Likely Extension of Film and Television Tax Credits in California

California Governor Newsom is backing extending tax credits for films and television shows in California.  Governor Newsom is touting California’s commitment to reproductive rights as the attraction (in addition to the credits) for businesses to operate in California.  The press release states, in part:

SACRAMENTO – Together with Senator Anthony Portantino (D-La Cañada Flintridge) and the California Film Commission, Governor Gavin Newsom today announced his support for SB 485, which would invest $1.65 billion in the state’s Film & Television Tax Credit Program to extend it for an additional five years, through 2030. This program allocates $330 million per year in tax credits for the industry.
 
This announcement comes as hundreds of showrunners demand that production companies implement protocols to protect pregnant employees in states where abortion is outlawed.
 
“As other states roll back people’s rights, California will continue to protect fundamental freedoms for all and welcome businesses that stand up for their employees,” said Governor Newsom. “Extending this program will help ensure California’s world-renowned entertainment industry continues to drive economic growth with good jobs and a diverse, inclusive workforce.”
 
The state’s Film & Television Tax Credit Program has been shown to generate $24 in economic activity for every $1 invested – spurring tens of billions of dollars in economic output, helping create over 110,000 jobs, and bringing shows and films to California. Extending the Film & Television Tax Credit Program will help the state’s ongoing efforts to retain its status as the world’s film and TV production capital, a status long earned due to its superior crews, talent, infrastructure, weather, locations, and a host of other attributes that lead to business and creative success.
 
In response to today’s announcement by Governor Newsom, California Film Commission Executive Director Colleen Bell stated that the Commission stands ready to help all projects – including those that reject states where fundamental rights are under assault – make the most of all that California has to offer.  
 
“The Governor’s actions today speak to the values held by so many people across the film and TV production industry,” she said. “More than ever, California offers the best value and the best values.” 
 
Bell also noted that the creative community has unique influence and therefore, unique responsibility. “Working in and supporting a state that violates basic freedoms is antithetical to the industry’s core values,” she added. “It’s also bad business.” 
 
“California is the entertainment capital of the world and it is exciting and appropriate for the state to invest in keeping and expanding its impact. The economic benefit from extending the Film and Television Tax Credit Program creates thousands of jobs for talented crafts people and generates significant revenue for our budget. I am grateful to Governor Newsom for his unwavering support and leadership for enhancing this historic industry – which is unique to California. Talent and industry need certainty to compete with other states and the tax credit program extension does just that,” said Senator Anthony Portantino, author of SB 485.
 

Film and TV Tax Credits Working for California?

California significantly increased tax credits to incentivize the location of film and TV production in the state of California in late 2014.  I've written about it and its impact, here, back in 2016.  How is it doing since then?  The California Film Commission, the government entity responsible for administering the tax credit program, issued a Report examining the impact of the program over the last three years from 2015 to 2018.  A press release concerning the Report states: 

Employment – in terms of hours worked in-state by below-the-line crew members. Program year-three continued the long-term growth trend with a 15.6 percent increase in hours worked in 2017 compared to 2014 (the year before Program 2.0 began). This growth builds on 2016’s 12 percent increase over 2014. These figures are based on data for below-the-line workers including Teamsters, IATSE members, basic crafts and others covered under the Motion Picture Industry Pension & Health Plans.  In addition, Los Angeles-area sound stages are operating at near capacity (as reported by FilmL.A.), which is leading to substantial growth in construction for new stages and production support facilities.   

- Big-Budget Films (over $75 million) – which are a target for the uncapped incentives offered by other states and countries. During year-three of Program 2.0, California attracted five additional big-budget films (“Call of the Wild,” “Captain Marvel,” “Ford v. Ferrari,” “Island Plaza” and “Once Upon a Time in Hollywood”). To date, the expanded tax credit has attracted a total of 10 big budget films. 

- Relocating TV Series – which have their own dedicated allocation of tax credits. During year three of Program 2.0, California attracted two additional relocating TV series (NBC’s “Timeless” from Vancouver, and Amazon Studios’ “Sneaky Pete” from New York). To date, the expanded tax credit program has gained a total of 15 relocating TV series from across the U.S. and Canada. 

- Production Activity Statewide – for which Program 2.0 provides an added incentive uplift. During the program’s first three fiscal years, tax credit projects spent a total of more than $78 million in 19 counties outside the Los Angeles 30-Mile Zone. This figure will continue to rise as more tax credit projects for year-three (and prior years) report their out-of-zone spending.

