The 2025-26 Budget: California’s Film Tax Credit

2025-26 BUDGET The 2025-26 Budget: California’s Film Tax Credit GABRIEL PETEK | LEGISLATIVE ANALYST | FEBRUARY 2025 SUMMARY California’s Film Industry Impacted by Increased Competition, Recent Disruptions. Over the last two decades, California has faced increasing competition in the motion picture industry from other states and countries offering production companies financial incentives and lower labor costs. This has led to a gradual decline in the state’s dominance in the industry. Recent disruptions, including COVID-19, the 2023 Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) and Writer’s Guild of America strikes, and the 2025 Los Angeles Wildfires, have further depressed production activity. Governor Proposes to Increase the Annual Cap on Credit Awards. The Governor’s budget proposes to increase the annual cap on tax credits available under the program from $330 million to $750 million. This would apply to version 4.0 of the credit for fiscal years 2025-26 through 2029-30. Expanding the Credit Is a Valid Approach to Increase Production Activity in California. Our assessment of the available evidence suggests that increasing the size of the credit will increase the number of productions that choose to locate in California. Although some credit recipients would have located in the state regardless, a sizable number would choose to film in other jurisdictions absent the credit. Since the credit is consistently oversubscribed, increasing the annual cap would likely result in a corresponding increase in credits awarded. Legislature’s Response to Proposal Should Depend on the Importance of Protecting Hollywood Relative to Other Goals. Although the film tax credit likely increases the size of California’s film industry, there is weak evidence that expanding the tax credit would benefit California’s economy as a whole. Therefore, we recommend the Legislature consider adopting the Governor’s proposal only if the Legislature views maintaining California’s market share of the film industry as a high priority and an end in itself. If Protecting Market Share a Priority, Use of Benchmarks Would Help Improve Fiscal Oversight of Credit. If the Legislature elects to expand the credit, utilizing explicit benchmarks that compare the desired market share to the state’s current position would help improve fiscal oversight of the credit. CALIFORNIA’S MOTION PICTURE INDUSTRY California Remains the Largest Player Motion Picture Industry Workers Earn Above in the U.S. Motion Picture Industry. Despite Average Wages. In 2023, workers in California’s making up only 1.4 percent of California’s total motion picture industry earned a weekly wage of economic output, the state’s motion picture over $2,700 on average, 60 percent higher than industry is one of its most iconic, particularly the average weekly wage in California across all given its heavy concentration in Hollywood and industries ($1,730). As seen in Figure 2 on the Los Angeles County. As shown in Figure 1 on the next page, inflation-adjusted wages in the industry next page, California’s motion picture production have not changed much in recent years, nor has workforce is by far the largest in the United States, California’s wage premium relative to the rest of the over 2.5 times the size of its largest competitor country (around 20 percent). (New York), and has held fairly steady in size over the last two decades. www.lao.ca.gov 1 2025-26 BUDGET Recent Disruptions Have Figure 1 Negatively Affected Filming Activity in California. Two notable California’s Production Workforce Largest in Nation events account for the volatility seen in Figure 3, namely COVID-19 300,000 and the 2023 SAG-AFTRA and 250,000 Writer’s Guild of America strikes, which coincide with the sharp 200,000 Other States decreases observed in 2020 and Georgia 150,000 2023 respectively. The drop in New York California’s production activity is 100,000 displayed in Figure 4, which shows 50,000 California the number of shoot days in the Los Angeles area by year and type 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 of production. The COVID-19 effect was short-lived and shoot days returned to pre-pandemic levels in 2021. In contrast, filming activity Figure 2 following the strikes has shown no signs of recovering so far, California Film Industry Wages with shoot days slightly declining Have Held Steady, Above National Average further in 2024. Figure 5 shows the Inflation-Adjusted Average Wages differing effects of these two events by comparing the total percent $3,500 change in employment levels for 3,000 California and the U.S. since 2019. CA The impact of COVID-19 was 2,500 similar in California and the U.S. USA 2,000 overall, and employment bounced 1,500 back in both cases by the end of 1,000 2021. However, while the U.S. as a whole saw a more modest decline 500 in employment in 2023, California experienced a much larger 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 decrease and has not yet seen any signs of recovery. State’s National Market Share Has Declined. Effects of Los Angeles Figure 3 shows the evolution of motion picture Wildfires on Industry Are Unknown, but Likely production employment in California relative to the Small. The recent Los Angeles wildfires caused U.S. Since 2010, California’s share of employment significant property damage, primarily in the Pacific has decreased from over 54 percent to 46 percent Palisades and Altadena neighborhoods. Although as of 2023, becoming particularly volatile over the it appears that most productions that halted filming last few years. in the wake of the fires have resumed production, some industry workers will have been severely affected by the fires and may decide to relocate. However, based on estimates from entertainment industry unions, this number is likely in the hundreds and thus probably not a significant shock to the broader workforce. 