The recent film tax credits won't save Hollywood

As the entertainment capital of the world, California has a significant interest in keeping film and television production in the state. However, as production budgets have decreased and inflation has increased, it is an irrefutable reality that production is leaving the state.

Los Angeles, in particular, has seen a rapid decline following the 2023 strikes, with Los Angeles's share of film and television employment dropping from 35% in 2022 to 27% in 2023. "Latest Otis College Report on the Creative Economy Details Changes in Entertainment Workforce," https://www.otis.edu/about/otis-now/news/otis-college-report-creative-economy-may-2024-release.html.

In order to keep production in the state, California needs to evolve its film and television tax credit program to compete with other states and foreign countries. See Cho, Winston, "California vs. the World: The Race to Nab Film and TV Productions," https://www.hollywoodreporter.com/business/business-news/california-film-tv-tax-incentives-1235979740/.

David Brauer of Brauer & Co., a CPA firm with expertise in film and television tax credits, noted that while the current California film and television tax credit program is a "great benefit for productions and Californians," an increase in the California Film and Television tax credit program will keep California competitive with Georgia and New York, as to total annual incentives offered. Georgia's tax credit is uncapped, and in May of 2023, New York increased its film tax credit to $700 million. Hubler, Shawn  and Taylor, Derrick Bryson., "California Governor Proposes $750 Million in Annual Film Tax Credits," New York Times, October 27, 2024, https://www.nytimes.com/2024/10/27/movies/california-governor-newsom-film-tax-credits.html and Maddaus, Gene, "New York to Increase State Film Incentive to $700 Million," https://variety.com/2023/film/news/new-york-film-tax-incentive-700-million-1235570424/. It is only logical that California was not far behind the two states.

On Oct. 27, 2024, Gov. Gavin Newsom announced a proposal to increase the current California Film & Television Tax Credit Program from $330 million annually to $750 million. "Governor Newsom proposes historic expansion of film & TV tax credit program," https://www.gov.ca.gov/2024/10/27/governor-newsom-proposes-historic-expansion-of-film-tv-tax-credit-program/#:~:text=A%20study%20of%20the%20program,from%20production%20in%20the%20state. If passed, this increase would make California the state with the second largest capped film and television tax credit program. Hubler, Shawn  and Taylor, Derrick Bryson., "California Governor Proposes $750 Million in Annual Film Tax Credits," New York Times, Oct. 27, 2024, https://www.nytimes.com/2024/10/27/movies/california-governor-newsom-film-tax-credits.html.

While only the proposed new cap has been revealed at this point, Colleen Bell, the director of the California Film Commission, hinted at "a range of additions and potential fixes to the existing program," to keep jobs in the state. Cho, Winston and Kilkenny, Kate, "Alarming Production Drop Spurs Gavin Newsom to Propose Doubling Tax Credits to Hollywood," https://www.hollywoodreporter.com/business/business-news/gavin-newsom-california-tax-credit-hollywood-1236045695/.

The current California tax credit program disincentivizes production in California compared to other states for three key reasons:

First, in California, film tax credits are not guaranteed. In order to obtain a tax credit a production must meet a certain job ratio for the type of project, based on how many jobs a production is creating, with additional points for things like visual effects spend and music labor. Jobs Ratio Ranking, https://film.ca.gov/tax-credit/jobs-ratio-ranking/. Productions then get compared to other productions of that type and only a certain number of productions are chosen for the tax credit as a result. Id.

On Sept. 10, 2024, the California Film Commission announced that $39.6 million in tax credit funding was given to "three big budget feature films and fifteen independent films." "19 Projects to Spend $284.4 Million, Employ Over 3,800 Cast and Crew Through California's Film and Television, Soundstage Tax Credit Programs," https://film.ca.gov/19-projects-to-spend-284-4-million-employ-over-3800-cast-and-crew-through-californias-film-and-television-soundstage-tax-credit-programs/.

Viviana Zarragoitia, senior vice president of Film and TV Finance at Three Point Capital, often counsels clients that they have a better chance of filming in other states that are not beholden to a jobs ratio because "in other states, you apply and to the extent there is money available, you are awarded the amount." Productions need certainty when it comes to effects to the budget, and in California's new iteration of the film tax credit, the state should remove the jobs ratio.

Second, the current cap on the California tax credit is too low to compete with other states. Of the major U.S. states that offer some form of a film and television tax incentive and are known for film production, California has by far the lowest annual cap. State Film and Television Incentive Programs, National Conference of State Legislatures, https://www.ncsl.org/fiscal/state-film-and-television-incentive-programs. Per Zarragoitia, "increasing the cap is a good place to start [in order to] keep production [in California.]" If Governor Newsom's proposal is passed, the increased annual cap will bolster production in the state.

Finally, California should lower or remove the minimum spend required in order to obtain the film tax credit. Under the current program, all types of productions must have a minimum spend of $1 million. The Basics, California Film Commission, https://film.ca.gov/tax-credit/the-basics-3-0/. Even television series must have a budget of $1 million per episode. While New York has a similar $1 million minimum spend requirement, Georgia's minimum spend is only $500,000. Cho, Winston and Kilkenny, Kate, "Alarming Production Drop Spurs Gavin Newsom to Propose Doubling Tax Credits to Hollywood," https://www.hollywoodreporter.com/business/business-news/gavin-newsom-california-tax-credit-hollywood-1236045695/. If California lowers or removes the minimum spend, the state can encourage independent film, user-generated content, and other types of smaller productions in order to promote digital content generation and independent production in California.

While California's proposal to increase the cap on the film and television tax credit is a step in the right direction, other changes need to be made to the program in order to make production attractive to filmmakers and content creators. Notwithstanding any such changes, California and other states face competition from foreign countries.

Zarragoitia has noted that she is seeing a trend with her clients of productions moving out of California in general as places like Spain and Hungary become more favorable to film both in terms of incentives and a lower cost of labor. Indeed, the Prodpro Global Production Report as of July 11, 2024, highlighted a severe decline in productions filming in the United States in 2024 compared to 2023. Cho, Winston and Kilkenny, Kate, "Alarming Production Drop Spurs Gavin Newsom to Propose Doubling Tax Credits to Hollywood," https://www.hollywoodreporter.com/business/business-news/gavin-newsom-california-tax-credit-hollywood-1236045695/.

With the new incentive program, it will be interesting to see how California fares against other countries going forward.