Newsom wants to extend Hollywood tax credits — and give out millions in refunds

Universal City, CA - June 15: As part of California's full reopening, marking the end of pandemic-era restrictions like masks, social distancing and most capacity restrictions, Gov. Gavin Newsom enters alongside Universal Studios characers, including Shrek and Troll characters, before taking part in a press conference at Universal Studios, in Universal City, CA, Tuesday, June 15, 2021. Governor Newsom drew 10 winners to receive $1.5 million each, for a total of $15 million, as part of the final cash prize drawing in the state's $116.5 million Vax for the Win program - the largest vaccine incentive program in the nation. (Jay L. Clendenin / Los Angeles Times)
Gov. Gavin Newsom visits Universal Studios in June 2021. (Jay L. Clendenin / Los Angeles Times)
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Movie studios would be eligible for a long-sought perk under Gov. Gavin Newsom’s proposal to let them convert a portion of their state tax credits into cash payments, essentially creating a government subsidy for Hollywood that California doesn’t offer to any other industry.

If Newsom’s plan is passed by the Legislature and signed into law, California’s film tax credit program would become “refundable” in 2025 — meaning that on top of giving qualifying film and TV productions credits that wipe out their state tax liability, the state also would give them payments totaling tens of millions of dollars a year.

The boost would help bring more film productions to California amid competition from other states, the Newsom administration argues. And it’s structured to incentivize Hollywood to increase the diversity of its workforce — a goal of the Democrat-dominated Legislature, which is itself more diverse than ever before.

But the proposal is facing pushback from lawmakers frustrated by what they see as Hollywood’s insufficient progress in hiring women and people of color since the state increased the film tax credit two years ago for construction of new soundstages. Those incentives were designed to encourage the hiring of workers who reflect the race and gender makeup of the state.

Tension also is rising as lawmakers work to close a $22.5-billion budget deficit that could result in cuts to spending on public transit and clean energy, as well as delays in funding day care for 20,000 children.

“We can't go back to our constituents and tell them why we put money in your pockets,” Assemblyman Phil Ting, a San Francisco Democrat who chairs the budget committee, said to film commission representatives during a hearing this week in the Capitol in which he chastised them for not being prepared to present diversity data.

“We have to tell the child-care people, ‘Hey, sorry, we couldn't give you money for child care because we gave money to movie studios.’”

Newsom’s plan, spelled out in his January budget proposal, would extend California’s film tax credit for five more years, until 2030, and allocate $330 million per year for the credits and refunds. If productions qualified for a tax credit larger than their tax liability, they could receive a portion of the credit as a refund, which is essentially a cash payment. The governor’s plan also would dock tax credits from productions that do not hit diversity goals.

His approach combines legislative Democrats’ interest in pushing for greater diversity in show business with a perk the industry has been seeking for years — a refund that allows productions to get paid by the state in amounts beyond the taxes they owe. Several states offer a refundable film tax credit, and some major studios have such small tax bills in California that they can’t use all the credits they’re awarded by the state.

“Access to tax credits to offset the cost of production is a primary consideration for where projects will shoot. And they do leave, taking Californians’ jobs and economic opportunities away from California, where they belong,” said Colleen Bell, executive director of the California Film Commission, which is part of Newsom’s administration.

Movie studios and their employee unions both testified in favor of Newsom’s plan. Their support should give it considerable political muscle in a Legislature where most lawmakers are aligned with organized labor and many enjoy the glamour of associating with California’s marquee industry. Hollywood studios, executives and labor unions are reliable campaign donors to many state lawmakers and the California Democratic Party, and spent millions to help Newsom defeat a recall attempt in 2021.

But the politics in this debate could be more complicated than they appear.

Still hanging over the Legislature is a standoff over how to ensure greater safety on film sets that began after actor Alec Baldwin fatally shot cinematographer Halyna Hutchins while filming “Rust” in New Mexico. Last year, studios and unions got behind different bills to improve safety but both of them stalled. It’s not clear whether the two sides will reach an agreement this year that could be passed into law, but the move to extend a tax break could be a leverage point in negotiations.

Lawmakers already grappling with a constrained budget and the pressure to cut programs also face the possibility that handing a lucrative benefit to Hollywood will lead to other industries asking for similar treatment from the state.

“We don't give the tech industry money in the same way, when we also ask for socially desirable outcomes as well as having a more diverse workforce,” said Assemblyman Alex Lee, a San Jose Democrat.

Assemblywoman Wendy Carrillo, a Los Angeles Democrat, said her push to increase diversity in the entertainment industry is complicated by California's ban on affirmative action. But finding lawful ways to incentivize a more inclusive workforce is a top priority in negotiating any extensions to the film tax credit.

“If the goal is to ensure that we're bringing production back to California, and we are creating new productions in California, and that more studios are able to apply and receive the film tax credit, then my goal is to also ensure that the workforce behind these incredible jobs, good union jobs with great benefits, are also reflective of the people of the state,” she said.

While supporters of the film tax credit say it would create more working-class jobs in California and spur associated economic activity, advocates for low-income people fear that making Hollywood’s tax credit refundable would leave less money available for services for the needy.

“There are a lot of unmet needs in the state that aren't being addressed,” said Kayla Kitson, policy analyst at the California Budget and Policy Center, which advocates for low-income Californians.

“Opening this door to making business credits refundable could set a precedent that other business credits could then be made refundable, which could end up costing the state a lot more money.”

California’s nonpartisan legislative analyst says making the film tax credit refundable would carry both benefits and downsides. While it would make the program appeal to more production companies, it could also wind up costing the state more money. The analyst recommended several changes to contain the cost and simplify Newsom’s plan, saying the rules he proposed “are unnecessarily complex.”

Ultimately, the analyst wrote in a report last month, the film tax credit should not be considered “a reliable tool to grow the state’s overall economy” but rather a way to make the entertainment industry a slightly larger portion of it:

“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.”

This story originally appeared in Los Angeles Times.