Moreover, the supposed impact of Captain Marvel on the local California economy has been estimated to be around $100 million.  The latest installment of Sherlock Holmes will also be shot in California, estimated to provide another $100 million boost to the local California economy.  Notably, Governor Newsom has pointed to restrictive social policies concerning abortion (mostly in Southern U.S. states, such as Georgia) as a reason for production companies to move their operations back to California. 

California Legislative Analyst Office Reviews Film Tax Credit Impact

I have previously written about California’s film tax credit system and interstate competition, here and here.  The California Legislative Analyst Office has recently published a report concerning the impact of California’s film tax credit.  While noting that the film tax credit likely prevented some jobs and production from leaving the state, it asserts that around 30% of projects receiving the credit may have occurred without the credit.  How does the report reach that conclusion: 

Some of the motion picture projects under the first film tax credit program probably would have filmed in California even if they had not received a tax credit. We explain below how we were able to estimate these windfall benefits arising from the first film tax credit.

Tax Credit Lottery Allows for Natural Experiment. It is impossible to identify with certainty which projects would have been made in California, which elsewhere, and which not at all, had they not received a film tax credit. Because of the way the first film tax credit was administered, however, we are able to roughly estimate the probability that any given film or television project might have been made in California without a tax credit. Beginning in 2011, the program was over-subscribed on the first day applications were accepted—with the demand for film tax credits far outstripping the available amount—and tax credits were mostly allocated to projects through a random process. This allowed for an imperfect natural experiment, as some projects were allocated a credit and other similarly situated projects were not. The California Film Commission (CFC) collected some information about projects that applied for and did not receive a tax credit from the program—whether they were made and, if so, where. (As noted elsewhere in this report, many projects were never allocated a tax credit because there was an insufficient amount of tax credits available. In other cases, some applicants received an allocation but withdrew from the program for various reasons—some of these were made eventually, but without a tax credit from California. When that happened, those tax credits became available for other projects that had been placed onto a waitlist. However, many of these began filming—in California or elsewhere—prior to being offered an allocation.) We supplemented this CFC data with publicly available data sources, such as information from the Internet Movie Database and Variety. Looking just at the film tax credit applicants in 2011, 2012, and 2013—the three years for which we have the best data—we see that 199 projects applied for and did not receive a film tax credit but were eventually made. Of these, as we show in the figure, one-third—66 projects—filmed in California without receiving a tax credit. Dozens of other project applicants that did not receive a film tax credit from California were filmed in British Columbia, Georgia, Louisiana, New York, and elsewhere.

The report notes that public subsidies such as the tax credit should be avoided [but are understandable given interstate competition].  However, it also notes that the economic impact is relatively substantial—although difficult to measure well:

It is important that we emphasize that it is impossible to precisely measure the net change in an economy caused by a tax credit or any other policy change because many other economic changes are occurring simultaneously. It is not possible to know what the economy would have done had the policy not been adopted in the first place. We note that there is some uncertainty in the underlying data we use in this evaluation and, as we discussed in the nearby box, limitations to the methods that are used to estimate indirect and induced economic effects. Finally, any assessment of the full economic value of the opportunity costs is inherently subjective, as we cannot know how foregone revenue might have otherwise been used.

Overall, we think that the first film tax credit program probably increased the economic output of California by between $6 billion and $10 billion on net. This is a total amount over a period of more than a decade. The annual increase in likely economic activity—typically under $1 billion per year—boosts California’s economic output by no more than a few hundredths of a percentage point.

[Hat Tip to Professor Paul Caron’s Tax Prof Blog.] 

California Senate Passes Film Production Tax Credits Bill

This blog recently discussed California Assembly Bill 1839 concerning film production tax credits, here.  The bill is designed to incentivize the production of films (and create jobs) in California.  As noted in the previous post, the Milken Institute provided numerous recommendations modifying California's current film tax credit system. Assembly Bill 1839 followed many of the recommendations of the Milken Institute, but appeared to retain the criticized lottery system for determining who would benefit from the tax credits.  As discussed in the Los Angeles Times, after negotiations with Governor Brown, the Senate passed a version of the Bill that decreased the total amount of tax credits from $400 million a year to $330 million a year.  This still more than triples the amount of the tax credit from the current film tax credit system.  Moreover, the lottery system is also expressly abandoned for a system which allocates the tax credits based on number of jobs generated by the project.  This seems to heavily favor blockbuster, big budget movies.  However, the Assembly Bill does expressly allocate some funding for independent films. 

