California Triples Film Tax Credit

September 25, 2014

Despite questions about the effectiveness of film tax credits, California recently passed AB 1839 , which expands the state’s film credit program to $330 million from its current $100 million. The bill also included provisions changing the way the credit is awarded. As we reported several months ago, the California Legislative Analyst’s Office (LAO) issued a report about the effectiveness of film tax credits, highlighting that the program does not “pay for itself” as advertised.

The California Legislative Analyst’s Office pointed out that from 2004 to 2012, California’s total share of US film and television post-production jobs has declined to 61 percent from 65 percent. As other states around the country create larger and larger film tax credits to spur production, policymakers’ concerns about Hollywood’s declining role in film and television production is understandable.

This concern led members of California’s state legislature to propose AB 1839, which was originally rumored to be worth $400 million in tax credits before being reduced to $330 million. In a state that is home to nearly two-thirds of the film and television industry, it can be hard to say no.

While the new law replaces the “first come, first serve” reward policy with a competition-based system, the concerns about the credit’s effectiveness remain. As we have previously written, film tax credits create favoritism for a politically-connected industry and ultimately lose public money.

As we argued in a 2010 special report, while the imagery of getting the state’s unemployed back in the workforce is nice, film tax credits don’t really accomplish that goal. In fact, most film production jobs are filled by a few select people with specialized skills, most of whom were probably not unemployed beforehand.

Numerous studies have shown that the public cost of these jobs are not covered by increasing revenues. When considering the return on investment (ROI) of the credits, Michigan discovered they were distributing over $100,000 for every full-time equivalent position created by film credits. Indeed, many independent studies have found film tax credits generate less than 30 cents for every $1 of spending (accounting even for movie-induced tourism, increased business to non-film businesses, and other indirect effects).

Even if California’s new “competitive and accountable” system could generate an above average ROI of 50 cents per $1, the state will still realize a loss of over $150 million annually. This is, unfortunately, not a one-time expenditure, but rather yearly spending through the tax code. If California taxpayers really want to support the movie industry, they could cut film companies a check through the spending side of the budget, and thereby at least be transparent. For those taxpayers who are not special effects experts, hair and makeup artists, or video editors, the full burden of these expenditures must be carried long after the final cut.

Rather than leaving taxpayers as collateral damage of ineffective film credits, California could look to the tax code for broad-based solutions. The state has some of the highest income tax rates and the eighth worst state and local tax burden in the country, factors that drive individuals and businesses elsewhere. In fact, from 2000 to 2010, California had a net loss of $29.4 billion in personal income, which is certainly at least influenced by the state’s tax climate.

California lawmakers may be trying to write a feel good family hit all of their own; however, only tax reform sound can generate the growth and prosperity needed to put individuals back to work. AB 1839, instead, reads more like Richard Benjamin’s The Money Pit.

Read more on California here.

Read more on film tax credits here.

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