2 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Figure 3 California’s Share of U.S. Film Industry Employment Is Decreasing 56% 54 52 50 48 46 44 42 40 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Figure 4 Production Activity Dropped Sharply in 2020 and 2023 45,000 40,000 35,000 30,000 Other 25,000 Commercials 20,000 Feature Film 15,000 10,000 Television 5,000 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 Figure 5 2023 Strikes Disproportionately Affected California Percent Change in Film Industry Employment Since 2019 20% 10 -10 -20 -30 California -40 USA -50 -60 2019 2020 2021 2022 2023 2024 www.lao.ca.gov 3 2025-26 BUDGET FILM AND TELEVISION TAX CREDIT PROGRAM California Film Tax Credit Created in 2009. • Refundable Credits. Production companies In response to the proliferation of state-level allocated a tax credit may make a one-time tax credits and other incentives for film and TV election to make the credit refundable. This production in the early 2000s, the Legislature option allows taxpayers who do not have approved the creation of its own credit in 2009. a significant California tax liability to more Applications for the credit are evaluated by the effectively utilize the credit. Taxpayers must California Film Commission (CFC), who then apply as much of their credit to their current allocate and issue credits to successful applicants tax liability as possible before the excess is based on the amount of qualified expenditures the refundable for that year. Taxpayers may only proposed production would make in California. elect to make 90 percent of their total credit The amount of credits available annually under the allocation refundable, and the use of such program has grown from $100 million in 2009 to credits must be spread across the five taxable $330 million as of 2015. The credit can be used years beginning with the year of election. to defray corporation, personal income, or sales • Diversity Plans. Currently, credit recipients tax liabilities. must submit a work plan that includes explicit Recent Changes to Program Take Effect diversity goals and is approved by the CFC. in 2025. The 2023-24 budget package included Starting with awards made in 2025-26, a changes to the film tax credit that will take effect production can receive an additional 4 percent starting with tax credits awarded in 2025-26. credit if they submit a work plan to CFC and There are two notable changes: CFC determines that the recipient has made a “good-faith effort” to achieve the goals in the work plan. ALLOCATION AND USE OF TAX CREDITS $3.4 Billion in Credits Allocated Since lower and (2) credit claims often lag behind the Program’s Inception. The CFC has issued initial award as taxpayers can carry forward over $3 billion in credits to around 700 projects credits if they do not have sufficient tax liability in since its inception in 2009. In recent years, that year. A recent shift away from claims against the commission has averaged approximately the corporate income tax and towards sales and $272 million of credits awarded to 38 separate use taxes is at least partially due to temporary projects per year. Not all credits made available by restrictions placed on the use of tax credits as the Legislature for the CFC to award are distributed part of the 2020-21 budget package. Since the each year. Some credits initially made available to 2024-25 budget package implemented similar production companies are never issued, usually restrictions, this trend will likely continue for the due to cancellations/delays in production or lower next few years. expenditures during production than anticipated at Mix of Productions Shifts Towards Television. the time of application. Figure 7 shows the types of productions that were Credit Claims Have Increased in Size and awarded tax credits. The most notable change Changed in Composition Over Time. Figure 6 is an increase in the share of credits awarded to shows the amount of credits claimed by recipients non-relocating TV shows from 51 percent in the over time. The annual amount of credit claims first decade of the program to 59 percent in the per year has settled in the range of $150 million credits most recent iteration starting in 2020, with to $200 million for the last several years. Claims a corresponding decrease in credit allocations for were lower in the first several years of the program feature films. because (1) the amount of credits available was 4 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET Figure 6 Size and Composition of Credit Claims Has Shifted Over Time (In Millions) $250 200 150 100 Corporation Tax 50 Sales Tax Personal Income Tax 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Figure 7 Allocation of Credits by Production Type 60% 2009-2019 50 2020-2024 40 30 20 10 Feature Film Independent Film TV Relocating TV TAX INCENTIVES IN OTHER JURISDICTIONS Majority of U.S. States have a Tax Incentive percentage of expenditures made in-state are the for Film and TV Production. Policymakers most common type of incentive, but several states in many states have put in place a variety of provide rebates or partial exemptions from taxation. incentives to lure film and TV production away from Over the years, some states have expanded their Hollywood and other production hubs. Figure 8 existing programs to make them stand out relative on the next page shows the distribution of such to other states, while others have scaled back or incentives across the U.S. Tax credits based on a eliminated them completely. www.lao.ca.gov 5 2025-26 BUDGET Figure 8 Film Tax Credits and Incentive by State Tax Credit Other Incentive None Incentives Outside the U.S. Are Becoming the value of credits that will be allocated to that Common, More Generous. California’s project. In contrast, competitors allocate credits competition for motion picture production is on a first-come, first-served system or simply as increasingly coming from outside the United States. an uncapped entitlement. Additionally, California In particular Australia, Canada, and the