Protecting California's Innovation and Business Economy
California Leaders:
Don’t Balance the Budget On the Back of Innovation
A cap on the Research & Development tax credit and a new tax on software and digital products are being considered as part of the state budget. Together, these will raise costs on Californians and employers while weakening the competitiveness of the innovation economy that powers our state.
Threat #1 — The R&D Tax Credit Cap
Preserve the Research & Development
That Funds California's Future
Cutting state support for research and development will discourage companies from innovating in California – costing jobs, slowing breakthroughs and eroding the revenue base that funds core programs and essential services.
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R&D advances a myriad of sectors and benefits all Californians, from medical treatments and manufacturing breakthroughs to climate technologies and agricultural improvements, our lives and our economy depend on it.
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Predictability matters. Businesses made long-term decisions based on the state's commitments on R&D credits; changing the rules midstream breaks faith with employers.
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Thirty-four other states offer an R&D tax credit and are actively competing for these investments. California should be doubling down on its innovation leadership, not handing rivals an opening.
The Issue
Two New Taxes Threaten California's Future
Capping the R&D credit and taxing software and digital products at the same time sends the wrong signal at the wrong time, and layers new costs and uncertainty onto the sectors driving California's revenue growth and economic success. These are permanent taxes being proposed, despite revenues rising, and will sacrifice the state's future competitiveness.
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Harmful tax policy doesn't stay contained. It ripples across the entire business ecosystem, from large employers that power our economy to the small businesses that are the backbone of our communities.
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As small businesses struggle with the cost of doing business in California, these proposals would push affordability and financial sustainability even further out of reach.
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Suspending or reducing R&D benefits while expanding taxation of software creates a cumulative, anti-innovation message.
Threat #2 — The Software (SaaS) Tax
Protect Affordability, Don't Expand the Tax Base
Extending the sales tax to prewritten software and digital products may appear to be narrowly aimed at large businesses, but it would raise the cost of the everyday digital tools that Californians rely on at a time when affordability is one of the state's greatest challenges.
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Californians would pay a new tax on the digital tools they use every day, from email and payroll to cybersecurity, e-commerce, finance, and AI. Those costs are likely to trickle down to consumers.
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This expands a regressive tax, hitting hardest the small businesses and low-income residents who can least afford it.
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California already imposes the highest state sales and use tax rate in the country; with local rates added, many Californians pay among the highest combined rates in the nation.
By the Numbers
Why the Stakes Are So High
$1 Trillion
contributed by California’s tech sector in 2023 – 30% of the state’s economy
4.2 Million
jobs supported by the tech sector, roughly 20% of all jobs statewide
34
states that offer R&D tax credits and are competing with CA
21%
Californians who have thought of leaving due to lack of well-paying jobs
TAKE ACTION
Tell Sacramento:
Don't Tax California's Innovation Economy
California lawmakers should reject these proposals and protect affordability for Californians, continued innovation and an economy that remains strong and supportive of our state's most contributive industries.
Contact your legislator today to let them know that this tax would harm California’s innovation economy.