California has tried using carrots to encourage film and TV productions to hire a diverse workforce.

Now, for the first time, it’s getting out the sticks.

Under a proposal from the governor’s office, productions that fail to meet their diversity goals will lose 4% of their tax credit allocation.

The provision is part of a five-year extension of the state’s $330 million tax credit. Productions that receive the credit will be required to submit a diversity “workplan,” under which they must commit to hire a crew that is “broadly reflective” of the state’s demographics.

If they fail to make a good faith effort to meet their hiring goals, or fail to submit a plan, the California Film Commission will deduct 4% from their tax incentive.

California has had an incentive program for film production since 2009. It was originally intended to fight “runaway production,” as other states were luring jobs away with their own incentives. But in the last two years, lawmakers have also begun to see the program as leverage to diversify the entertainment industry, which is much whiter than the state population.

In 2021, the state created a new $150 million program to encourage the construction of soundstages. That bill included a provision, spearheaded by Assemblywoman Wendy Carrillo, that gave a 4% bonus for productions that met diversity goals.

The state’s $330 million program is set to expire in 2025. Last year, state lawmakers began work on extending it to 2030. At the time, lawmakers planned to adopt the diversity bonus from the soundstage credit. But that legislation stalled in August.

The latest version, introduced by the governor’s office in February, drops the bonus. Instead, the bill language provides for the 4% penalty if diversity goals are not met.

The proposed penalty is much smaller than the bonus would have been, as it is applied only to the amount of a credit allocation, not to the full amount of eligible production spending.

The Motion Picture Association has not objected to the proposal, which remains in an early stage in the legislative process.

Under the proposed language, productions are required to adopt a plan to make their workforce reflect the state’s population in terms of “race, ethnicity, disability status and gender.” In the earlier versions of the law, disability status was not included, which led to pushback from disability advocates.

Gov. Gavin Newsom has also proposed making the credit refundable, which would allow studios that don’t have state tax liability to instead take payment in cash. A report on Tuesday from the state Legislative Analyst’s Office stated that the administration expects that change will cost the state about $200 million.

The LAO has traditionally been skeptical of the program, citing research that indicates the return on investment is far lower than supporters claim.

In its latest report, the office concluded that California’s entertainment industry is probably “a couple percentage points” larger than it would be without the tax credit program.

But it said that it was not clear that extending the program would expand the overall economy.

“Instead, the film tax credit’s most likely impact appears to be increasing the motion picture industry’s share of California’s economy,” the report concluded. “Given this, how the Legislature assesses the Governor’s proposal should primarily depend on how much it prioritizes the importance of maintaining Hollywood’s centrality in the motion picture industry.”