There is little doubt that Governor Brown will sign the Bill.  The current version appears to be a done deal: $330 million a year for tax credits, blockbuster movies are included and the lottery system is dead.  As to the total amount of tax credits, this is still less than the $420 million amount of film tax credits provided by New York State. 

A Race to the Bottom? Inter-State Competition and Tax Incentives in the Entertainment Industry

The competition between states in the U.S. for companies and jobs is very intense (and between countries).  In California, it is hard not to hear about how Texas and its governor Rick Perry are offering a great deal for companies to move from California to Texas.  And, he and Texas have been somewhat successful in getting companies to relocate although some argue that the success with respect to poaching jobs is a bit overblown.  One of the carrots that Texas uses to attract California companies is tax incentives.  California also uses tax incentives to keep companies (and work) in California (the incentives are offered by the state as well as local government such as cities). 

In the entertainment industry, particularly film and television, in California, it is not Texas that is the main competitor in the U.S.—it is New York.  According to a recent Milken Institute report titled, “A Hollywood Exit: What California Must Do to Remain Competitive in Entertainment—and Keep Jobs,” and authored by Kevin Klowden, Pricilla Hamilton, and Kristen Keough, California lost around 16,000 jobs between 2004 and 2012 in the film and television industry while New York gained around 10,000 jobs.  These are relatively high paying, middle class jobs.  The authors note how California and New York both have “high wages, regulation and high cost of doing business,” but California is losing jobs and New York is gaining them.  The authors point to the tax incentive systems of both states to shed light on the reasons for the difference. 

In describing the California tax credit system concerning films and television, the authors state:

The Credit Lottery: Unlike most states, which operate based on individual applications, California requires productions that wish to qualify for tax credits to apply at the beginning of June for a drawing at the end of the month. These incentives are in high demand: In 2012, 27 projects out of 322 applicants received credits through the lottery. In 2013, the state received 380 applications. Because the demand for credits far outstrips supply, the lottery serves to maintain fairness by not favoring any particular kind of production over another. Pinched for revenues and lacking the necessary staff, the state does not assess candidates for incentives based on potential economic benefits.

The main drawback of a lottery is its lack of predictability. Production companies will often submit multiple films in the drawing in the hope that one will wind up a winner while also making backup plans to shoot in another state. . . . Further, when films and television shows are locked into a set schedule, they often cannot wait for the results of the lottery, choosing instead to relocate.

The authors describe the New York tax incentives program:

New York offers a generous incentive that has attracted productions. With an annual cap of $420 million, the Empire State offers productions shot within New York City a 30 percent refundable tax credit and those shot outside the city a 35 percent refundable tax credit. . . . One of the biggest policy advantages in New York is its postproduction credit, which now matches the state’s production credit. In 2012, Governor Andrew Cuomo signed legislation that raised the postproduction credit from 10 percent to 30 percent in the New York City area and the surrounding commuter region (see appendix for details).  Additionally, the tax credit was raised to 35 percent for postproduction work completed in upstate New York.  

The governor went a step further in 2013 by extending the postproduction credit until 2019, lowering the threshold for visual effects and animation from 75 percent to 20 percent of the total special effects budget, or $3 million (lesser of two). This means that large films or animations can do a portion of postproduction visual effects in New York even if the state does not have the current capacity to do the full project.  New York is also allowing productions shot outside the state to qualify for the postproduction credit. In January of this year, the governor announced a $4.5 million grant to Daemen College and Empire Visual Effects to create 150 new postproduction and visual effects jobs in Buffalo, hoping to grow the state’s overall postproduction capacity.

To compete with New York, the authors make several recommendations.  Here are some of them.  The authors address uncertainty in the current California system by “Rais[ing] the total amount of available annual funds in the state’s filmed production credit to a level that allows for the elimination of the annual lottery. . ..”  The authors recommend “dedicat[ion of] a portion of the fund to hour long dramatic television.”  The authors propose including movies with budgets over $75 million to be “eligible for filmed production incentives.”  The authors also state that, “Digital visual effects and animation expenditures should be made explicitly eligible for filmed production incentives at the 20 percent rate.”

Assembly Bill 1839 has been passed by the Assembly and is before the California Senate.  If it is passed by the Senate, Governor Brown must still sign the bill--which he may choose not to do.  The bill adopts several of the recommendations of the Milken Institute in some form such as including movies with budgets over $75 million as eligible for incentives.  Notably, the bill quadruples “production tax incentives” (from $100 million to $400 million).  The bill and analysis can be found, here.  Now, what will other countries do to react to this bill if passed?