The 2023-24 Budget: California's Film Tax Credit

2023-24 BUDGET The 2023-24 Budget: California’s Film Tax Credit GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2023 SUMMARY California’s Film Tax Credit Created to Counteract Other States’ Efforts to Attract Hollywood. During the 2000s, California policy makers became concerned that the state may be losing motion picture production to other states. In response, the Legislature in 2009 created a film tax credit to encourage motion picture productions to locate here. The Legislature since has extended and expanded the credit multiple times. It currently is scheduled to expire in 2025. Governor Proposes Five Year Extension of Film Tax Credit. The Governor’s budget proposes a five year extension of the film tax credit. The Governor also proposes to make the credit refundable—allowing production companies to claim credits in excess of the amount of taxes they owe. Film Tax Credit Makes California’s Motion Picture Industry Bigger, but Effect on Overall Economy Is Unclear. Our review of research on state film tax credits suggests that state’s with film tax credits have larger motion picture industries. Whether or not this results in growth of the state’s overall economy, however, is unclear. This is because revenues forgone to the film tax credit could have been spent on other activities, which would have grown other parts of the economy. Existing evidence does not allow us to be confident that film tax credits lead to more economic activity than alternative uses of funds. Decision on Extension Should Depend on How the Legislature Prioritizes the Importance of Hollywood. We do not recommend considering the film tax credit as a reliable mechanism to grow the state’s overall economy. Instead, how the Legislature assesses a potential extension should depend on how much it prioritizes the importance of maintaining Hollywood’s centrality in the motion picture industry. If Extending the Credit, Refundability Worth Considering but With Modifications. If the Legislature elects to extend the credit, refundability is worth considering but with modifications to achieve some benefits of refundability (such as improved taxpayer equity) while limiting the downsides (such as increased costs and administrative complexity). These modifications include: specifying a schedule for the credit to be claimed over a period of years, reducing the annual allocation cap, and limiting other flexibilities in production companies’ use of the credit. www.lao.ca.gov 1 2023-24 BUDGET CALIFORNIA’S MOTION PICTURE INDUSTRY Los Angeles Remains the Center of U.S. all workers in the state. These earnings put motion Motion Picture Industry. The U.S. motion picture picture workers on par with workers in sectors like production industry is heavily concentrated in banking, engineering, and advertising. Los Angeles. A little under half of the industry’s jobs Motion Picture Production Activity Steady are located in and around Los Angeles. As shown in Recent Years. Figure 2 shows one measure of in Figure 1, motion picture production employment motion picture production activity in California (total in California has been steady at around 125,000 for days of principal photography [shoot days] across the past two decades. Over the same time period, all productions) for 2010 through 2022. As this employment in the industry outside of California has figure shows, aside for a dramatic drop early in the increased gradually. As a result, California’s share pandemic, production activity has maintained a of national employment in the industry has fallen consistent level over much of the past decade. from 52 percent a decade ago to 47 percent today. Television Shows Are the Largest Category Nonetheless, California remains the preeminent state of Production. TV shows have made up between in motion picture production, with more than twice 40 percent and 50 percent of production in California the jobs as the next largest state (New York). in recent years. TV production in 2021 and 2022 Motion Picture Industry Pays Above Average is about 20 percent higher than the five years Wages. California workers in the motion picture leading up to the pandemic. This increase is entirely industry earned an average of $2,600 per week in attributable to reality TV shows. In contrast, feature 2021, nearly 60 percent higher than the average of film production has declined in recent years. Figure 1 About Half of U.S. Motion Picture Jobs Are in California 300,000 250,000 200,000 Rest of U.S. 150,000 Rest of California 100,000 Los Angeles County 50,000 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020 2 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Figure 2 Production Activity Largely Steady in Recent Years Total Annual Shoot Days (In Thousands) 45 40 35 Other 30 25 Commercials 20 Feature Films 15 10 TV 5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 FILM TAX CREDIT Creation and Expansion of California’s Tax Credit Programs Expanded in 2015. The state’s film tax credit was expanded in 2015 to