Milken Institute study: Strengths, weakness in California film tax credits

California’s film tax credit program has helped to stem the flight of movies and TV shows since it was enacted in 2009, but would be more effective with more funding and fewer restrictions on the types of projects that can qualify, a new study concludes.

The report, “Fighting Production Flight,” from the Milken Institute says California’s film tax credit -- which gives producers 20% to 25% tax credits toward qualified production expenses for films and TV shows shot in the state - has been successful in that it has been oversubscribed and has had a “demonstrable impact in arresting the decline in filmed entertainment spending and employment in the state.”

DOCUMENT: Fighting Production Flight

But the report also cites shortcomings. “The key concerns with the program are its limited funding relative to demand, the fact that it placed all targeted programs in the same application and allocation process, and the lack of long-term structural incentives that would serve to expand the program beyond its current funding and statutory limits,” the report says.

The report’s release comes as the state Assembly weighs a bill to extend funding for the film credit, due to expire next year, for another five years. However, the bill’s fate is uncertain because of the state’s budget crisis.

In the first two years of the program, more than $300 million in tax credits were awarded to 125 projects having combined direct spending of more than $2.3 billion in state with $760 million in wages paid to below-the-line crew members, Milken notes. This year, 28 projects were selected to receive funds.

The report provides further evidence of how California’s entertainment industry has been in decline. The state’s share of national entertainment employment has fallen from 4.4 times the national average in 1997 to less than 3.7 times the average now because of growing competition from other states and foreign governments that provide film tax credits and incentives. The industry’s employment in California has hovered around 160,000 for most of the decade, down from 180,000 during its heyday in the late 1990s.

An earlier Milken Institute report on film flight estimated that in 2008, if California had retained the 40% share of total entertainment jobs in North America it enjoyed in the late 1990s, 10,600 direct jobs would have been preserved and more than 25,000 indirect jobs would have been generated in the state.

In its latest study, Milken recommends several changes to improve the program, including offering tax breaks to encourage infrastructure construction, such as the development of sound stages; and making the tax credits transferable or refundable as they are in several other states, including New York. Currently, only independent films with budgets of under $10 million can be sold or transferred to a third party. Tax transfers are attractive because they allow filmmakers to cash in their credit if they don’t have a tax liability with the state.

The Milken study also recommends removing the current cap on tax credits to movies with budgets of less than $75 million, noting that bigger-budget movies create more jobs. “Removing, or at least raising, the cap could increase the rate of return on film tax incentives,” the report states.

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