California's $1.65B Tax Deal: 6 Hidden Hurdles for Producers

Courtesy of Office of Senator Kevin de Le὚n
California Sen. Kevin de Leon

The bill, which Gov. Jerry Brown is expected to sign this month, has several surprises

This story first appeared in the Sept. 19 issue of The Hollywood Reporter magazine.

California legislators, led by State Sen. Kevin de Leon (D-Los Angeles), had one goal when they approved $330 million in annual tax incentives for film and television production: to compete with New York. "All the production companies and studios said we don't have to match other states, dollar for dollar, we just have to be competitive [with New York]," says attorney Gene Erbin, who lobbied on behalf of the DGA.

But while dollars are up (from $100 million annually to a total of $1.65 billion for five years), the bill, which Gov. Jerry Brown is expected to sign this month and would take effect in July, has several shortcomings that have left some producers unimpressed:

1) California's 20 to 25 percent tax credit falls short of other states, including Louisiana, Georgia and Illinois, which offer 30 percent or more, not to mention Canada (up to 55 percent with regional subsidies), the U.K. (up to 40 percent) and Puerto Rico (up to 40 percent).

2) The Golden State only pays for production costs, while others (including Louisiana, Georgia, New Jersey and Illinois) also pay a portion of "above the line" costs, including star salaries.

3) The new law allocates about 60 percent of the credits to television, with an emphasis on attracting pilots. Those get first priority for any money left over from other areas — including films.

4) The $75 million ceiling on budgets for mega-movies might have been eliminated, but the new incentives only apply to the first $100 million spent. (However, as soon as a blockbuster qualifies as a franchise, its sequels automatically get priority funding.)

5) If a major studio overestimates the number of jobs a project will create by more than 30 percent, it can be banned from applying for credits the following year. For indies, missing an estimate by 20 percent will result in a penalty reduction in credits.

6) Applicants are required to certify that "if not for the credit," their production would not take place in California. Producers wouldn't lie, would they?