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California Boost: Will Tripling Tax Credits Work?

The news that California will more than triple the size of its tax credit program for movie and TV production was met with words of praise from crew members and studio reps, and pledges of  new jobs from politicians.

Will it make sure Hollywood stays in Hollywood?

California has been caught in a frenzy of other states and countries offering generous packages of tax credits, often at the expense of the traditional capital of the entertainment industry.

“It certainly should have a fairly substantial impact, especially since it is being offered to a broader array of productions,” said Paul Audley, president of FilmLA, which issues permitting and tracks production shoots in Los Angeles.

“It is very good news,” he said. “But the question exists, with states like Louisiana and Georgia and New York, is this enough to turn the tide and bring all the production back? I think that the answer is no.”

Louisiana and Georgia have been perhaps the most aggressive about luring production away, particularly big-budget feature films. Both states have no funding caps on the amount they offer each year, and they have a greater tax credit: 30%, even more in certain cases.

New York, also at 30%, and sometimes more, offers $420 million in tax credits per year, albeit with a bevy of restrictions.

The bet among California lawmakers is that even at 20% to 25%, the tax credit program’s $330 million annual allocation and other changes will be enough to convince studios and producers to bring big-budget tentpoles and one-hour dramas back home.

The legislation, which was expected to pass off the California Senate floor on Thursday or Friday, not only adds more financial heft, but expands eligibility to include big-budget features and most new one-hour series and one-hour pilots.

“Any step in the right direction is going to be welcome,” said producer Mark Johnson, whose recent credits include “Breaking Bad” and “Halt and Catch Fire.” “Compared to what we had, it sounds like it is close to a giant step.”

Even though other states offer bigger incentives, he noted, Los Angeles still has the advantage of having access to crews and equipment. Plus, he said “What producer, director, actor doesn’t want to work at home?”

Producers also have complained that the way that California has awarded credits — via a lottery system — leaves budget planning to chance. It was set up as a way to deal with the reality that the supply of the current $100 million per year in credits was far short to meet demand. In fact, California’s Legislative Analyst predicted that providing the credit to all projects that were eligible would expand the annual cost of the program by $1 billion.

The new legislation replaces the lottery with a new competitive system based on a “job creation ratio.” Applicants will be scored based on the amount of wages they plan to pay crew members, divided by the amount of tax credit, according to the latest version of the legislation. Producers who miscalculate their ratio by more than 10% to 20% face penalties, unless they can show that “reasonable cause” existed for their faulty calculation. There is more leeway, however, for independent filmmakers.

The California Film Commission will be tasked with working out the details, likely with  prospect of more work from the more complex way of awarding the credits.

Sen. Kevin de Leon said that scrapping the lottery and replacing with a job-creation system were among the “convincing arguments for the governor,” Jerry Brown, who on Wednesday finally signed on to the tax credit plan and its $330 million annual allocation. De Leon doubted that Brown would have agreed to the increased amount with the lottery system still in place. “If you left the current system the way it is, you would maybe get $200 million per year,” he said of the negotiations.

And while there are concerns that applicants, under the new job creation formula, will face a new set of complexities,  De Leon said it is part of the process. “This is not free money,” he said. “This is taxpayers’ money. If there is an extra layer of paperwork, so be it.”

Nevertheless, Joseph Chianese, senior VP at Entertainment Partners, which guides industry clients on incentives, believes that with the additional money and the expanded eligibility, the legislation is a “game changer for California, and makes California very competitive.”

Rob O’Neill, partner at accounting firm Moss Adams, said that the expansion of the program will “stop the bleeding. It will prevent those already here from leaving, or it will limit their incentive to look elsewhere.

“For people who have already established shooting locations elsewhere, in places where they have already built infrastructure around it, they will still be there.”

He said that what would make California “truly competitive” is to offer a fully transferable tax credit, which states like Georgia and Louisiana offer but are limited to independent features in the Golden State. Those credits allow producers to sell their incentives to another company that may have a greater tax liability — creating a whole cottage industry of brokering between buyer and seller.

The bigger concern may not be so much in the details as it is on whether other states will respond by upping their game. On “Which Way, L.A.?” on Thursday, a representative from the Tax Foundation, which has been critical of movie and TV tax credits, wondered if industry lobbyists will merely go to other states, point to what California has done, and urge them to sweeten their offers, too.

Moreover, the competition isn’t just from other states but other countries, like Canada and Great Britain, which have made big strides in luring production, particularly visual effects. Canada’s subsidy helped lure Sony Imageworks in June, and some VFX artists have their doubts that the California incentives will be enough to stop the flight.

California is different, some of the bill’s most visible supporters say. Rather that luring production away, the state is fighting to save it.

“We are confident, given the past experience with this tax credit, that people take advantage of it,” Los Angeles Mayor Eric Garcetti said in Wednesday. “Today, in Louisiana it is unlimited. But a bunch of people applied in California, where it is $100 million. That means they wanted to be here, and there’s a reason — The crews, whatever their logic was. We knew that it was on sound footing that if this grew, more would take advantage of it.”






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