California wants to limit tax credits for business, distressed life sciences and technology industries

California’s life sciences industry is sounding the alarm over Gov. Gavin Newsom’s proposal to permanently cap corporate tax credits.

The proposal is projected to contribute several billion dollars in revenue to California annually, but opponents say the state life sciences industry would be seriously threatened by the reduction of their tax subsidy.

Tax credits allow businesses to reduce expenses by reducing their final tax bill (as opposed to a deduction, which reduces total taxable income). The proposed change, which would take effect in the 2027 tax year, would limit the credits businesses can claim each year. The proposal is designed to ensure that “larger corporations pay a minimum level of tax” without having a negative effect on small businesses, according to the finance department.

The proposal is the latest attempt to make corporations pay more in taxes in California, where voters are likely to weigh in ballot initiative to tax billionaires in November. The life sciences industry, which says its annual economic impact is nearly $400 billion, has been outspoken about the proposed cap. The tech industry is concerned. Dozens of lawmakers are urging top state lawmakers to reject the new limit.

“The answer to the state’s long-term budget challenges is not to weaken the sectors that drive California’s economy and generate state revenue,” 50 Assembly members wrote to Assembly Speaker Robert Rivas and Senate Advocate Monique Limon on May 22.

The current state corporate tax rate is 8.84%down from 9.6% in 1980 and 9.3% in 1987, California has been either the fourth or fifth largest economy in the world for the past several years; in 1985, with a higher tax rate, it ranked seventh in the world by gross domestic product. Corporations have also paid less in federal taxes since 2017, when President Donald Trump cut the federal corporate tax rate from 35% to 21%.

The proposed tax credit cap would largely reduce the state’s R&D credit and affect California’s largest corporate taxpayers — fewer than 100 — according to the Legislative Analyst’s Office analysis of the proposal.

Rowan Isaacs, the LAO economist who did the analysis, testified at a recent budget subcommittee hearing. He told CalMatters that questions and comments from lawmakers show skepticism about whether the tax credits actually spur new research. “These companies were going to do this R&D anyway,” he said.

The life sciences industry is opposed

California’s life sciences industry disagrees, saying the proposal would add to existing challenges. Officials say it’s the latest regulatory and political curveball the state continues to throw at businesses.

Although California led the nation in life sciences venture capital funding in 2025, “our global biomedical leadership is not guaranteed,” Sam Chung, senior vice president of government relations for industry group California Life Sciences, told CalMatters. “All these bills take a piece of flesh out of our leadership.” (He is also concerned about proposed legislation (It would change California’s antitrust laws, which he says could have major implications for the industry.)

Drug development takes a lot of time and money, Chung said. If California cuts tax credits that biotech companies have long relied on, companies may move to other states with more generous credits, he said. He also worries about competition from China and the interest of some American venture capitalists in Chinese biotech.

Darien Schanske, a UC Davis law professor who helped draft the proposed billionaire tax and proposed a similar limit on business tax credits, said he doubts other states’ tax credits exceed California’s — even if the credits are reduced by this proposal. He cited other advantages of the state, including its education system, which provides the researchers the industry needs.

As for California’s argument that the proposal protects smaller businesses, Chung said businesses of all sizes are important, adding that mergers and acquisitions are the “lifeblood” of drug development.

“Scientists who develop something need the support of big companies,” Chung said. “It’s a very symbiotic relationship. Everyone has to work together to get to the finish line.”

The life sciences industry also faces uncertainty about federal funding under the Trump administration.

At a time when research grants from the National Institutes of Health are cut out or are at risk, “to not have that and then not have the support from the state is a double whammy,” said Tim Scott, president and CEO of another industry group, Biocom. The proposal would not eliminate tax credits, only limit them.

Scott, a biotech entrepreneur, told CalMatters that cutting R&D tax credits could threaten hiring. The life sciences industry — including biotechnology, pharmaceuticals and medical devices and equipment — employs more than 336,000 people directly and 1 million people directly and indirectly, according to a 2026 report by California Life Sciences.

“This R&D tax credit keeps those jobs here, keeps the facilities that are being built here, and without it, it becomes a lot more problematic,” he said.

The industry report showed the Bay Area had 107,000 direct industry jobs in 2025, while San Diego and Los Angeles had about 54,000 each and Orange County had about 47,000.

Opponents say businesses can probably afford it

Backers of the cap point out that what was a “very generous” R&D tax credit won’t go away. California’s standard corporate tax rate is 8.84% of the company’s net income; the tax credit cap will be $5 million or 50%, whichever is greater. The cap will not apply to net operating losses.

“This tax break in particular is the second largest corporate tax break (provided by the state),” said Shanske, the UC Davis law professor. He said that under the current system, companies have been able to “stack up” credits for research done long ago to the point where they can avoid paying California tax.

“If you imagine there’s a program where the state actually writes a check to the biggest, wealthiest companies in the state, I think there’s going to be an outcry,” Schanske said. The LAO analysis estimates that the “check” the state writes is about $3.5 billion a year based on how R&D tax credits currently work.

The May budget review suggested the cap would raise $850 million in 2026-27 and $1.7 billion to $1.8 billion annually between 2027-28 and 2029-30.

Isaaks, the LAO economist, said a possible alternative would be for lawmakers to restructure the R&D credits to make them more targeted.

What will state legislators do?

The companies wrote to lawmakers that sectors such as semiconductors, software, clean tech, aerospace, advanced manufacturing and artificial intelligence also rely on research and development credits — which are capped at $5 million for tax years 2024 through 2026, also at the governor’s request because of budget concerns.

“The contradiction at the heart of this proposal is hard to ignore,” they wrote. “The May revision itself reflects revenues significantly higher than previously forecastdriven significantly by California’s innovation economy and economic activity generated by research-intensive industries.”

In their letter to Rivas and Lemon, the 33 Democrats and 17 Republicans in the state Assembly said that “restricting R&D incentives may generate short-term budgetary gains, but risks long-term economic consequences.”

Nick Miller, a spokesman for Rivas, said the Assembly is taking a close look at the governor’s proposals. Lemon’s office referred CalMatters to state Sen. John Laird, chairman of the Senate Budget and Fiscal Review Committee.

“California’s innovation economy is critical, but we also face significant fiscal challenges,” Laird said in an emailed statement. “It’s our job to carefully weigh these considerations as we work toward a balanced budget.”