Hollywood warns California against sabotaging film incentives

The entertainment industry is warning Governor Gavin Newsom that the state risks undermining California production if it imposes a new cap on corporate tax credits.

In a June 8 letter, a coalition of industry and labor groups argued that the governor’s budget proposal will cost production jobs and sabotage the state’s incentives for movies.

“The result will not be theoretical – it will be immediate and concrete,” the letter said. “This impact will be felt across the manufacturing ecosystem,” adding that the measure “poses a direct and immediate threat to tens of thousands of middle-class jobs.”

In response to a dramatic downturn in film and TV production, Newsom more than doubled the state stimulus last year to $750 million. But the governor’s budget for the coming fiscal year would limit companies’ ability to claim tax breaks, which entertainment groups say defeats the purpose of the expansion.

The coalition, including the Motion Picture Association and Hollywood unions, is pushing for an exception that would exempt film credits from the new restriction.

In May, Newsom pledged to make companies “pay their fair share” by permanently limiting tax credits to 50% of a company’s liability or $5 million, whichever amount is greater. The proposal was intended to help stabilize the state budget and eliminate a structural deficit until July 2028, while also protecting smaller companies with lower tax liabilities.

The film credit is one of many state tax incentives. The others include the research and development credit, which costs the state about $1.5 billion to $2 billion a year, and the low-income housing credit, which costs about $388 million.

Newsom’s proposal would prevent companies from using these credits to wipe out all or most of their tax debt. But entertainment industry groups say it will make it harder for companies to monetize their film credits, making them more reluctant to film in California.

“Producers make location decisions based on whether and when they can reliably realize the full value of available incentives,” the letter advises.

The latest version of the budget, now moving through the Legislature, would set a flat $5 million cap on appropriations use over the next three years. Starting in 2030, it would set a permanent credit limit of no more than 70% of a company’s tax liability.

In a statement, the state’s Treasury Department called the 70% limit “an appropriate middle ground that preserves the incentive effect of the state’s business tax credits while ensuring that a reasonable minimum tax is paid.”

The department also said the proposal will also have “a limited impact on the film tax credit program,” noting that companies can still use credits to offset sales taxes and can still redeem any refundable credits over a five-year period at a 10% discount.

But industry groups still argue that film credits should be completely exempt from the new restrictions since they have already been accounted for and approved by the legislature through 2030.

The Independent Film and Television Alliance, which joined in the June 8 letter, argued that the proposal would affect both indie producers and major studios.

“Independent productions depend on the ability to monetize transferable tax credits as a critical part of their financing,” Jackie Brenneman, the group’s president and CEO, said in a statement. “By limiting how much credit a single buyer can apply for in a year, the limit narrows the pool of buyers who can absorb a full certificate and lowers the amount they will pay for it.”

Newsom and the Legislature have made the film credit refundable in 2025. But some companies still have non-refundable film credits issued before then, and these could not be claimed for tax liability due to previous state restrictions on the use of credits. The letter warns that these credits are now at risk of expiring, and states that they should be made refundable or transferable.