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Staring down a $12 billion budget deficit, Gov. Gavin Newsom proposed
steep cuts to California’s health care services and public universities —
all while promising more dollars to Hollywood.

Newsom on Wednesday doubled down on his proposal to expand the state’s investment in film and television tax credits, incentives created by then-
Gov. Arnold Schwarzenegger in 2009 to boost California’s marquee industry.
If passed, the state would allocate up to $750 million each year to film production, up from the current $330 million.

Despite saying that any funding request from Los Angeles unrelated to
disaster recovery would be a “non-starter,” Newsom deemed the tax credit expansion essential to reviving an ailing industry.

“It’s on life support,” he told reporters. “We need to step things up, and
this is all part and parcel of economic recovery, economic growth.”

Newsom’s plan would also increase the amount each qualified applicant can receive, extend the credit to live action and animated series and devote
more money toward independent films.

But his proposal has drawn criticism from both Democrats and Republicans
who argue the state should prioritize essential programs in a tight budget year. Assembly Republican Leader James Gallagher of Chico called Newsom’s proposal “tone-deaf.”

“I’m not sure the rest of California will be OK with their senior
programs, their disability programs, their education programs being cut in order to prop up a regional industry,” said Assemblymember Corey Jackson,
a Moreno Valley Democrat.

Some lawmakers warned that other states could respond with even more
aggressive incentives, creating a “race to the bottom.”

“It seems eminently predictable that we will be back next year with a
proposal that says: ‘We’ve fallen behind again. I don’t know what
happened. And now we need to do more,’” said Sen. Christopher Cabaldon, a
Napa Democrat, in March.

Despite those concerns, the proposal has advanced in the state Legislature
with little resistance. Assemblymember Jesse Gabriel, a Los Angeles
Democrat who chairs the powerful budget committee, told CalMatters that
anyone seeking large funding increases this year “should stop wasting
people’s time” because there isn’t enough money.

Newsom’s proposal is different, Gabriel said, because it would expand a longstanding, tested program that would also help offset the impact of the
LA wildfires.

For Newsom, a lame-duck governor with presidential ambitions, expanding
the tax credits could please the wealthy Hollywood donors who could propel
his campaign.

But the handout can easily be portrayed as a tax break for the rich.

“The ads kind of make themselves,” said Kim Nalder, a political science professor at California State University, Sacramento. “It’s been effective
in previous years to … use (Hollywood) as an example of unserious,
privileged waste.”

Saving Hollywood
Hollywood has suffered. A “quadruple-whammy” of the COVID-19 pandemic that
shut down productions, a Hollywood writers strike, deadly wildfires and
growing production incentives from other states that lured movies out of California have decreased its nationwide share in film industry employment
from 54% in 2010 to 46% in 2023, according to the bill analysis. Film production levels in Los Angeles also saw a sharp drop-off in recent
years.

The industry is also struggling to compete globally, so much so that even President Donald Trump has weighed in, ordering a 100% tariff on overseas productions, though he has given no details. In response, Newsom has
offered to work with Trump to develop a $7.5 billion federal tax credit.

“I applaud President Trump for recognizing that we are losing a lot of
films to foreign countries, and I hope he steps up,” Newsom said
Wednesday.

The proposed state film tax credit expansion has united motion picture
studios and entertainment industry workers, but it is the unions that have
been leading the fight.

The groups backing the plan have poured at least $8.4 million into
lawmakers’ coffers since 2015, including nearly $6.5 million from the California State Council of Laborers alone, according to an analysis of CalMatters’ Digital Democracy database. Walt Disney, a top supporter, has
given nearly $750,000 to lawmakers since 2015.

Dozens of unionized workers have filled legislative hearing rooms and
spilled into the hallways as they testify in support.

“We are the thousands of artisans whose names whip by in the credit roll
at the end of the movie. Not those that appear in huge letters and fade
slowly at the beginning of the movie. We don’t go to the award shows. We
work the award shows,” said Renata Ray, representing a chapter of the International Alliance of Theatrical Stage Employees.

Nalder said that is a smart political move since labor unions hold so much political sway with Democratic lawmakers.

And the tax credit expansion “touches both the struggling workers as well
as international mega-stars,” said Thad Kousser, a political science
professor at University of California-San Diego.

Still, the funding could backfire on Newsom as he eyes a potential White
House run in 2028.

“You’ve got to think about policies’ effect on your core supporters … but
also the average voters in places like Iowa, New Hampshire, who may not
see someone who’s helping bail out Hollywood as someone taking the nation
in the direction they want to see,” Kousser said.

Do film tax credits work?
California’s film tax credit was created in response to other states’ incentives. As of last year, 37 states had similar incentives.
California’s program is often compared to the unlimited tax credit in
Georgia, a frequent destination for film production, and New York’s
incentives, which were raised last week, from $700 million to $800 million
a year.

But California’s program is unique: It is the only state to award credits
based on the likelihood of a project creating jobs and boosting the
economy. It is also one of the few states to prohibit using the tax
credits to pay “above-the-line” crews, such as directors, actors or
writers.

The nonpartisan Legislative Analyst’s Office said there is “good evidence
that tax credits increase production activity” and it could increase the
size of the state’s film industry.

That is partly because some studios choose to film elsewhere when they are denied tax incentives. Between 2011 and 2013, roughly two thirds of the applicants who did not receive tax credits in California shot out of
state, according to a 2016 report by the legislative analyst. And between
2020 and 2023, almost 60% of applicants who were denied the tax credits produced out of state, according to a 2023 report by the California Film Commission, which administers the credits.

But would the tax credit boost the state’s broader economy? Research is
mixed.

A study of California’s first film tax credit program, which used a
lottery system to award credits, found major studios that received the incentives spent and hired more in California.

Supporters of the California proposal, such as Assembly Democratic Caucus
Chair Rick Zbur, a Los Angeles lawmaker who introduced the legislation —
argue that the program “pays for itself.” They frequently cite a 2023
analysis by the nonprofit Los Angeles Economic Development Corporation
which concluded that for every dollar the state spent on the tax credits,
state and local governments collected $1.07 in tax revenue. It also said
each dollar invested led to $24.40 in economic activity and $8.60 in
increased wages.

“Every show that shoots in California supports hundreds of jobs. It pumps
money into local economies from lumber yards to restaurants, from car
rentals to dry cleaners,” said Ed Lammi, a former Sony Pictures Television executive, in an opinion piece citing the research.

The study was prepared for the Motion Picture Association, one of the legislation’s top supporters. The association has given lawmakers $168,000 since 2015, Digital Democracy data shows.

But while some studies show some evidence that filmmakers are drawn to
states with better incentives, the legislative analyst’s office and most researchers have concluded that states almost always lose money on such programs, and that the credits have little to no effect on a state’s
economic growth or its job market.

Michael Thom, a professor at the University of Southern California, wrote
to lawmakers in March that his research showed the programs generally
failed to create jobs or increase wages. “Simply put, California cannot
afford the existing incentive, much less a substantial expansion to it,”
he said.

Mike Gatto, a Los Angeles Democrat who authored the first expansion of the
film tax credit program in 2014, said he is skeptical about subsidizing
the film industry without addressing the root causes of its problems.

“It is doubtful that the amount of money that the state gives to this
industry proves to be something that we get back,” he said.

https://smdp.com/business/faced-with-budget-woes-gavin-newsom-wants-more- tax-credits-for-hollywood/

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