LOS ANGELES: A California business tax credit cap aiming to save US$4bil threatens to drive away film and television production, according to a letter signed by a bipartisan group of lawmakers who demand a quick fix to the budget signed by governor Gavin Newsom.

If the problem isn’t remedied, efforts to woo production to California “will be significantly kneecapped”, according to the letter to Newsom and leaders in the state legislature, signed by 39 lawmakers.

“It creates significant uncertainty for production companies, in terms of when, how and even, if, they will be able to monetise earned tax credits.”

California’s US$351.7bil budget, which Newsom signed June 29, included a provision to cap business tax credits at US$5mil, a feature that will save an estimated US$1bil in the fiscal year that started July 1 and US$3bil the following year.

For high-budget movies and TV series, the new limit makes California uncompetitive with other states and countries that offer more generous incentives.

It undercuts a deal last year to double the state’s tax credits for film and television production, an amount increased to US$750mil in the new budget signed by Newsom.

“The uncertainty created by this turn-around will, in effect, say to production companies that credits earned under the programme may not be honoured as originally promised,” the Motion Picture Association and the Entertainment Union Coalition wrote in a separate letter to lawmakers this month.

“Why would a company choose to do business in California under those conditions?”

California lost more than 42,000 entertainment jobs between 2022 and 2024 as runaway production hit Hollywood, according to both letters.

Since last year’s expansion, the state has awarded tax credits to 170 projects, including 41 new films, bringing US$6.6bil in economic activity and nearly 35,000 cast and crew jobs across California, the California Film Commission reported July 7.

Newsom didn’t immediately reply to requests for comment.

“California is where filmed entertainment was born, and with this expansion, we’re making sure it stays here,” Newsom said during a July 2 visit to a studio lot in Burbank, where he touted the tax credits.

“We’re not just investing in productions and sound stages, we’re investing in middle-class careers, small businesses, and the communities that power this iconic industry.”

Rick Zbur, a Democratic state assembly member who spearheaded the film and television tax credit increase, as well as the legislative fix, said the US$5mil cap came as a surprise to him and other lawmakers.

“I’m not sure who knew what about what,” Zbur, whose district includes Paramount, Netflix and Universal studio lots, said in an interview.

“But I’m confident that my legislative leadership did not fully appreciate how this kneecapped the film and television tax credit. And I certainly didn’t.” 

Under recent rules, a US$100mil production would qualify for as much as US$30mil in tax credits, Zbur said.

The new cap would slash that US$30mil more than 80%, although additional money might be claimed through tax refunds that could take five years to recoup, Zbur said. 

The Legislature should revise its rules on the entertainment credit when it returns from recess in August to make sure studios don’t cancel productions in California, he added. — Bloomberg