California Film & Television Tax Credit: Defending the State from Runaway Production

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For more than a decade, California has been steadily losing its once undisputed dominance of the film and television production industry. From 2003 to 2009, California’s share of feature film production was cut nearly in half. In San Francisco alone, film and television production employment dropped 43 percent between 2001 and 2006.

But in 2009, California enacted a Film & Television Tax Credit Program to help defend the state from runaway production. Guess what happened next?

In 2010, the decline in on-location feature filming in L.A. reversed after four straight years of decline. Feature film (movie) production days were still down 62% from their high in 1996 (this is up slightly from its record low the year prior). Had incentivized films not accounted for 26% of all Feature activity, 2010 would have been the worst year on record for the L.A. region. The California Film & Television Tax Credit is not a “tax loophole.” It is California’s only means of protecting its vital economic engine — the entertainment industry.

It’s time for California to wake up. The state is under attack. In the late 1990′s, Canada employed generous film tax incentives as an economic weapon, fighting hard to capture one of the planet’s most valuable and prized industries: the U.S. motion picture and television industry — ”Hollywood.”

Out-of-state tax credits had a devastating effect on California as film and television productions were sucked out of the state economy at astonishing rates. Producers would have been fiscally irresponsible to ignore the cost savings they could achieve by filming in Canada. In a few short years, the number of Canadians employed by runaway productions doubled from 25,500 to over 53,000 as spending soared. The spectacular success of Canada’s effort was quickly copied around the world and today, more than 44 U.S. states also compete to get a piece of the pie.

Each year, billions of dollars in film production spending is enjoyed by California’s competitors. Just six locations (Vancouver, Toronto, Louisiana, Georgia, New Mexico, Massachusetts) that offer film incentives captured $3.2 billion in direct production spending in 2010 alone. Historically, much of that spending occurred in California.

In the past, many factors contributed to runaway production and, regrettably, this has blinded many in the state to the current reality. Since the late 1990′s, film incentives have been the predominant factor causing runaway production. For example, the year before Louisiana enacted its inventive (2002), production spending there was just $3.5 million; in 2010, it was over $674 million, which represents a mind blowing 19,000 percent increase.

Indeed, in 2005 one Canadian official told Canada’s National Parliament that the tax credit system they devised was a “simple and efficient system” of attracting foreign productions, and if Canada wanted to attract more, they “would just have to give a 50 per cent tax credit on labor, and nothing would be filmed in Hollywood, everything would happen here.”

After a decade of relentless attack from film incentives in other states and nations, California’s signature industry is decimated:

  • In 2003, over 66% of studio feature films shot in California. In 2011, that number had dropped to less than 40%.
  • In 2009, the worst year on record, on-location shooting days for feature films in Los Angeles dropped nearly 65%.
  • In 2005, 79% of new network one-hour dramas filmed in California. In 2012, only 8% (just two of the 23 new shows) filmed here.
  • From 2004-2011, California lost $3 billion in film crew wages to other states and nations offering film incentives, according to Entertainment Partners.
  • For many IATSE union Locals in Greater Los Angeles, the unemployment rate is 30% or higher, which is higher than unemployment during the Great Depression.

According to the Milken Institute, since Canada enacted the first tax credit program in 1997, now copied in roughly 40 states and dozens of nations, California has lost 36,000 jobs as a result.
The direct cause of runaway production requires a specific means of defense. Against rival jurisdictions’ film incentive assault, California’s only means of defense is the California Film & Television Tax Credit.

Some critics of the program claim it is a wasteful handout to productions that would “shoot in California anyways.” That such critics would actually believe most productions would shoot in California anyway shows a frightening disconnect from reality.

In fact, as a UCLA study recently confirmed, of the projects that never got California credits but were ultimately produced, 91.6% of their combined budgets were spent in other states — all of which offered their own film incentive programs. The most important kind of productions (large budget feature films in particular) are not shooting in California like they used to. The bountiful flood of film production California enjoyed for decades has slowed, to scarcely a trickle.

Further, many of the people who oppose having a film incentive in California base their criticism on facts about incentive programs in other states, NOT California. The extension and expansion of California’s film incentive is not a matter of want, but of need.

Consider just one of our competitors. To lure major films to Louisiana, the state subsidizes 30-35% of ALL production costs, which includes “below-the-line costs” for off-screen labor and “above-the-line costs” for things like star salaries. Their incentive needs that kind of firepower because without it, productions wouldn’t film there unless the plot called for it. In other words: on a level playing field, Louisiana can’t compete with California. Indeed, no one can.

Unlike California, Louisiana’s program is not an actual tax reduction for film producers. Instead, since production companies do not have Louisiana tax liabilities, they can sell the credits to wealthy Louisiana residents or get a cash refund directly from the State of Louisiana. Film incentives operate as “corporate welfare” in places like Louisiana, not California.

In Louisiana, the cash refund option operates under a buy-back provision. For many years, the price Louisiana paid to producers for tax credits was 74-cents on the dollar and virtually no one elected to sell their credits back to the state when they could get 85-95 cents on the dollar by selling them to a broker. But in 2009, Louisiana began paying 85-cents on the dollar and the buy-back part of the program has taken off. By 2012, almost half of Louisiana’s film credits were paid out in cash directly from the state coffers.

With its incentive, California can level the playing field for a fraction of what others offer. The California incentive is just 20-25% of “below-the-line” costs only, which are typically 60% of the total budget. And, perhaps most importantly, California’s film incentive does not function like a cash subsidy as it does in places like Louisiana, New Mexico or Canada… [In California] only independent productions can sell their credits.

Californians need to stop listening to empty rhetoric that portrays the California Film & Television Tax Credit as a form of wasteful “corporate welfare” and reject baseless claims it was influenced by campaign donations from Democrats in Hollywood. Finally, lawmakers on both sides of the aisle agree on at least one thing: Film Works for California.

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