United tends to have more requirements and restrictions Kingdom have tax credits and incentives that are on the use of tax credits than other competitors. more generous than most similar incentives in the Although elective refundability is available from United States. As a result of these incentives and 2025, California’s version does come with more generally lower baseline costs (such as wages), restrictions, as discussed above. California is also these countries have gained some market share at the only program in our comparison that does not the expense of the U.S. in recent years. allow any so called “above-the-line spending,” such Structure of California’s Incentive Differs as wages for directors, writers, and actors, to count From Main Competitors. There are a few notable toward expenditures for credit purposes. Finally, elements of California’s tax credit that differ from California and New York’s programs tend to stand some of its main competitors in the industry (New out as having the most additional requirements York, Georgia, New Mexico, Canada, and the such as diversity and workforce development United Kingdom). California is the only state that plans, although the tax credit programs outside has an explicit competitive element to its tax credit, the U.S. that we analyzed do have cultural tests as it ranks projects using a formula that weighs the relating primarily to hiring a certain number of local wages that will be generated by a production versus crewmembers and/or executives. 6 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET ECONOMIC ANALYSIS OF FILM TAX CREDITS Good Evidence That Tax Credits Increase Weak Evidence That California’s Tax Credit Production Activity. A key fact about the modern Benefits the State’s Economy Overall. While the film and TV industry is that production is relatively film tax credit likely increases the size of California’s mobile. Although California has an agglomeration film industry, a much more difficult question to of infrastructure and skilled workers, production answer is whether it grows the state’s economy as facilities are present in most states that offer a a whole. There is currently no compelling evidence production incentive, and talent/equipment can be to suggest that film tax credits have a positive easily transported. When not bound by physical effect on the size of the state’s economy overall, constraints, financial incentives are more likely to after considering two important offsetting factors. be salient for location decisions. Existing empirical First, since the credit results in reduced state evidence on the effect that tax credits have on revenues, in the absence of the credit, additional production location is not watertight but does revenue could have been used for another purpose, suggest that there is a meaningful relationship. which may have an equal or even larger effect A previous LAO analysis of the early years of on the state’s economy. For example, estimates California’s tax credit estimated that two-thirds of of local employment multipliers, which attempt the projects that were allocated a tax credit would to measure the total increase in local jobs due to have filmed in another location had they not been investment in specific industries, find that motion awarded a credit. Academic research has found picture, video, and sound recording have roughly (1) a positive relationship between states that average multipliers compared to other sectors. have film tax credits and production activity, and Second, increases in motion picture production (2) offering a tax credit does increase the likelihood activity due to incentives may partially replace other of a production choosing to locate in that state. economic activity. Labor and resources used on tax Spending Associated With Projects Allocated credit productions may have been used on other Tax Credits Slightly Increases Size of Film productions or in other industries and, therefore, do Industry. California’s film tax credit likely increases not necessarily represent new economic activity. the size of the state’s motion picture and sound State Incentives Typically Do Not Pay for recording industry by a few percent. CFC reporting Themselves. Film tax credits generally have a shows total expenditures associated with projects negative overall effect on state revenues. Evidence receiving a tax credit have averaged about from academic research and state evaluations in $2.5 billion per year over the three most recent places such as Georgia and New York find that fiscal years. Relative to the gross domestic product every $1 of credit allocated returns significantly less of California’s motion picture industry in 2023 of than $1 in state revenue. One notable outlier to this $54.4 billion, this represents a little under 5 percent pattern is a report from the Los Angeles County of the sector. This, however, overstates the effect Economic Development Corporation, who claim of the credit on the size of California’s industry, as to find a small fiscal benefit associated with the some productions receiving credits would have film tax credit. The Los Angeles County Economic been made in California anyway. Further adjusting Development Corporation estimates, however, very for this, the increase in the output of California’s film likely are overstated. These estimates ignore some industry associated with the tax credit decreases of the important offsetting factors discussed above, to around $1.5 billion, or just under 3 percent. specifically that some productions receiving the As discussed next, this should not necessarily credit would have filmed here anyway and revenues be interpreted as increasing the total size of the lost to the film tax credit could have been used to state’s economy. fund other economically beneficial programs. www.lao.ca.gov 7 2025-26 BUDGET GOVERNOR’S PROPOSAL Increase the Credit’s Annual Cap From available for the CFC to allocate to $750 million $330 Million to $750 Million. The Governor’s