California poised to hike film tax credits to stem runaway production

Moving to slow the exodus of filming to other states and countries, California lawmakers are poised to quadruple tax subsidies for location shooting to $400 million a year.

Legislation approved on a 5-0 vote by the Senate Appropriations Committee on Thursday also would eliminate a controversial system in which film and TV productions won tax credits based on a lottery system, regardless of the economic effect of the production.

The bill, AB 1839, must still be approved by the full Senate and signed by Gov. Jerry Brown. But legislative backers say they are confident the measure will clear all remaining hurdles, saying there is widespread recognition that California is losing one of its signature homegrown industries to other states.

Feature film production in Los Angeles County has fallen by half since 1996, and the region’s share of TV pilot production has fallen 73% since its peak in 2007, according to FilmL.A. Inc.

“There is no question this will make a difference,” said Bill Mechanic, a veteran film producer and former chief executive of Fox Filmed Entertainment. “This is good for California.”

Most states now offer lucrative incentives for filming, awardinig about $1.5 billion in film-related tax credits, rebates and grants in 2012, up from $2 million a decade ago.

“To halt that steady outward march of jobs and creativity, California must have a robust, smart, and efficient tax incentive program of our own — a tax incentive program that guarantees job growth and economic expansion, coupled with strong accountability and transparency measures,” said Kevin de León (D-Los Angeles), chairman of the Senate Appropriations Committee.

Just about every major movie filmed on location gets a tax incentive. Film tax credits have been so integral to the filmmaking process that they often determine not only where but if a movie gets made.

Studios factor them into budgets; producers use the promise of credits to secure bank loans or private investment capital to hire crews and build sets.

AB 1839, sponsored by Assemblymen Mike Gatto (D-Los Angeles) and Raul Bocanegra (D-Pacoima), expands a program enacted in 2009 that was intended to address the problem of so-called runaway production.

Although the existing credit has kept some lower-budget movies from leaving the state, it hasn’t stemmed the exodus of production.

The bill would broaden eligibility to include big movie productions (those with budgets above $75 million), all new television series and provide an additional 5% credit for shooting outside of the L.A. area.

What’s more, it would also dismantle the controversial lottery used to allocate funds and replace it with a system that awards credits based on their economic impact, including how many jobs a movie or TV show would create.

The California Film Commission developed an annual lottery — the only one of its kind in the nation — as a way to randomly distribute funds. The commission contended that it was the fairest and most efficient way to divide the money, so it wouldn’t be consumed by a few big movies.

But studios and producers have complained that the system doesn’t take into account the economic impact of their projects and makes it impossible to plan ahead for productions.

“The lottery makes it untenable because you don’t know if you’re getting it or not,” said Mechanic, who is planning to shoot his new film, a thriller set in San Francisco, in Georgia to take advantage of its tax breaks.

“If you’re making an independent film, you can’t wait to see if it will make it in the lottery,” he said. “You need certitude.”

De León, who is Senate President Pro Tem-elect, had raised concerns that the current lottery was flawed because it treated all productions alike, regardless of how many jobs they created.

“When it comes to fueling an engine of job creation with taxpayer dollars, we have an obligation to ensure we are doing everything in our power to maximize their return on investment,” De León said. “This way we can finally be assured — clearly and transparently — that California’s taxpayers are receiving the maximum possible economic return on this investment.”

Hollywood’s production community hailed the news.

The bill “underscores a commitment to the hardworking men and women of California’s film and television production community and to putting an end to the loss of these middle class jobs,” said a statement from the California Alliance, a coalition of entertainment unions, vendors and studios.

The program provides filmmakers with a tax credit of up to 25% of costs for specific production-related expenses, including set construction and crew salaries.

Studios and producers use those credits to offset their state tax obligations.

Kevin Klowden, managing economist with the Milken Institute, says little economic rationale exists for sustaining the current system, given the higher funding.

“If you’re stuck in a situation where you have to choose, what you want is a production that is going to create the most primary and secondary jobs relative to the amount of tax dollars spent,” Klowden said. “You want to have a large economic impact and return more money back to the community and the state.”

Eliminating the lottery could create a backlash with some independent filmmakers.

Senior studio executives have privately expressed frustration with California’s lottery, but were reluctant to air their views Thursday. All six major film studios declined to comment or did not respond to requests for comment.

Thursday’s Senate committee approval came after heavy lobbying by a coalition of entertainment industry unions, studio representatives and city officials, including L.A. Mayor Eric Garcetti.

Garcetti, who has made fighting runaway production one of his priorities, flew to Sacramento this week. He and several other mayors met with the governor Wednesday to make their case for more funding.

“This represents a responsible and significant investment in the future of California’s middle-class,” Garcetti said. “We need an enhanced tax credit program to compete and win against the other states and countries that are siphoning jobs and revenues away from California.”

Times staff writer Daniel Miller contributed to this report.