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More Film Tax Incentives Not a Solution for California

2 min readBy: Lyman Stone

The LA Times editorial board has endorsed a move for an expanded film tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. in the Golden State, arguing that “To not nix pics, California must use tax trix.” Given that California’s historical command of the film production industry puts it, and especially Los Angeles, in a unique position to suffer from other states’ distortionary taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policies, it’s understandable that the state would be scrambling to defend one of its signature industries.

We’ve written previously on the debate about California’s film tax credit program, arguing that it is a distortionary tax-carve-out, and noting that the program (like Iowa’s in previous years) has attracted criminal behavior. We’ve also given legislative testimony in California offering policy solutions like moving film subsidies out of the tax code and onto the spending side, improving transparency of the program, and carrying out realistic economic studies of the program.

Ultimately, there’s a key question that California’s policymakers need to be asking. If the film industry can’t survive in California without tax credits, despite its storied history there and California’s numerous natural advantages, how many other industries without such favorable tax preferences are being stifled? The same truth the film industry (or SpaceX, asking for personal property tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. s) articulates applies to many industries: California’s high taxes make it difficult for businesses in the state to compete in many highly mobile industries.

The solution, however, isn’t tax incentives. More carve-outs for big production companies won’t help Californians because, as we’ve explained before, “At some point you accept that Louisiana is determined to pour its treasure into Hollywood’s pockets, and you let them do it.” Louisiana, New York, Georgia, or the myriad other states with film tax incentives seem prepared to go tit-for-tat on lose-lose tax policy.

Rather than competing in that losing game, California can focus on reforming the actual taxes that motivate companies to leave. Personal property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es, such as those SpaceX has complained about, are one such archaic and damaging tax. California’s 13.3 percent top individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate and 8.84 percent top corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate are also no doubt concerns for businesses of all shapes and sizes, not just Hollywood. If California policymakers, or the LA Times editorial board, have come around to thinking that cutting taxes can support economic competitiveness and growth, then they should focus on broad measures that help all Californians, not just narrow carve-outs for one industry.

Read more on film tax credits here.

Read more on California here.

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