Film Tax Credit $330 million per year. The new program—referred California Film Tax Credit Created in 2009. to as Program 2.0—also made significant changes During the 2000s, California policy makers became to how credits are allocated and provided an concerned that the state may be losing motion additional 5 percent tax credit for certain kinds picture production jobs to other states. In response, of production spending, such as visual effects. the Legislature in 2009 created a tax credit to The state film tax credit was set to expire in June reduce production companies’ tax liabilities by 2020, but the 2018 budget package extended up to 25 percent of certain production expenses. it for an additional five years (through 2025) and Credits can be used to reduce corporation, made relatively minor changes to the program— personal income, or sales tax liabilities. The credit now referred to as Program 3.0. The 2021 budget is nonrefundable (meaning a taxpayer cannot package temporary increased the annual allocation claim credits in excess of their tax liability) but of film tax credits under Program 3.0 by $90 million can be carried forward and claimed over several for fiscal years 2021-22 and 2022-23. Figure 3 on years. Total credits were capped at $100 million the next page compares the three iterations of the annually statewide. The California Film Commission film tax credit. (CFC) allocates and issues the credits to eligible production companies. www.lao.ca.gov 3 2023-24 BUDGET Figure 3 Comparison of California Film Tax Credit Programs Program First Film Tax Credit “Program 2.0” 2018 Extension Years in Effect 2009-2017 2015-2020 2020-2025 Amount per Year $100 million $330 milliona $330 million Credit Allocation Lottery Jobs ratio score Modified jobs ratio score Allocation 10 percent of total Credits allocated as follows: Credits allocated as follows: Categories credits reserved for • 40% for TV projects • 40% for TV projects independent films • 35% for feature films • 35% for feature films • 20% for relocating TV series • 17% for relocating TV series • 5% for independent films • 8% for independent films Credit Percentage Base: 20% of qualified Base: 20% of qualified spending, plus Base: 20% of qualified spending, plus spending. additional: additional: • Independent films: • 5% of spending outside LA • 5% to 10% of spending outside LA 25% • 5% of visual effects (up to 30% total) • Relocating TV series: • 5% of music scoring • 5% of visual effects 25% Independent films and relocating • Independent films and relocating television: 25% television: 25% Other Complete “career readiness” In addition to the added requirements of Requirements requirement. Provide a statement that Program 2.0, production companies credit was a significant factor in choice must have a written policy against of location. sexual harassment and provide a summary of programs to increase workplace diversity. a Only $230 million was available in the first year of Program 2.0 because it was concurrent with the first credit. Additional Funding for Productions Filmed never made, (2) did not complete production on at New or Renovated Soundstages. The 2021 time, or (3) spent less on qualified expenses than budget package also included an allocation of anticipated. $150 million in film tax credits for productions that Most Credits Issued Under First Film Credit are filmed at new or renovated soundstages. The Have Been Claimed. Most credits from the first credits are available for productions in 2022 through film tax credit program were used to reduce 2032. The CFC identifies and certifies qualified corporation tax payments. Figure 4 shows film tax soundstage construction projects. Productions credit claims from 2011 to 2021. To date, taxpayers receiving credits under this program are required have used $571 million of credits from the first to set ethnic, racial, and gender diversity goals program to reduce their corporation tax payments. and to develop a plan to achieve those diversity Much of the remaining credits have been claimed goals. Those productions are eligible to receive an against sale taxes. additional 4 percent tax credit if they meet or make $1.55 Billion Allocated Under Program 2.0. a good faith effort to meet their diversity goals. This The CFC allocated $1.55 billion in tax credits to 238 new program otherwise is similar to the broader film productions between 2015 and 2020. The average credit program. credit amount per production under Program 2.0 ($6.5 million) was notably higher than under Program Statistics the earlier program (about $2 million). Figure 5 $646 Million in Credits Issued for First Film shows the distribution of credits across types of Credit. The state had expected to issue a total of production. TV received 70 percent of the credits, $800 million in credits under the first version of the with 11 percent going to relocating TV shows. This program. Of that amount, the CFC issued a total contrasts with 55 percent under the first film tax $646 million in tax credits. This amount is less credit