California’s film and TV tax credit boost. What are the pros and cons?

Gov. Gavin Newsom’s proposal to more than double the size of California’s film and television tax credit program won’t fix all of the Golden State’s problems when it comes to the stunning decline in entertainment production here.

But it does signal a significant — albeit belated — attempt to address one of the key factors that has driven much of Hollywood’s economy to regions with more generous government incentives.

Newsom on Sunday announced his intention to expand the annual tax credit amount to $750 million, compared with the current total of $330 million, my colleagues Samantha Masunaga and Christi Carras reported. That would top the yearly cap for New York, where the incentive program is limited to $700 million. Critically, though, Georgia, another huge production hub, has no cap.

It’s not exactly an immediate fix for California’s production crisis. If approved by the Legislature, the boost would take effect as early as July 2025 and span five years. But it is action that industry leaders have been calling for with increasing intensity as Los Angeles continues to lose ground to other locales around the nation and internationally.

Industry leaders and experts who spoke to The Times generally welcomed the proposal as a much-needed step, while cautioning that more remains to be done.

FilmLA, the organization that handles film permits and tracks on-location production in the Los Angeles area, said in a recent study that California’s share of the global production market for movies and TV shows fell to 18% in 2023 from 22% the year before, measured in terms of projects released during that period. Production activity in Greater Los Angeles is at near-historic lows, falling 5% in the third quarter, according to the nonprofit’s latest report.

It’s an issue that can’t be fully illustrated with data. People come to Los Angeles to build a career but end up having to leave their families for weeks at a time to take a job in New Mexico or Hungary or wherever. It’s not ideal.

The reasons for the pullback in production during recent years have been many and varied. Much of this has been driven by studios’ attempts to stop financial losses after overspending to compete with Netflix in the streaming wars. During and after the writers’ and actors’ strikes of 2023, the entertainment and media conglomerates took advantage of the opportunity to pare back spending, resulting in canceled shows and tens of thousands of layoffs.

The U.S., and California in particular, have taken a disproportionate share of the pain. Global production activity dropped 17% in the third quarter compared with the same period in the pre-strikes year of 2022, according to tracking firm ProdPro. However, the U.S. suffered a much steeper decline, with volume plummeting 35%. In contrast, Canada saw a 1% increase during the same period.

Why is California falling behind? Many cite the high costs of doing business in Los Angeles, as well the allure of government incentives in such filming hot spots as Georgia, New York, Canada and the United Kingdom.

Some studio executives have begun to place blame on the new contracts forged by the entertainment industry unions. Outgoing Sony Pictures Chief Executive Tony Vinciquerra, speaking last week at international TV market Mipcom in Cannes, warned that the higher costs of last year’s deals are part of what’s forcing studios to seek cheaper locations.

Vinciquerra also criticized California for not responding to “what’s going on in the world of incentives.”

“The cost of doing business in California is so high that it’s very difficult to price out a film,” he said.

SAG-AFTRA’s national executive director, Duncan Crabtree-Ireland, strongly pushed back in a statement, accusing Vinciquerra of peddling a “false narrative” about the guild contracts. “Threatening the offshoring of American jobs is a cynical attempt to manipulate workers while masking the industry’s own business failures,” Crabtree-Ireland said.

In any event, Newsom’s action may help improve California’s competitive footing.

The state’s film and TV tax credit program was established in 2009 as a way to prevent film and TV production from fleeing.

At that time, the credit was restricted to $100 million annually, a limit that was raised to $330 million a few years later, awarding studios tax credits covering up to 25% of qualified production costs. Last year, Newsom extended the program for five more years. Starting in 2025, awards will be “refundable,” meaning studios are entitled to cash payments when their credits exceed their tax liabilities.

But in its Sunday announcement, the governor’s office basically acknowledged that the shortcomings of its incentive program have resulted in productions leaving for other places. Projects that couldn’t secure California’s tax credits moved elsewhere, with “an estimated 71% of rejected projects subsequently filming out-of-state,” Newsom’s office said.

There’s been ample debate about the usefulness and effectiveness of state film and tax incentives. Industry-funded studies and reports from organizations such as the Los Angeles Economic Development Corporation have touted tax credit programs for creating jobs and boosting economic activity in their respective states. Production supports jobs directly and indirectly — by keeping prop houses, caterers and other businesses busy.

However, others question the ultimate return from such programs, saying their benefits are exaggerated and that they amount to a race to the bottom between the states. A report commissioned by New York’s Department of Taxation and Finance said that the state’s film production credit program “does not provide a positive return to the state” in terms of taxes, generating 15 cents in direct tax revenue for every $1 invested. The same report argued that some of the productions that got tax benefits probably would have filmed in New York anyway.

Similarly, a Georgia State University study estimated a fiscal return of less than 20 cents on the dollar for Georgia’s program.

Critics of these programs also suggest that tax dollars would be better spent on housing, education and other pressing issues, rather than effectively subsidizing entertainment studios.

Fair enough, but if California wants to maintain its status as the home of the entertainment industry, it has little choice but to increase its giveaways for productions. What’s more, much has changed since 2009. Other states and countries have established filmmaking infrastructure and crews, reducing what was once L.A.’s competitive advantage. The movie and TV business is nomadic and will go wherever it can get the best deal.

“Some of the intrinsic advantages of L.A. have been eviscerated,” Jody Simon, partner at Fox Rothschild, told The Times. “I believe there’s still an underlying preference to shooting in L.A., so hopefully this brings more production back.”

And the state’s program still has key limitations. Others cover a bigger percentage of qualified spending. For example, unlike rival programs in other places, California’s incentive does not cover costs for paying actors, directors and other “above-the-line” personnel, a major contributor to movie and television budgets. Newsom’s latest proposal does not change that. Yes, in California, giving a studio a tax break for Tom Cruise’s salary remains a bridge too far.

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