California’s life sciences industry is sounding the alarm over a proposal from Governor Gavin Newsom that would permanently cap corporate tax credits.

The proposal is projected to contribute a few billion dollars in revenue to California annually, but opponents say the state’s life sciences industry would be seriously threatened by having their tax subsidy reduced.

Tax credits allow businesses to reduce costs by lowering their final tax bill (as opposed to a deduction, which lowers the overall taxable income). The proposed change, which would go into effect in tax year 2027, would limit the credits businesses can claim each year. The proposal was designed to ensure “that larger corporations pay a minimum level of tax,” while not having a negative effect on small businesses, according to the Finance Department.

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The proposal is the latest attempt to get corporations to pay more taxes in California, where voters will likely be considering a ballot initiative to tax billionaires in November. The life sciences industry, which says its annual economic impact is nearly $400 billion, is speaking out about the proposed cap. The tech industry is concerned. Dozens of lawmakers are urging the state’s top lawmakers to reject the new limit.

“The answer to the state’s long-term budget challenges is not to weaken the sectors driving California’s economy and generating state revenues,” 50 assemblymembers wrote to Assembly Speaker Robert Rivas and Senate Pro Tem 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 over the past few years; in 1985, with a higher tax rate, it ranked seventh in the world by gross domestic product. Corporations have also been paying less in federal taxes since 2017, when President Donald Trump slashed the federal corporate tax rate from 35% to 21%.

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

Rowan Isaaks, the LAO economist who did the analysis, testified at a recent budget subcommittee hearing. He told CalMatters that lawmakers’ questions and comments indicated skepticism about whether the tax credits were actually incentivizing new research. “These companies were gonna 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 its existing challenges. Representatives say it’s the latest regulatory and policy curveball the state keeps throwing at businesses.

Though California led the nation in venture capital funding for life sciences in 2025, “our global biomedical leadership is not guaranteed,” Sam Chung, senior vice president for government relations for industry group California Life Sciences, told CalMatters. “All these bills take a chunk of flesh out of our leadership.” (He is also concerned about proposed legislation that would change California antitrust law, which he said could have big consequences for the industry.)

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Drug development requires lots of time and money, Chung said. If California reduces the tax credits biotech companies have long relied on, companies may relocate to other states with more generous credits, he said. He’s also worried about competition from China, and of some U.S. venture capitalists’ interest in Chinese biotech.

Darien Shanske, a UC Davis law professor who helped draft the proposed billionaire tax and has floated a similar limit on business tax credits, said he doubts other states’ tax credits outweigh California’s — even if the credits are reduced by this proposal. He also cited the state’s other benefits, including its education system, which is supplying 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 big companies’ backing,” Chung said. “It’s a very symbiotic relationship. Everyone needs to work together to get to the finish line.”

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The life sciences industry is also facing uncertainty over federal funding under the Trump administration.

At a time when research grants from the National Institutes of Health have been cut or are at risk, “to not have that, and then not have support from the state as well, is kind of a double whammy,” said Tim Scott, president and chief executive of another industry group, Biocom. The proposal would not eliminate tax credits, just cap them.

Scott, a biotech entrepreneur, told CalMatters that reducing R&D tax credits could threaten hiring. The life sciences industry — including biotech, 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.

“That R&D tax credit keeps those jobs here, it keeps the facilities being built here, and without it it becomes much more problematic,” he said.

The industry report showed that 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

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

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

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

The May budget revision assumes 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 legislators to restructure R&D credits to make them more targeted.

What will state lawmakers do?

Businesses wrote to lawmakers that sectors such as semiconductors, software, clean technology, aerospace, advanced manufacturing and artificial intelligence also rely on R&D credits — which has been limited to $5 million for tax years 2024 to 2026, also at the governor’s request because of budgetary concerns.

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“The contradiction underlying this proposal is difficult to ignore,” they wrote. “The May Revision itself reflects revenues significantly higher than previously projected, driven in substantial part by California’s innovation economy and the economic activity generated by research-intensive industries.”

In their letter to Rivas and Limon, 33 Democrats and 17 Republicans in the state assembly said “limiting incentives for research and development may generate short-term budgetary gains, but risks long-term economic consequences.”

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

“California’s innovation economy is enormously important, but we’re also facing significant fiscal challenges,” Laird said in an emailed statement. “Our job is to carefully weigh those considerations as we work toward a balanced budget.”