Incentives Watch: A Look at the Proposed Changes to California’s Film and Television Production Credit, Part 2

With many states creating their own incentives to lure the film industry away from Hollywood, California felt it needed to make major changes in order to keep the film industry in its traditional home. The proposed California Film and Television Job Retention Act (AB1839) is designed to keep more film and television productions in the state of California. The bill was unanimously passed by the California Assembly and is currently being reviewed by the California Senate Appropriations Committee. Joseph Henchman of the Tax Foundation provides his insight over email on the proposed changes to California’s film tax credit program.

Joseph Henchman is the Vice President of Legal & State Projects and Operations at the Tax Foundation. He is an attorney and policy analyst who supervises the Tax Foundation’s state policy and legal programs. He has written over 75 major studies on tax policy and has testified before Congress six times. He is a California native.

This interview with Joseph Henchman is the second in a two-part series on the proposed California Film and Television Job Retention Act. Last week, California State Assemblyman Mike Gatto, who co-authored the bill, discussed the proposed changes to California’s film and television production credit.

Bloomberg BNA: How does the proposed credit differ from the film and television production credit that is currently available in California?
Henchman: It would make it more generous for the industry, and thus more expensive for ordinary taxpayers. Currently, big budget productions (those over $75 million) are ineligible for the tax credit, and this cap will be removed. The bill also takes away the credit from television shows unless the show spends at least $1 million per episode. It also loosens the current requirement that credits be forfeited unless production starts within 180 days. The bill would also allow credits to reduce sales tax payments.

Most significantly, the bill removes the current $100 million per year cap. The legislative analyst could not even estimate how much the state revenue loss would be. Considering the credit is 20 percent of spend, and the industry spends $30 billion a year in California, it could be very expensive.

Bloomberg BNA: What sets the proposed credit apart from the film credits that are available in other states?
Henchman: The big difference is that it’s defensive for California. California was the home for film and television production, and first Vancouver and now 40-odd states are throwing $1.5 billion a year in tax money to lure productions out of Hollywood. This leaves California with three options.

One, California could accept that the industry is disloyal and mobile and let other states pour their treasure into this and instead focus on other things. That sounds like defeatism, so it’s not a popular choice.

Two, California could use its congressional muscle to stop this race-to-the-bottom, since all these credits are just moving activity around the country and aren’t creating or growing anything on net. The film industry obviously opposes that option since the race-to-the-bottom is lining their pockets at taxpayers’ expense.

Finally, three, California can make its credit more generous and hope other states won’t match them. That’s what this bill does, although it’s very likely the film studios will just use California’s increased generosity to demand even better deals from Louisiana, Georgia, New York and other states.

Bloomberg BNA: There seem to be two major criticisms of the proposed credit: that the credit will not bring enough return on its investment, and that the credit will disproportionately benefit Southern California over Northern California. Do you think that these are fair criticisms of the bill?
Henchman: The only people who claim that this credit pays for itself are film industry lobbyists and the politicians they give money to. One leading independent analysis calculated that California’s $100 million in film tax credits generated only $27 million in state tax revenue – a loss of 73 cents on the dollar. This money would be better used for other pressing state needs, or returning it to taxpayers in the form of lower business taxes generally, rather than lining the pockets of one of the most profitable and successful industries in the state.

Bloomberg BNA: Which of the proposed tax credit changes do you predict will make it into the final bill that is signed by Governor Brown?
Henchman: I hope it will become less one-sided. Here we have the film industry saying they want to stay in California but these other states are offering too good of a deal. So the bill sweetens the California side of things but with no obligations on the studios’ part. You could require every credit recipient to have to film all their films and TV shows in California. You could disallow the credit for anyone who tries to use California’s increased generosity to leverage better deals from other states. You could require the studios to achieve their promised job gains or pay fines to the state.

Above all, the total credit amount should be capped so there’s some certainty for the state budget. Each production should also report how much in credit money it costs to create each full-time equivalent job they created. Michigan calculated this number and found it was over $100,000, showing there was better uses for the money than subsidizing film production.

Bloomberg BNA: Do you have any other comments about the proposed bill?
Henchman: The industry and the legislators talk about the benefits of this tax credit program: jobs, economic activity, induced tourism, not seeing California depicted in a movie that was filmed somewhere else, and so forth. But, you can’t just list benefits, you have to compare it with the costs to evaluate whether it’s worth using the money for this instead of for something else. Every independent study has found the costs of these credits greatly exceed their benefits. Here, we have a bill with literally indeterminate costs and only hazy benefit estimates. I find it hard to believe anyone has seriously concluded that the benefits outweigh the costs.

I find it slightly amusing that we have California legislators arguing that a cut in business taxes, at least for one industry, will lead to amazing growth in jobs and economic activity. I certainly don’t dispute that and wonder why they don’t carry that logic beyond the film industry. California’s top income tax rate is 13.3 percent, the highest in America. The corporate rate is 8.84 percent, one of the highest. Sales taxes, gas taxes, excise taxes - all high too. If California wants to cut taxes by a few billion dollars, it would be better if they cut them for all taxpayers, especially the businesses creating jobs year in and year out and who are loyal enough not to flee to Louisiana or New York because those states offered them a big incentive package.

It’s tough to say no to Hollywood. They want the state to write a blank check to them, and it’s hard to really blame them. I hope the legislators will keep in mind that this needs to be a good deal for all Californians, not just those working for the film industry.


Continue the discussion on LinkedIn:  Are the proposed film tax credit changes good or bad for California?

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By:  Rishi Agrawal
Follow Rishi on Twitter at: @RAgrawal_SALT.
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