starting in 2025-26. Budget proposes to raise the amount of tax credits ASSESSMENT Proposal Would Position California’s expenditures growing faster than revenues. Given Incentive Among Most Generous. Among these projected deficits, the Legislature should states with caps on credit allocations, California be cautious about making new commitments would pass New York ($700 million) for the largest which would widen the gap between revenues program under the Governor’s proposal. Although and expenditures. several states and countries have uncapped Recent Trends Raise Concerns About programs, California would still be among the Long-Term Position of Hollywood. California’s largest in terms of credits allocated due to its size motion picture industry is facing headwinds. relative to other markets. Increased competition from places with lower labor Program Expansion Is Not Justified on costs and generous incentives, particularly outside Economic Development Grounds. As discussed the United States, combined with technological above, there is little justification for the claim that progress that has further decreased the need film tax credits increase the size of the economy to be located in a specific location has led to a overall. More broadly, research suggests that noticeable decrease in market share over the last industry subsidies, such as the film tax credit, decade. While not there yet, at some point, further rarely are effective at achieving broader economic deterioration of the state’s market share could pose development. Therefore, without rigorous evidence a risk to California’s place as a center of the film to the contrary, we are skeptical that further industry, potentially eroding the state’s competitive expanding California’s credit will buck this trend. advantage in this area. Revenue Losses Coincide With State’s Tax Credit a Valid Tool for Preserving Expected Operating Deficit. The administration Hollywood’s Market Share. Despite sizeable estimates the total revenue losses from the windfall effects, we view the film tax credit as Governor’s proposal to be $438 million over the being reasonably effective at increasing production next four years, reaching $209 million in 2028-29. activity in California. Since the credit is consistently As discussed in our Fiscal Outlook, beginning oversubscribed, adopting the Governor’s proposal in 2026-27, the state faces future operating would result in the state’s market share being deficits of $20 to $30 billion per year due to state higher than if no action is taken. FINAL CONSIDERATIONS Response to Proposal Should Depend on worldwide production, but likely would not result What Goal Legislature Intends to Achieve. Based in economic benefits to the state as a whole. If the on our assessment above, increasing the annual Legislature views maintaining California’s market cap on the film tax credit to $750 million would share of the film industry as a high priority and an somewhat increase the size of the motion picture end in itself, then the Governor’s proposal would industry in California and help maintain its share of help achieve that goal. 8 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET If Acting to Protect Hollywood’s Market Owens, Mark F., and Adam D. Rennhoff. “Motion Share, Explicit Targets Could Help Inform picture production incentives and filming location Future Expansions and Improve Fiscal decisions: a discrete choice approach.” Journal of Oversight. If the Legislature wants to use tax credit Economic Geography 20.3 (2020): 679-709 expansions to protect the film industry, establishing Patrick, Carlianne, Peter Bluestone, Federico more explicit benchmarks about what constitutes Carvajal, Nadia Farooq, and Kshitiz Shrestha. “Tax protecting the industry could help improve Incentive Evaluation: Georgia’s Film Tax Credit Tax fiscal oversight of the credit. Going forward, the Incentive Evaluation.” Georgia’s Film Tax Credit effectiveness of the film credit, and the need for Georgia Department of Audits and Accounts. (2023) future changes, could be informed by comparing PFM Group Consulting LLC. “Economic Impact the state’s actual market share to the desired of Tax Incentive Programs.” New York State market share. Department of Taxation and Finance. December 30, 2023. REFERENCES ProdPro. “2025 TV & Film Outlook Report.” Bivens, Josh. Updated Employment Multipliers January 30, 2025 for the U.S. Economy. 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Button, Patrick. “Do tax incentives affect Tax and economic development lessons from state business location and economic development? motion picture incentive programs.” The American Evidence from state film incentives.” Regional Review of Public Administration 48.1 (2018): 33-51. Science and Urban Economics 77 (2019): 315-339. Thom, Michael. “Time to yell “cut?” An evaluation Button, Patrick. “Can tax incentives create a of the California Film and Production Tax Credit for local film industry? Evidence from Louisiana and the motion picture industry.” California Journal of New Mexico.” Journal of Urban Affairs 43.5 (2021): Politics and Policy 10.1 (2018). 658-684. Thom, Michael. “Do state corporate tax Kline, Patrick, and Enrico Moretti. “People, incentives create jobs? Quasi-experimental Places, and Public Policy: Some Simple Welfare evidence from the entertainment industry.” State Economics of Local Economic Development and Local Government Review 51.2 (2019): 92-103. Programs.” Annual Review of Economics 6:629-662 Workman, Alec. “Ready for a close-up: The (2014) effect of tax incentives on film production in Moretti, Enrico. “Local Multipliers.” American California.” Economic Development Quarterly 35.2 Economic Review 100 (2): 373–77. (2010) (2021): 125-140. www.lao.ca.gov 9 2025-26 BUDGET 10 LEGISLATIVE ANALYST’S OFFICE 2025-26 BUDGET www.lao.ca.gov 11 2025-26 BUDGET LAO PUBLICATIONS This report was prepared by Rowan Isaaks, and reviewed by Brian Uhler and 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