Millions of dollars in tax credits will be available for California businesses through the California Competes program this year, representing a five-fold increase in money available for companies looking to expand, hire and remain in the state.
[caption id="attachment_94196" align="alignright" width="297"] Dimitri Alexeev, Tom Gargliano, Tim Ricard[/caption]
Up to $150 million in income tax credits will be granted as part of a planned ramp-up of California Competes, following the $30 million awarded in the first 12-month cycle ended June 30. A committee overseeing the program under the office of Governor Jerry Brown voted to approve the first round of credits on June 19.
The larger second round stands to benefit a much broader array of companies in California, from small firms to those with hundreds of employees, according to tax and business development experts in the North Bay. And as part of a broader tax package passed in 2013, the credit marks a rare example of tax-based incentives in a state known for its high cost of doing business.
“If you look at the tax benefit programs from the state – you can literally count them on your fingers, there aren’t that many,” said Dmitri Alexeev, senior tax manager in the North Bay practice of accounting and advising firm Moss Adams. “The individual and corporate tax rates in California are some of the highest in the country. Jerry Brown and the Legislature realized something needs to be done to keep business here.”
The governor’s Office of Business and Economic Development – GO-Biz – recommended 31 companies for awards in the credit’s first year. The office selected those companies based on plans for hiring and expansion, and received nearly 400 applications representing $500 million in requests for the first award cycle, according to GO-Biz.
Those listed in the first round include Novato’s Ultragenyx Pharmaceutical, which was recommended a $2.1 million credit to support hiring of 180 employees and business investments totaling $16.3 million. Others in the North Bay include $100,000 for Matheson Tri-Gas, which has a Santa Rosa location, and $20,000 for XCell Science, another pharmaceutical company in Novato.
Credits are awarded based on a guarantee that companies will follow through on plans like hiring, investment or a decision to move to or remain in California. Approximately 6,000 hires and $2 billion in investments are from winners of the first round, according to GO-Biz.
Yet despite those results, many in the North Bay noted that the short window for applying in that first round – a less-than-one-month period between March 19th and April 14th – meant that larger firms with more resources held a distinct advantage over smaller companies. More small businesses are expected to participate in the upcoming application period, with 25 percent of credits set aside specifically for business with gross receipts under $2 million.
“We’ve been getting a lot of phone calls,” Mr. Alexeev said. “With the economy improving, there’s going to be more investment made.”
The creation of the California Competes tax credit included an overhaul of the California Enterprise Zone system, a program launched in 1984 that has provided tax incentives for business expansion in areas that the state considers economically disadvantaged.
Governor Brown’s office has argued that oversight of the 40 locally managed enterprise zones in California had become unwieldy, and that the $750 million in annual tax breaks through the program had failed to produce sufficient hiring and business investment. Replacing the enterprise zone approach with the California Competes credit created centralized oversight, and evaluates applications based on factors surrounding economic impact.
“The state is looking at this more as an investment,” said Tom Garigliano, partner-in-charge of Burr Pilger Mayer’s (BPM) North Bay Tax Practice
The enterprise zone system continues to administer incentive programs for hiring on a limited basis, but the majority of funds for income tax breaks and manufacturing perks have been redirected as part of 2013’s Assembly Bill 93 and Senate Bill 90. The new approach extends enterprise zone-like benefits to areas formerly ineligible for those perks, said Tim Ricard, program manager at the Sonoma County Economic Development Board.
“I think it’s much better for Sonoma County business, because we have never qualified as an enterprise zone,” Mr. Ricard said. “Businesses across the state, not just in economically challenged areas, can qualify.”
Inquiries about the credit began to accelerate toward the end of the first round’s application window – Mr. Ricard and others said that they expected more interest from smaller business in particular as the program enters its second year.
While the actual dollar amount awarded to smaller businesses in the first round was less than for larger firms, Mr. Garigliano of BPM noted that it represented a larger share of those companies’ planned investments. The observation is particularly relevant in the North Bay, where those small companies represent a large portion of employers, he said.
Also of particular interest in the North Bay as part of the broader legislation that created California Competes is the partial sales and use tax exemption for the purchase and lease of manufacturing equipment. Mr. Garigliano said a number of his winery and brewery clients are already taking advantage of that benefit, and that he expects more to consider applying for the California Competes credit this year.
“I think a lot of people took a ‘wait and see,’ approach,” said Mr. Garigliano, speaking of the California Competes tax credit. “$150 million is on the table now – we’ve been talking to a lot of folks.”
The application period for the upcoming California Competes funding cycle will be announced prior to July 1. The program is currently planned to last for three years, ramping up to a full $200 million in credits for the award cycle that launches next year. More information is available at www.business.ca.gov.