, lower than the 9.6% rate in 1980 and 9.3% in 1987. At the federal level, corporations have paid a lower tax rate since 2017, when the Trump administration reduced the federal corporate tax rate from 35% to 21%.

Rowan Isaaks, the Legislative Analyst’s Office economist who reviewed the proposal, said lawmakers have questioned whether the current tax credits are actually encouraging companies to conduct additional research or whether those companies would have performed the work anyway. He said one alternative could be to redesign the R&D credit to make it more targeted.

The issue now rests with state lawmakers as they negotiate the budget. Nick Miller, a spokesperson for Rivas, said the Assembly is reviewing the governor’s proposals. Limón’s office referred questions to state Sen. John Laird, chair of the Senate Budget and Fiscal Review Committee.

“California’s innovation economy is enormously important, but we’re also facing significant fiscal challenges,” Laird said in a statement. “Our job is to carefully weigh those considerations as we work toward a balanced budget.”

Original source: CalMatters

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