Hollywood Slams New Report Critical of California Production Tax Incentives

Warner Bros. Studios - H 2012

Warner Bros. Studios - H 2012

UPDATED: As a proposal is under consideration to extend a $100 million annual expenditure to counter runaway production, a report argues that incentives are a losing proposition.

Does California's production tax incentive system make financial sense?

As the state legislature debates an extension of tax credits designed to combat runaway production, a report by the legislative analysts office is taking serious issue with the value of the annual $100 million expenditure.

The report by analyst Mac Taylor and others says, “Even if the combined state and local tax revenue return is right around $1 for every tax credit dollar....the state government’s tax revenue return would by definition be less than $1….The credit program, therefore, appears to result in a net decline in state revenues.”

That bottom-line analysis has brought howls of protest from groups with ties to Hollywood.

“It’s frustrating because this is an industry that is quite important to the state, that we have grown here and that we're losing and we are just watching it leave,” says Christine Cooper, vp of the economic and policy analysis group of the Los Angeles County Economic Development Corporation and an author of a report that the new study criticizes

“We’re talking about incentives that are actually a net gain for the state,” says Steve Dayan, business agent for Teamsters Local 399 and a member of the California Film Commission's board. “I think this is being politicized.”

The state report issued June 13 is critical of two recent studies that both showed the tax credits boosted the state economy, created jobs and brought in more revenue than the program cost. The new report says “the net benefit of the credit program is likely less" than what the studies say and their estimate of job gains in California is “likely overstated.”

One of the studies analyzed, a 2011 report by the UCLA Institute for Research on Labor and Employment, found that for every dollar the state spent it got back at least $1.04. The new report says that is “overstated,” and in fact “it is likely that the state and local tax revenue return would be under $1 for every tax credit dollar.”

The new report faults the UCLA study and the one done by Cooper and others for failing to look at whether the money the state is spending would be better used for other programs. If that is the case, says the report, the tax credits could be “having less economic and tax net benefits than shown” in the study.

That may be true, counters Cooper, but she says that is “rarely” something that would be considered. “We’re in a budget shortfall,” says Cooper, “so it may never apply to anything except paying off some of the debt that we’re in; so it’s very typical not to take that into account.”

The new analysis also raises questions about how much film and TV activity would stay in the state even if there were no tax credits. The LAO points out that after a period of decline starting around 2007, the number of permit days has actually been rising recently.

That may be true, but the assumption is false, says Dayan: “What’s happened is that motion picture feature films like Iron Man, big feature films, have been replaced by reality television and low budget independent movies. Those kind of movies stay here because they can’t afford to pay the housing and per diem (if they go out of state) and they can’t compete for crews in places like Louisiana where there are lot of bigger fish.”

The new report also says the studies analyzed don’t take into account that even when production goes elsewhere, there often is still some work and benefit that stays in California. “I love that conclusion,” says Cooper sarcastically. “But I would still rather have it be filmed here than in Louisiana or New Mexico.”

They legistlative office also raises what it calls “crowding out effects,” meaning if facilities were not being used for productions that benefit from tax credits, and if workers were not engaged on those productions, they might be employed by others who do not get such state subsidies.

“That is very odd to me,” counters Dayan. “That somehow we don’t have a deep enough crew base here? Or facilities? If you call Warner Bros. today and ask how many stages they have available, you’re going to find more stages available than they have had in a long time.”

The analysis also raises questions about assumptions made that film-related tourism benefits the state, meaning after people see something on the big or small screen they then come to California as tourists to experience it. They suggest a lack of tax credits “would likely not result in significant changes in net benefits in most years.”

“That is crazy,” says Cooper. “People come here for the Walk of Fame in Hollywood, to see the studios. If we lose the industry, we’re going to lose significant economic activity.””

This bottom-line analysis comes at a time that California is suffering from major budget problems and is cutting many other programs. While entertainment industry boosters see clear benefits from supporting the movie and TV industries, there are those from other areas and other industries who want to see the tax credit money taken away or in some cases allocated elsewhere. So the threat to the program appears very real.

On Friday, Ben Golombek, communications director for Assemblyman Felipe Fuentes, author and a primary backer of the Assembly version of the five-year tax credit extension legislation, said: “We’re disappointed that in their haste to compile a brief summary, the LAO chose to criticize the methodology in the LAEDC and UCLA reports, but didn’t take the time to actually contact the distinguished economists at either the LAEDC or UCLA to ask about the thorough months-long process that each undertook in compiling their reports.” 

Dayan was much more blunt about what he sees as a lack of context in the state analysis: “What they don’t mention is we have a jobless rate in this state 40 percent above the national average. If you look at the cost per job created under these incentives, it’s around $5,000 per job, which when you compare it to other states or federal programs is really cheap.”