program. than expected because some productions (1) were 4 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET Credit Claims Shifting to Figure 4 Sales Tax. Whereas most of the credits from the first program were Cost of Film Tax Credit Increasing Over Time claimed against corporation taxes, Film Tax Credits Claimed on Tax Returns (In Millions) claims against the sales tax have increased in importance during the time of Program 2.0. From $300 2017 to 2021, around $500 million 250 in credits ($275 million from Program 2.0) have been claimed 200 Corporation Tax against corporation taxes. Over Sales Tax 150 Personal Income Tax the same time period, around $300 million in credits were claimed 100 against the sales tax. This shift may be due in part to actions taken in 50 the 2020 budget package to limit taxpayers’ use of business tax 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 credits in 2020 and 2021. Limited Number of Taxpayers Benefit From the Credit. In tax years 2017 through 2019, 10 to 15 taxpayers annually used Figure 5 film tax credits to reduce their taxes. Allocation of Film Credit by Production Type Program 2.0 Demographics. Demographic data voluntarily submitted to the CFC by film tax credit 2015-2020 recipients suggests that some demographic groups are underrepresented among the workforce on Independent Films tax credit productions. In particular, the voluntarily reported statistics show men outnumbered women three to one on productions. Similarly, Latino and Asian American crew members make up a considerably smaller share of production workforce than their share of California’s overall population. Feature Films Competition From Other States Most Other States Offer Film Tax Incentives. TV During the 2000s, state film tax incentives (primarily tax credits) expanded rapidly across the country. Relocating TV At the peak in 2010, 45 states had a film tax incentive. In the wake of the Great Recession, a number of states eliminated their programs. Nonetheless, 37 states currently have active film tax incentives. Recent Expansions in Other States. According to the National Conference of State Legislatures, at least ten states created or expanded film tax incentives in 2021. Another five states did so in 2022. www.lao.ca.gov 5 2023-24 BUDGET Several State’s Credit Programs Are More have an annual cap on the amount of tax credits Generous Than California. Several other states available to production companies. Similarly, while have film tax credit programs that are more California’s film tax credit is nonrefundable, more generous (and expensive) than California’s. than ten states provide refundable credits. This Whereas California caps film tax credit allocations means a taxpayer can claim more credits than their at $330 million per year, some states—such as tax liability, allowing them to receive a refund. Georgia, Massachusetts, and Connecticut—do not ECONOMIC EFFECTS OF THE CREDIT In this section we review existing research on [2020], and Button [2021]). Overall, this evidence the economic effects of film tax credits. Dozens of suggests that film tax credits probably influence the studies over the last two decades have examined location decisions of 25 percent to 75 percent of the economic effects of film tax credits in California credit recipients. and other states. These studies have used a variety California’s Motion Picture Industry Probably of methods and reached varying conclusions. a Few Percentage Points Larger. The CFC While all of these studies have limitations, some reports around $2 billion in annual production approaches are more reliable than others. In spending associated with projects that received particular, our review focuses on studies that Program 2.0 credits. Adjusting for the share of (1) account for the fact that some productions productions that would have happened anyway would have selected the same location even without suggests the Program 2.0 credits were associated a tax credit, (2) consider both direct economic with around $1 billion in additional production effects (such as wage paid to production workers) activity per year. This represents about 2 percent of and indirect economic effects (such as wages paid California’s overall motion picture industry. to workers at businesses supporting motion picture Unclear Effect on the Broader Economy. production), and (3) avoid the use of statistical Although the film tax credit likely increased methods known to be unreliable. economic activity in California’s motion picture States With Film Tax Credits Likely Have industry, whether it resulted in growth of the More Motion Picture Production. While some state’s broader economy is unclear. Forgone state studies reach mixed or inconclusive findings, the tax revenue from the film tax credit could have balance of the evidence suggests that motion been spent on other programs or services. This picture production increases in states with film tax alternative spending similarly would have increased credits. Our 2016 analysis of data on productions