State Analyst Warns of Film Tax Credit “Race to the Bottom”

Tuesday, May 06, 2014

California started doling out money to film and TV productions in the form of tax breaks and other incentives in 2009, but the state's independent Office of the Legislative Analyst (LAO) says the state should be cautious about continuing a practice that could stoke a “race to the bottom.”

In a report released last week, the Analyst stopped short of recommending that the Legislature reject Assembly Bill 1839, which would extend and expand for five years tax credits annually totaling $100 million to film and TV productions. But it did point out that the benefits to the state are dubious and the credits probably bring a return of only 65 cents on the dollar.

“If the Legislature wishes to continue or expand the film tax credit, we suggest that it do so cautiously,” the LAO report said.

California has lost a lot of film and TV business in recent years, as production companies look for cheaper venues and government incentives. Most states and a lot of countries offer grants and tax credits, and the LAO said those efforts have been somewhat successful in skimming off business from California. It calculated that states alone provide $1.4 billion in incentives annually.

California, which still dominates film and TV production nationally, is currently fifth among states in financial incentives behind New York ($420 million annually), Louisiana ($236 million), Georgia ($140 million) and Florida ($131 million).

The Analyst conceded that “it might be difficult for California not to provide subsidies and still maintain its leadership position in this industry,” but warned that the “film tax credit does not 'pay for itself.' ”

Still, a major decline in California's “flagship industry” would not be insignificant. Nearly half the industry's relatively high-paying production and post-production jobs nationally are located in Los Angeles County, a combined 108,600 positions. That's 3% of the county's jobs. That doesn't take into account an estimated 250,000-300,000 jobs in related industries.

The LAO cautioned against responding to a specific jurisdiction's competition and suggested that a policy of providing financial incentives to corporations should not focus on particular industries. The analyst prefers broader corporate welfare that offers tax breaks and incentives for “all businesses to stay or relocate to California.”  

Despite the Analyst's preference for broader incentives, the report warns of unintended consequences should California get more aggressive about throwing money at Hollywood. “In responding to other states' increased subsidy rates, California may only stoke this race to the bottom without making any real headway in terms of increasing its share of film and television productions,” the report says.

As it is, nine of 10 qualified applicants for California subsidies are rejected. Not everyone can apply. Films must have budgets between $1 million and $75 million; a TV movie or mini-series has to have at least a $500,000 budget; and a new TV series must have a production budget of at least $1 million. There are myriad other considerations, including selling one's tax credits, that make up the complicated largesse.

The current program of incentives is scheduled to expire on July 1, 2017, and is opposed by the California Teachers Association, the California Schools Association and individuals who wonder why California won't pay them to stay in the state.

–Ken Broder


To Learn More:

Legislative Analyst Discounts California Film Tax Credit (by Jim Miller, Sacramento Bee)

Overview of Motion Picture Industry and State Tax Credits (Legislative Analyst's Office)

Cold Water Thrown on California Film & TV Tax Credit Expansion by Non-Partisan State Analyst (by Dominic Patten, Deadline Hollywood)

Legislators Introduce Bill to Expand California Film and TV Tax Credit Program (by Wendy Lee, KPCC)

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