California’s biggest research hubs, from South San Francisco to San Diego, are bracing for a new kind of lab test: the state tax code. Governor Gavin Newsom’s May budget revision proposes a permanent cap on how much corporate tax credits, including the prized research and development credit, can reduce a company’s California tax bill. Starting in tax year 2027, the cap would limit credits to the greater of $5 million or 50% of a firm’s pre-credit tax liability, and officials say the impact would fall most heavily on research-heavy companies. Industry groups are already warning that the move could chill hiring and slow or shelve new lab and manufacturing projects as lawmakers kick off budget talks.
What the cap would do
The plan would permanently restrict how much large corporations can use business tax credits each year beginning with the 2027 tax year, with the stated goal of making sure the biggest firms pay at least a baseline level of tax. The Legislative Analyst’s Office estimates the cap would bring in roughly $850 million in 2026-27, since it would apply for only part of that fiscal year, and about $1.7 billion to $1.8 billion annually once it is fully in place. The Legislative Analyst’s Office also finds that research and development credits make up most of the tax credit usage and that fewer than 100 of California’s largest corporate taxpayers would be meaningfully affected.
Industry pushback
Trade groups were quick to push back. In a May 14 statement, California Life Sciences called capping the research and development credit “a major tax increase” on a capital-intensive sector and urged the Legislature to reverse course to avoid driving projects and investment overseas. Biocom’s president and CEO told CalMatters that "R&D tax credit keeps those jobs here,” and the reporting notes the industry directly employs more than 336,000 people in California and supports roughly 1 million jobs when indirect effects are included.
How supporters frame it
The governor’s office presents the cap as a targeted tweak that leaves incentives intact for most smaller businesses while making sure the state’s largest and most profitable corporations help pay for schools, healthcare and public safety. The May Revision materials also clarify that the cap would not change refundable credit elections made under prior law, a point spelled out in the governor’s budget fact sheet, according to the Governor’s Office. Supporters argue the change would add some predictability to state finances as revenues swing.
Where this goes next
Dozens of lawmakers and business coalitions are urging caution. In a May 22 letter, 50 Assembly members warned leadership that limiting research and development incentives may yield short-term budgetary gains but risk long-term economic consequences, as reported by CalMatters. The Legislature will take up the proposal in budget hearings this month while working toward the June 30 deadline to pass a balanced budget, a timeline described by the Los Angeles Times. Lawmakers are expected to explore amendments or structural alternatives that could narrow the scope of companies subject to the cap or link it to changes in how the research and development credit is calculated.
What lawmakers could change
Policy analysts note that legislators could pursue structural reforms alongside, or instead of, a cap, such as changing the research and development credit’s baseline or adjusting credit rates, to preserve more of the incentive effect while phasing in revenue more gradually. The Legislative Analyst’s Office highlights these tradeoffs and urges the Legislature to weigh short-term budget relief against possible long-run effects on California’s innovation-driven economy.