activity in some part of the state’s economy. that applied for California’s film credit suggested Measuring the economic effect of any state that two-thirds of recipients would not have spending (including film tax credits) is challenging. filmed here without the credit. A similar study Nonetheless, the best available evidence suggests of California’s film credit found being offered a that we cannot be confident that the economic credit doubled the chances a production would benefit of film tax credits exceeds alternative uses be made in California (Workman [2021]). Another of state funds. study examining location decisions of productions Comparing Film Credits to Some Alternatives. around the country found that state film credits One of the more optimistic estimates from the meaningfully shifted the distribution of productions studies mentioned above suggests that each dollar towards states with credits (Owens and Rennhoff of film tax credit results in an increase of $2 to $4 in [2020]). Multiple studies systematically comparing earnings for workers in that state. At the same time, states with film credits to states without generally research on other types of public spending—such showed increased production activity in states with as K-12 education and workforce development— film credits (Bradbury [2019], Rickman and Wang suggests comparable or better earnings benefits for 6 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET workers (Heinrich et al. [2013], Jackson [2015], and implausible assumptions. Most importantly, the Hollenbeck [2017]). This suggests the potential for study assumes that no productions receiving tax at least similar economic benefits if state resources credits would have filmed here in the absence used for film tax credits were instead allocated to of the credit. This is out of line with economic other purposes. research discussed above which suggests tax Does Not Pay for Itself. A recent study from credits influence location decisions of only a portion the Los Angeles County Economic Development of recipients. Two studies that better reflects this Corporation found that each $1 of Program 2.0 research finding suggest that each $1 of film credit credit results in $1.07 in new state and local results in $0.20 to $0.50 of state revenues (Owens government revenue. This finding, however, is and Rennhoff [2020]), Rickman and Wang [2020]). significantly overstated due to the study’s use of GOVERNOR’S PROPOSAL TO EXTEND THE CREDIT Extend the Credit for Five Years. The Governor credit as a reliable tool to grow the state’s overall proposed to extend the film tax credit an additional economy. Extending the film tax credit likely would five years, from July 2025 to June 2030. The annual lead to California’s motion picture industry being allocation would remain $330 million. a couple percentage points larger than otherwise. Make Credit Refundable, but With However, it is not clear that extending the film credit Restrictions. The proposal also would make the would expand California’s overall economy. Instead, film tax credit refundable. Production companies the film tax credit’s most likely impact appears could receive a refund for a portion of their credits to be increasing the motion picture industry’s that exceed their tax liability. Specifically, a share of California’s economy. Given this, how taxpayer may receive a refund equal to the lesser the Legislature assesses the Governor’s proposal of: (1) 18 percent of the credit or (2) 90 percent of should primarily depend on how much it prioritizes the portion of the credit exceeding their tax liability. the importance of maintaining Hollywood’s A taxpayer electing to receive such a refund would centrality in the motion picture industry. forfeit a portion of their credit equal to the lesser Refundable Credits Have Some Advantages… of: (1) 2 percent of the credit or (2) 10 percent of the Making the film tax credit refundable could have portion of the credit exceeding their tax liability. some advantages: Diversity Requirements. The proposal also • Improved Taxpayer Equity. With the current includes diversity requirements that are similar nonrefundable credit, a taxpayer’s ability to to those that apply to productions filmed at claim the credit is tied to the amount of their new or renovated soundstages, with two key state tax liability. This means their ability differences. First, whereas the soundstage to claim credits can vary based on factors requirement provides an additional 4 percent credit unrelated to motion picture production. For to productions that meet or make a good faith example, some taxpayers engage in other effort to meet their diversity goals, the Governor’s operations that result in sales tax liability, proposal would subtract 4 percent from baseline which allows them to claim additional credits. credit for productions failing to do so. Second, the Similarly, some taxpayers may receive requirements do not apply to independent films with tax credits for other activities the state qualified expenditures