Despite the large amount of money Gov. Gavin Newsom (D-CA) is throwing at Hollywood, California’s newly expanded tax credit program for film and television production likely won’t be the best bang for the Golden State’s buck.
California is now offering an annual $750 million in tax credits to entice in-state production, Newsom announced earlier this month when he signed the bill into law. That amount is more than double what was previously offered. Newsom’s office hailed the legislation as an effective means to boost the economy and create jobs.
However, an economist says the increased incentives won’t revive the struggling entertainment industry.
“The last several billions of public dollars for incentives were supposed to ‘save Hollywood’ and evidently failed,” Michael Thom, a professor at the University of Southern California’s Sol Price School of Public Policy, told the Washington Examiner. “Why would this time be any different?”
In March, Thom provided written testimony to a California state Senate committee on Newsom’s proposal to expand the film tax credit. The professor said it won’t be a net positive for taxpayers.
Through his own research, he concluded that the “incentives fail to stimulate enough economic activity to justify their substantial cost.” In his testimony, he cited several peer-reviewed studies conducted by himself and other professors showing that the incentives produce little economic return.
In one study, Thom found that 23 states concluded they lost money on their film incentives.
“The evidence is consistent and clear that increasing tax incentives for film and television production to three-quarters of a billion dollars annually will only worsen the state’s budget situation,” he wrote. “Simply put, California cannot afford the existing incentive, much less a substantial expansion to it.”
California faces a $12 billion budget deficit for fiscal 2025-2026. Even though the expansion of the tax credit program was part of a larger budget deal to close the deficit, one report suggests that the incentives are unlikely to lead to massive economic growth.
Conducting a nonpartisan analysis of the current budget, California’s Legislative Analyst’s Office found little evidence suggesting the state’s overall economy would substantially benefit from the tax credit.
“Research suggests that industry subsidies, such as the film tax credit, rarely are effective at achieving broader economic development,” the report released in February concludes, citing research from Thom and others. “Therefore, without rigorous evidence to the contrary, we are skeptical that further expanding California’s credit will buck this trend.”
Despite no notable economic benefit, the tax credit would slightly increase the film industry’s size and boost production activity in the state.
The California Film Commission disagrees with the report’s findings, insisting the tax credit does provide a statewide economic benefit.
“California’s film and TV tax credit is a targeted jobs program that generates billions in spending and supports over 200,000 middle-class jobs,” an agency spokesperson said in a statement shared with the Washington Examiner. “It keeps production here, sustaining small businesses and local economies statewide — not just in Hollywood.”
Despite its critiques of the tax credit, the LAO recommended that the state legislature “consider adopting the Governor’s proposal only if the Legislature views maintaining California’s market share of the film industry as a high priority and an end in itself.”
Given the legislation’s passage, it seems the Democrat-controlled California legislature thought the $750 million film tax credit was a high enough priority. The bill had a few detractors, however.
Notably, only two Republicans, state Sen. Roger Niello and state Assemblyman Carl DeMaio, voted against the expanded tax credit.
Niello argues that the Newsom administration should not prioritize film subsidies when it is already facing a $12 billion deficit.
“California’s budget is not limitless, and a good program should not be measured by how fast it’s depleted,” he wrote in a column for the Hollywood Reporter.
The state senator also notes how California is deeply mired in regulations and taxes, which make the state “a challenging place to do business.” The film tax credit is a distraction from “these deeper structural issues,” he says.
“It’s a way of saying, ‘We know it is expensive to be here, so here’s a tax break to help.’ That is a definition of damage control,” Niello wrote.
Agreeing with his Republican colleague in the state legislature, DeMaio says California’s high labor costs and stringent union regulations are the main reasons why film and television productions are fleeing the state.
Many businesses across all industries are indeed leaving California, which is tied with Nevada for the highest unemployment rate in the nation, not including Washington, D.C.
“Many jobs overall have left and continue to leave California,” Thom said. “You can chalk that up to high taxes, high housing costs, burdensome regulations, high labor costs, and average, at best, public services. That impacts all industries, not just entertainment.”
Meanwhile, Republican state Assemblyman Tom Lackey voted for the bill because he hoped it would keep jobs in the state.
“This isn’t about the glitz and glamour of Hollywood. This is about protecting working families in my district whose jobs depend on this industry,” Lackey, who represents the 34th State Assembly district, told the Washington Examiner. “This assistance will keep paychecks flowing and will prevent production from moving out of state.”
Lackey previously said the bill wouldn’t be enough to save Hollywood, according to the Hollywood Reporter. Nonetheless, he believes it’s essential to make California more competitive with other states and nations that may have more generous incentives.
New York has one of the most competitive tax credits in the United States, capped at $800 million per year, including a separate $100 million for independent films. And Texas is rapidly becoming a major player in the film and television industry after the Lone Star State approved a tax credit fund that distributes $300 million to qualifying productions every two years until 2035.
Overseas, the United Kingdom and Canada are leading destination stops for filmmakers looking to reduce their tax burden.
California’s $750 million tax credit program comes against the backdrop of Hollywood still reeling from major disruptions, including the 2023 actor and writer strikes and the raging Los Angeles wildfires from earlier this year. Newsom hoped the program would help offset the effects of these disruptions.
Days before the governor approved the expanded tax credit, the California Film Commission announced that at least 48 new projects will be shot across the state. This move is projected to generate $664 million in economic activity and hire 6,500 cast and crew members.
The California Film Commission claims the film subsidies it manages are necessary to maintain California’s global standing in the entertainment industry.
“The newly expanded program is a key part of keeping it that way, especially given the global backdrop of competition for film and television production,” a spokesperson for the commission said. “It secures below-the-line jobs, supports local businesses, and ensures the entire production ecosystem continues to thrive in California for years to come.”
The state agency shared an independent study from the Los Angeles Economic Development Corporation showing the tax credit generating $24.40 in economic output, $8.60 in wages, and $1.07 in tax revenue for every $1 allocated. The study, published in March 2022, also showed the tax credit returning $961.5 million in tax revenue to local and state governments over five years.
The LAO challenged that study, pointing to other research concluding that each tax credit dollar results in 20 cents to 50 cents in state revenue instead. The office often presents a more cautious approach in its assessments of the film tax credit, compared to the Newsom administration.
So does Thom, who questioned the LAEDC’s conclusions in his aforementioned written testimony. The public-benefit nonprofit corporation similarly disputes Thom’s methodologies found in his various studies. However, the difference between their research is that Thom doesn’t receive funding from the entertainment industry or its lobbyists. The LAEDC’s financial ties to the sector call into question its favorable findings.
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Thom believes the possibility of bias is a larger problem in economic literature written by people working in Hollywood.
“A few years ago, a self-described ‘consultant’ published a peer-reviewed study that argued the incentives were a net positive,” he said, referring to a 2021 article authored by a Walt Disney Company manager named Alexander Workman. “It turned out that the ‘consultant’ works for Disney and, before that, had an internship with the Motion Picture Association. Imagine that!”