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California LAO Finds $1 of Every $3 in Film Incentives Go to Projects That Would Have Happened Anyway

3 min readBy: Joseph Bishop-Henchman

California’s state Legislative Analyst’s Office (LAO) is out today with a comprehensive review of the impact of the state’s film 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. credit program. Their report reviews the program as it existed from 2009 to 2014, before a change that year both boosted the amount of credits awarded (from $100 million per year to $330 million per year) and changed the award process. All told, the state awarded $800 million in credits under the program, paying 20 percent of qualified expenses for qualified projects (25 percent for independent films and TV series relocating to California). Unused 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. s can be carried forward for up to five years; independent studios can sell their credits to other California taxpayers (and $53 million of them were, for an average 92 cents on the dollar).

Some key findings from the LAO report:

  • Nothing is in place to catch a taxpayer who mistakenly or deliberately claims the same credit more than once. This has happened (mistakenly) already and was caught as part of other tax compliance processes, but film credits in particular are not tracked in a way to prevent it. (p. 14)
  • About one-third of projects receiving tax credits to film in California would have filmed in California anyways. Lots of productions applied for film credits, but because the payout is so generous and the total amount is capped, applicants were waitlisted and amounts were awarded by random lottery. A large number of waitlist projects that didn’t receive a credit filmed in California anyways, and the LAO used a logistic regression model to estimate the same number for projects that did receive credits. (p. 16-19)
  • The program boosts California’s economy only minimally, if at all. The state awarded $800 million in credits, and this boosted the state’s economy by $4.5 billion. But much of this activity crowded out other economic activity that would have happened otherwise, and reduced state revenue not going for other programs had a negative effect. These changes “likely offset the increased economic activity significantly.” Their best guess is that the program boosted the state’s economy by under $1 billion per year, which for California’s $2.5 trillion economy (and $50 billion film industry) is “no more than a few hundredths of a percentage point.” (p. 17-21)
  • There was a boost in net state revenue for the first few years of the program, but followed by twelve years of negative state revenue impacts (i.e., the program not paying for itself). This is because the benefits were front-loaded (credits awarded before 2014) but the costs are spread out over many years (companies can take the credits on their taxes for up to five years; only $232 million of the $800 million had been claimed by November 2015). (p. 21-22)
  • The new changes to the program—especially replacing the random lottery with objective job creation criteria—are positive changes. (p. 24)
  • “We generally view company-specific or industry-specific tax expenditures—such as film tax credits—to be inappropriate public policy because they (1) give some businesses an unequal advantage at the expense of others and (2) promote unhealthy competition among states in a way that does not benefit the nation as a whole.” That said, the program is understandable as an attempt to counter the incentives offered by other states; LAO suggests as other states scale their programs back, California should too. (p. 24-25)

I expect proponents will say these devastating conclusions are not relevant anymore, because the program was significantly changed in 2014. But it remains a very expensive program using Californians’ tax dollars to subsidize a very successful and profitable industry.