less than $10 million. aims to encourage (such as research and development) which reduce their tax liability Assessment and limit their ability to claim film tax credits. Legislature’s Assessment Should Depend Making the film tax credit refundable delinks on How It Prioritizes Hollywood’s Importance. credit claiming from tax liability and thereby Based on our research review discussed above, lessens differential treatment of taxpayers. we do not recommend considering the film tax www.lao.ca.gov 7 2023-24 BUDGET • More Appealing to Production Companies. changes at FTB that would result in additional Refundable film tax credits would be more costs and complexity. Consistent with this, the appealing to production companies. This is Governor’s budget includes a request from FTB because it would allow companies to receive for $4.5 million in 2023-24 and seven positions tax benefits sooner in many cases. The to prepare itself to implement refundable program is already fully subscribed, however, business tax credits in general. FTB anticipates so increasing its appeal probably would not additional costs specific to administration of a result in more productions taking advantage of refundable film tax credit. the credit. However, refundability might change • Could Stoke “Race to the Bottom.” Ideally, the composition of productions applying for the state would not feel a need to have a and receiving credits. Some limited evidence film tax credit to maintain its current motion suggests that refundable credits may be picture industry. However, widespread particularly appealing to larger production competition from film tax credits in other states companies and productions with larger crews has caused the state to look to tax credits (Owens and Rennhoff [2020]). If so, this might as a way to protect a prized industry. In this further the goal of expanding the size of environment, a potential disadvantage of California’s motion picture industry. California adopting a refundable tax credit is that it could prompt competing states to further …But Also Disadvantages. However, the expand the generosity of their programs. This potential benefits of a refundable film tax credit heightened interstate competition would be should be weighed against several disadvantages: counterproductive to the film tax credit’s goal • Accelerated State Costs. A primary of protecting Hollywood. advantage for the state of the film tax credit being nonrefundable is that it spreads state Recommendations costs for the credit over several years. For If Extending the Credit, Refundability Worth instance, looking at the first film tax credit Considering but With Modifications. Ultimately, program, we see that most of the allocated whether or not the Legislature approves the credits were eventually claimed but only over proposed extension of the film tax credit depends on the course of many years. If the credit were how it weighs the importance of Hollywood against made refundable, state costs instead would be its various other priorities. If the Legislature elects incurred more quickly. to extend the credit, however, refundability is worth • Increased Costs. In addition, overall state considering but with modifications. Specifically, costs for the credit would increase if it were we suggest several modifications to achieve some refundable. With a nonrefundable credit, some benefits of refundability while limiting the downsides. taxpayers never have enough tax liability, even Taking these steps to contain costs could over multiple years, to fully claim theirs credits. especially make sense in an environment where the Because of this, the administration estimates Governor’s budget anticipates shortfalls over the that making the credit refundable would next several years. increase state costs for the proposed extension Consider Making Fully Refundable. The by a total of $200 million across multiple years. Governor’s proposed rules to limit the amount of film • Increased Administrative Complexity. tax credits refunded each year are unnecessarily California currently does not have any complex and would increase administrative burden refundable business tax credits. For this for applicants and FTB. We think there are more reason, the Franchise Tax Board’s (FTB’s) straightforward methods to limit state costs while procedures are designed only to allow making the film tax credit fully refundable, which we taxpayers to receive refunds for payments discuss below. Further, the proposed restrictions they have made. Making the film tax credit on refundability would lessen the extent to which refundable would necessitate administrative the policy change would improve taxpayer equity. 