California legislators are so close to getting it.
Last week, nearly 40 state lawmakers sent a letter to Gov. Gavin Newsom and top legislative leaders urging them to exempt the state’s politically powerful film and TV industries from a cap on corporate tax credits. A provision of the recently passed state budget, the measure limits the credit that a company can claim at $5 million or 70% of its tax liability, per news reports.
The cap “creates short-term budget savings by reneging on commitments made to the entertainment industry and the working families who depend upon it for their livelihoods,” according to the bipartisan group of legislators. The motion picture industry has likewise been sounding the alarm over the limitation, complaining that it causes uncertainty and “kneecapped” Gov. Gavin Newsom’s doubling of the credit last year.
“Why would a company choose to do business in California under those conditions?” asked a separate letter from the Motion Picture Association and the Entertainment Union Coalition.
That’s similar to a question every other California industry could ask: Why would they choose to stay in California given the tax burdens that businesses of every sort face?
We agree the motion-picture industry offers great benefits to our state, but what makes it special?
Why should film companies get exemptions while others don’t?
The governor this month issued a statement boasting that his expanded film credit created $6.6 billion in economic benefits, as production companies stepped up their efforts in California. Even granting that those numbers are probably exaggerated, it is true that lower taxes lead to more economic activity. It turns out that when the government takes less money from businesses, businesses can do more with their money. Imagine that.
If it’s true for movies and TV shows, then it’s true for technology, retail and manufacturing firms, too.
While it is politically expedient for politicians to rally behind a favored special interest group, and for special interest groups to advocate for themselves, cherrypicking which industries get a reprieve from counterproductive tax policies is the wrong way to go.
Selective tax breaks are naturally limited in what good they can do. “There is currently no compelling evidence to suggest that film tax credits have a positive effect on the size of the state’s economy overall,” the nonpartisan Legislative Analyst’s Office noted last year in a report on the state’s film tax credit. The LAO further added that, “Film tax credits generally have a negative overall effect on state revenues.”
This Editorial Board has long advocated for an overall lowering of taxes across the board. While tax credits indeed lower taxes, they do so in a way that lets politicians pick winners and losers in our state. Lowering taxes on businesses across the board not only avoids the problems of cronyism and favoritism, but gives everyone a better chance to grow and succeed.
As we’ve argued before, Hollywood should use its massive political clout to pressure Sacramento for an overall better tax and regulatory climate that benefits everyone, filmmakers included.