California has been ground zero for technology development. For California to remain a global technology leader, the state will need to ensure a favorable business environment for innovation. Yet, recent studies indicate that increasing numbers of Silicon Valley businesses are looking outside of California to start new operations. Other states and countries, such as China, where the government has tripled R&D spending since 1998, are becoming more attractive to many companies. As California continues to suffer from record budget deficits and the search for new revenue becomes more urgent, the state must be careful not to hinder an industry that will be essential to a recovery and long-term prosperity.
The success of the technology industry in the state has brought huge sums of venture capital and wealth to the state that has benefited all Californians, and it is important to continue fostering the entrepreneurship and innovation that improves everyone’s quality of life. Maintaining a tax structure that does not place an undue burden on the technology industry is essential to California’s economic health and to keeping the state at the forefront of cutting-edge technology.
This industry is highly mobile and competitive, and tax policies play a critical role in determining competitive advantages. Taxing digital products (for example music, ring tones, e-books) could give out-of-state sellers a significant advantage since they can still easily reach customers online. In addition, R&D tax credit policies can influence where technology companies decide to locate. A great deal of R&D has found its way to California historically, but in this increasingly global economy revising this incentive could be necessary to keep the state competitive. For instance, right now California’s R&D credit only applies to labor costs and not machinery. So there is double taxation on R&D – taxation of the equipment used in R&D and of the product when sold. The credit could also be more valuable if it was tradable so start-up companies that are not yet turning a profit can benefit as well.