8 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET The proposed restrictions could be binding on Reduce Annual Credit Allocation for Cost certain taxpayers for reasons unrelated to their Neutrality. The administration estimates that motion picture production activities—such as making the film tax credit refundable will increase whether or not they have significant sales tax liability. total state costs by about 12 percent. An option As such, we suggest the Legislature consider to reduce this impact could be to reduce the making the credit fully refundable, but only in annual allocation of credits commensurately, from combination with the additional suggestions below. $330 million to $290 million. Specify a Schedule of Credit Claiming. Eliminate Some Flexibilities in Claiming the As mentioned above, an advantage of the Credit. Some flexibilities in claiming the film tax nonrefundable film tax credit is that it spreads credit, such as allowing credits to be applied to state costs over several years. The state could sales tax liability or reassigned within a corporate maintain this benefit while making the credit filing group, primarily exist to lessen the constraint refundable by specifying that the credit be non-refundability creates for taxpayers. As such, claimed in equal increments over a number of these flexibilities become unnecessary if the credit years. A similar approach is used for other tax is made refundable. Further, these flexibilities credit programs, such as the state’s low-income add to the administrative complexity of the credit. housing tax credit. Spreading credit claiming over For this reason, we suggest eliminating these five years would achieve the same benefits as the flexibilities if the credit is made refundable. Governor’s proposal for partial refundability, but with less complexity. CONCLUSION Despite years of competition from other states, however, it is important for the Legislature to weigh Hollywood remains the center of the U.S. motion the importance of maintaining Hollywood’s primacy picture industry. California’s film tax credit has against its many competing priorities, especially been one of several contributing factors to the in an environment where the Governor’s budget stability of the motion picture industry in the state. anticipates shortfalls over the next several years. As such, it is somewhat understandable that the Note: This report was prepared in fulfilment of Legislature would consider extending the film tax the reporting requirement of Revenue and Taxation credit through the end of the decade. In doing so, Code 38.9(a). www.lao.ca.gov 9 2023-24 BUDGET REFERENCES Bradbury, John Charles. “Can movie production Owens, Mark F., and Adam D. Rennhoff. “Motion incentives grow the economy? Evidence from picture production incentives and filming location Georgia and North Carolina.” Evidence from decisions: a discrete choice approach.” Journal of Georgia and North Carolina (August 4, 2019) (2019). Economic Geography 20.3 (2020): 679-709. Bradbury, John Charles. “Do movie production Rickman, Dan, and Hongbo Wang. “Lights, incentives generate economic development?” Camera, What Action? The Nascent Literature on Contemporary Economic Policy 38.2 (2020): the Economics of US State Film Incentives.” (2020). 327-342. Swenson, Charles W. “Preliminary evidence on Button, Patrick. “Do tax incentives affect film production and state incentives.” Economic business location and economic development? Development Quarterly 31.1 (2017): 65-80. Evidence from state film incentives.” Regional Thom, Michael. “Lights, camera, but no action? science and urban economics 77 (2019): 315-339. Tax and economic development lessons from state Button, Patrick. “Can tax incentives create a motion picture incentive programs.” The American local film industry? Evidence from Louisiana and Review of Public Administration 48.1 (2018): 33-51. New Mexico.” Journal of Urban Affairs 43.5 (2021): Thom, Michael. “Time to yell “cut?” An evaluation 658-684. of the California Film and Production Tax Credit for Heinrich, Carolyn J., et al. “Do public the motion picture industry.” California Journal of employment and training programs work?” IZA Politics and Policy 10.1 (2018). Journal of Labor economics 2 (2013): 1-23. Thom, Michael. “Do state corporate tax Hollenbeck, Kevin, and Wei-Jang Huang. “Net incentives create jobs? Quasi-experimental impact and benefit-cost estimates of the workforce evidence from the entertainment industry.” State development system in Washington State.” (2017). and Local Government Review 51.2 (2019): 92-103. Jackson, C. Kirabo, Rucker C. Johnson, and Workman, Alec. “Ready for a close-up: The Claudia Persico. “The Effects of School Spending effect of tax incentives on film production in on Educational and Economic Outcomes: Evidence California.” Economic Development Quarterly 35.2 from School Finance Reforms.” The Quarterly (2021): 125-140. Journal of Economics 131.1 (2016): 157-218. O’Brien, Nina F., and Christianne J. Lane. “Effects of economic incentives in the American film industry: An ecological approach.” Regional Studies 52.6 (2018): 865-875. 10 LEGISLATIVE ANALYST’S OFFICE 2023-24 BUDGET www.lao.ca.gov 11 2023-24 BUDGET LAO PUBLICATIONS This report was prepared by Brian Uhler and reviewed by Carolyn Chu. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, California 95814. 12 LEGISLATIVE ANALYST’S OFFICE