California Film & TV Tax Credit Success Undeniable

Posted on June 28, 2011 by

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A brand new report from the Los Angeles County Economic Development Corporation (LAEDC) shows California’s Film and Television Tax Credit is an unparalleled performer.  The study estimated the economic impact of the first 77 productions approved for the initial tax credit allocation of $198.8 million for 2009/10 & 2010/11.   The study’s authors examined the budgets of nine productions of differing size and type and extrapolated the findings to the broader group of incentivized projects.

For every $1 million in qualifying expenditures, the nine productions will generate $3.9 million in economic output and support 21 jobs with labor income of $1.4 million. Each $1 million of qualifying expenditures will result in $207,100 in state and local taxes…

The total qualifying expenditures for all 77 productions is $970.3 million. Extrapolating from the results of our sample of productions, we estimate that the full slate of qualifying productions will generate more than $3.8 billion in economic output in California and support 20,040 jobs with labor income of almost $1.4 billion. Total state and local tax revenues are estimated to reach $201 million.

To be fair, since California’s film incentive is funded with state tax revenue rather than local tax revenue, the program is not “paying for itself” in terms of returning to the State’s tax coffers an equal amount as allocated, but it does appear to be coming very close to breaking even.  On the other hand, the report excludes “income taxes paid by producers or talent” who earn a share of the profits after a projects is released and appears to exclude the profits earned by firms (from catering companies to ad agencies and the major studios themselves) that will be subject to state corporate taxes.  Also excluded were the economic impacts from ancillary “follow-on” production spending facilitated by the incentive and film-related tourism to places like Universal Studios and the Chinese Theater, which is impossible to measure accurately but foolish to ignore.  The following chart shows the sources of tax revenue from the economic activity the incentivized projects generated, but it does not indicate how much tax revenue is attributed to local taxes versus state taxes:

The report  is consistent with the findings from a 2005 LAEDC report  on the cost of runaway production :

Almost every study on the economic impact from film incentive programs across the nation have unanimously shown film incentive programs do not pay for themselves and, at best, generate enough new revenue to offset between 14 to 30-cents of each dollar spent on the program.  Given this virtually universal finding for state film incentive programs from New Mexico to Louisiana to Massachusetts, how can the results for California be so different?  Fortunately, perhaps in anticipation of attacks from skeptics, the LAEDC report provides a detailed explanation:

California’s rich history in film making has allowed the development of a deep pool of talented workers in the variety of occupations needed to produce a motion picture or television series. This makes it possible for the industry to find suppliers for almost all its needs within the state, keeping this economic activity here. Almost 92 percent of all the goods and services purchased by the industry are sourced within the state.

Indeed, the LAEDC report shows California was the beneficiary of nearly 60% of the $82 billion in economic activity generated by the motion picture and video industries in the entire U.S. in 2009:

In addition, the report lists four specific reasons California’s film incentive is much more cost effective, relative to other states’ programs:

First, the economy of California is large and diversified, allowing households and businesses to obtain most of the goods and services they need within the state, meaning there is less leakage of purchases out of the state and the dollars circulate within the state.

Second, the motion picture and video industry itself is complex and comprehensive in California. Because the supply linkages are well-established, the industry can find all production facilities and requirements within the state, although lower costs elsewhere can impel the purchase of goods and services from outside of California.

Third, the California tax incentives are less generous than those offered in other states – in some cases, substantially less. With a deep talent base and skilled workers at all levels and stages of production, and a full range of supporting infrastructure and companies, California does not need to offer incentives above those (or even equal to those) offered by other states. Instead, smaller incentives that keep California “in the game” can be sufficient, as suggested by the response to the current program.

Fourth, California’s steeply progressive income tax gives the state the ability to recoup its tax credit quickly. Similarly, California’s high sales tax rate will generate more.

Also making California’s film incentive more efficient and cost effective is the fact that above-the-line expenditures generate economic activity but do not qualify for the credit:

A close inspection of the production budgets and impact results shows that the overriding factor influencing this rate of return is the proportion of the budget that is spent above-the-line. Above-the-line spending generates economic activity but does not qualify for consideration under the tax credit program, so in essence this spending comes at no cost to the state.

Conversely, one of the aspects of California’s incentive program that some consider to be a major shortcoming is the $75 million production cap.  This means larger feature films (those that pump the most money into the economy) with budgets greater than $75 million don’t qualify.  These productions are excluded and are less likely to shoot in state as a result.

The current tax credit program is limited to productions with budgets under $75 million. This is a policy which encourages larger budget productions to seek locations where tax incentives are not constrained by budget.

Larger productions, however, have commensurately larger impacts. If the program instead were to allow credits to a certain limit to be applied to productions of any size, this may encourage some productions to stay in California. The state would collect tax revenues on all activity associated with the production but would be liable only for tax credits up to the specified limit.

If this change were made to the program, the LAEDC estimated a $175 million film would generate $1.78 in state and local taxes for each dollar of credit allocated:

Thus for a production budget of $175 million, if a 20 percent tax credit were allocated on qualifying expenditures up to $75 million, the state will pay $15 million in tax credits but state and local governments will receive $26.7 million in tax revenue. In other words, $1.78 in taxes would be generated for each dollar of tax credit allocated.

In the hypothetical scenario above, the effective rate of the credit would be just 8.5 percent, which is less than even the 9.75% sales tax rate in Los Angeles County — talk about ROI!!

In the final analysis, the LAEDC report quells a potential debate about whether the California Film and Television Tax Credit is “revenue positive”, neutral or negative by framing the incentive program as a worthwhile investment to keep a critical industry that has paid billions in tax revenues over its 100 year history.  Hopefully, it will continue to do so for 100 more.

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