California Legislative Analyst: Production Tax Credit Does Not ‘Pay for Itself’

Califronia Tax Incentives Sacramento Capitol
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California’s Legislative Analyst released a report on Wednesday that casts a lukewarm view of the state’s production tax incentive program, even though it does not make recommendations on proposed legislation that would expand the credits in the face of intense competition.

While the report says that there are reasons for concern about runaway production, with a decline in the state’s share of jobs in movies and TV shows, it challenges claims that the tax credits doled out by the state provide equal or greater returns to the state treasury as a result of  increased economic activity generated by production spending.

The potential for a return-on-investment for the state has been a selling point of advocates for expanding the program, who argue that it won’t have a negative effect on the California’s bottom line in the form of lower tax revenue.

At the same time, the report gave credence to some state lawmakers’ urgency in calling for renewing and expanding the tax credit program, noting that California’s share of production jobs declined to 50% in 2012, from 65% in 2004, with losses in categories like big budget features and network dramas not covered by the credit. And while the analyst had reservations about tax credits as a matter of public policy, the report said that there were “reasonable considerations to extend or expand” the credit, including the fact that entertainment is a flagship California industry providing high-paying jobs, and that it may be necessary to “level the playing field” to compete with other states.

“It might be difficult for California not to provide subsidies and still maintain its leadership position in this industry,” the report states.

Nevertheless, the report challenges other studies that have been bullish on the amount of economic activity generated by the credit, calling them “overstated.” It says that such studies do not calculate the “opportunity cost,” the potential that other uses of the credit outlay could have a greater economic benefit.

“If a film project was attracted to the state because of the tax credit, and would not have otherwise filmed in the state, the economic benefit of the film is calculated based on how its spending trickles through the economy — a phenomenon called the multiplier effect,” the report says. “However, the existence of a multiplier effect does not imply that the subsidy generates economic gains that are greater than its costs.”

The report singles out a study from the Los Angeles Economic Development Corp. that every $1 of tax credit returned $1.11 in state and local revenue; the LAO says that the calculation “overstates” the return to state government because the figure includes local tax revenue, fees from services and payments for unemployment benefits. The analyst concludes that each $1 in state tax credits returns $0.65 to the state, $0.35 to local governments, $0.08 in state and local fees and $0.03 in federal and state social insurance taxes like Social Security.

The report comes as state lawmakers are weighing legislation to expand the state’s $100 million-per-year tax incentive program, including provisions that would make movies with budgets over $75 million eligible for the credit and another that would expand the incentive to almost all types of one-hour drama series.

Supporters expressed satisfaction that the report recognized that production jobs were slipping away from the state and saw that it was “reasonable’ to extend and expand the current program.

The co-authors of legislation to expand the state’s incentive program — Rep. Raul Bocaegra and Rep. Mike Gatto — released a statement saying that the report “confirmed that this flagship industry is at risk and that competition from other states and countries is both an aggressive and credible threat to California’s economy.”

They also challenged the notion that the credit did not pay for itself. They noted that the study still showed that “for every dollar expended, there is a dollar for dollar return to state and local government. Those numbers do not take into account added revenue, such as generated tourism.”

The legislative analyst has been critical of the credit in the past. In 2012, as the state was weighing a renewal of the program, the Legislative Analyst’s Office released a report that also challenged the returns from a tax credit. Lawmakers renewed the incentive anyway.

The most recent report was put together to provide background for lawmakers, with a more comprehensive study expected in late 2015.

Its general concern is that the state’s incentive program, along with that of other states, is not good public policy, with the competition between states representing what it terms a “race to the bottom.” It characterizes subsidies as promoting “unhealthy competition among states.”

“Were California to increase its subsidy, it is possible that competitors in other states and abroad would further increase theirs as well,” the report says. “This sort of competition can be characterized as a race to the bottom. It is unclear how these sorts of competitions end.”

A chief complaint of California’s incentive program is that it is done by lottery, which was set up because demand from eligible projects far exceeds the money available. Producers, however, say it is difficult to plan projects without knowing whether they will receive the credit. The analyst said that doing away with the lottery — and expanding the credit to all projects that are currently eligible — would increase the cost of the program by about $1 billion.

The report also warns lawmakers that they are facing limitations in collecting data to evaluate the effectiveness of the tax credit, and that the legislature may have to decide whether to renew or expand the program “without the benefit of conclusive evidence.”

The report was prepared by Brian Weatherford and reviewed by Marianne O’Malley. The Legislative Analyst’s Office provides non-partisan fiscal and policy advice to the legislature.

The full report is here.