CA's Film and TV Tax Credits Scrutinized by Legislative Analyst's Office

The California state Capitol building - Getty -H 2016
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A new study from the state's nonpartisan analyst office questions the usefulness of the annual credit.

The $100 million in California taxes that went to subsidies for the film and television industry every year between 2009 and 2014 didn't produce the economic returns the state had been hoping for, despite being well implemented, a new study by the state's nonpartisan Legislative Analyst's Office has found.

"The annual increase in likely economic activity — typically under $1 billion per year — boosts California’s economic output by no more than a few hundredths of a percentage point," the study, released Thursday, concludes.

It also finds that one-third of projects receiving tax credits to shoot in California would have been made in California regardless, a redundancy that's known as a "windfall benefit."

Relative to other tax incentive programs, like California's research and development tax credit, which at around $1 billion a year is the largest in the state, windfalls for the entertainment subsidy are probably on the low side, study co-author Brian Weatherford tells The Hollywood Reporter.

That "would suggest that the … film tax credit program targeted the types of production vulnerable to being filmed outside the state relatively well," Weatherford wrote in the study.

California's film and TV tax credit program, which started in 2009 at $100 million a year and was boosted in 2014 to $330 million a year, was originally a defensive measure against an increasing number of competing programs that were attracting productions out of state. The programs peaked in popularity in 2010 with 40 states jumping on the bandwagon. That number is now down to 33.

"The trend right now is that states are eliminating and scaling back these programs," Joe Henchman, an analyst at the Tax Foundation, a think tank in Washington, tells THR. "They were started as a protection for one of California's main industries. I'm worried that we're still going to be spending $330 million a year on them when we no longer need the protection."

The study calls industry-specific incentives "very problematic as a public policy" and recommends staying away from them in general.

"We have, however, acknowledged that California’s adoption of a film tax credit is understandable in light of the actions taken by other states to lure Hollywood productions away from California," it goes on. "If more jurisdictions back away from their film and television tax incentives, lawmakers should consider whether California’s incentive programs should be changed or eliminated as well."

The LAO report comes on the heels of two related studies released this summer out of the University of Southern California that were likewise critical of the tax credits. Assistant professor of public policy Michael Thom found the credits had little to no effect on wage growth or employment numbers, two purported benefits often touted by the proponents of the program.

The findings ruffled the feathers of the Motion Picture Association of America, Hollywood's lobby in Washington, which put out a strongly worded statement about them earlier in September.

California's program is notable in that its credits are based on the below-the-line budget of a production, instead of the entire budget, which often includes large fees for directors, actors, writers and producers.

"We really believe that this is a middle-class program," Steve Dayan, treasurer of Local 399, told THR at an event earlier in September.