California

Tax incentive evaluation ratings

Tax Incentive Evaluation Ratings: California

Rating: Trailing

Key points:

  • California is trailing other states because it has not adopted a plan for regular evaluation of tax incentives.
  • The state studies some incentives but not others, such as the $1.5 billion-a-year Research and Development (R&D) Credit.
  • Evaluations have shown their value by helping to inform lawmakers’ decision to replace the state’s Enterprise Zone Program.

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Without a process for regular evaluation of all major tax incentives, California lawmakers lack consistent information on the results of these programs. Instead, some incentives have been studied in detail, while others have been largely ignored.

Over the years, various state offices and agencies—including the Legislative Analyst’s Office, the Franchise Tax Board, and the state auditor—have periodically produced evaluations of incentives. The state has at times been proactive in requiring future evaluations for programs in laws creating or expanding them. For example, when policymakers expanded the state’s film and television production tax credit in 2014, they included a requirement that the Legislative Analyst’s Office evaluate the program’s effectiveness and provide the results to key legislative committees by 2019.a

California’s experience shows the value of high-quality information for improving the results of tax incentives. In 2013, lawmakers determined that the state’s Enterprise Zone Program wasn’t working as intended. The program was one of California’s largest incentives, costing an estimated $750 million in fiscal year 2014.b Despite this large commitment, a series of studies showed that the program was mostly moving jobs in the state without boosting net employment.c In response to these findings, lawmakers ended the Enterprise Zone program and redirected the $750 million to three new incentives designed to address the flaws.d The evaluations helped California make wholesale changes to its economic development strategy.

However, other incentives have been subject to far less scrutiny. For example, a 2016 state audit declared that it was “unable to determine the [R&D] credit’s effectiveness because no state entity oversees or regularly evaluates it.”e That represents a major gap in the information available to policymakers: At $1.5 billion a year, the R&D credit is one of California’s most expensive incentives.f If California lawmakers adopted a process for regular evaluation, the audit found, they would be more likely to have the information they need to determine whether incentives are achieving their goals.

Endnotes

  1. California Rev. & Tax. Code § 38.9, http://leginfo.legislature.ca.gov/faces/codes_displaySection.xhtml?sectionNum=38.9.&lawCode=RTC.
  2. California Department of Finance, “Tax Expenditure Report 2012–13,” 9, http://www.dof.ca.gov/Forecasting/Economics/Tax_Expenditure_Reports/ documents/Tax_ExpenditureRpt_12-14.pdf.
  3. California Legislative Analyst’s Office, “California’s Enterprise Zone Programs” (May 9, 2013), 6, http://www.lao.ca.gov/handouts/state_admin/2013/CA-EZ-Programs-050913.pdf.
  4. California A.B. 93 (2013), http://leginfo.legislature.ca.gov/faces/billNavClient.xhtml?bill_id=201320140AB93.
  5. California State Auditor, “Corporate Income Tax Expenditures” (2016), 18, https://www.auditor.ca.gov/pdfs/reports/2015-127.pdf.
  6. Ibid.; California Department of Finance, “Tax Expenditure Report 2016–17,” 7, http://www.dof.ca.gov/Forecasting/Economics/Tax_Expenditure_Reports/ documents/Tax_ExpenditureReport_2016-17.pdf.
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Improving Tax Incentives for Jobs and Growth

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Tax incentives—including credits, exemptions, and deductions—are one of the primary tools that states use to try to create jobs, attract new businesses, and strengthen their economies. Incentives are also major budget commitments, collectively costing states billions of dollars a year. Given this importance, policymakers across the country increasingly are demanding high-quality information on the results of tax incentives.