Last May, the state’s independent Office of the Legislative Analyst (LAO) warned that California was in danger of joining a dubious “race to the bottom” with other states by increasing its support of TV and film projects with tax credits.

On Wednesday, the state indicated it was not only in the race, it was sprinting toward the finish line, wherever that was. Governor Jerry Brown said that he would sign Assembly Bill 1839, which increases the annual $100 million a year doled out to the entertainment industry to $330 million.

Supporters wanted $400 million a year for four years, but appeared to have settled for a fifth year and the lower amount. The legislation has passed the Assembly and is headed to the Senate where its approval is expected next week.

California has lost a lot of film and TV business in recent years, as production companies look for cheaper venues and government incentives. Most states and a lot of countries offer grants and tax credits, and the LAO said those efforts have been somewhat successful in skimming off business from California. It calculated that states alone provide $1.4 billion in incentives annually.

California, which still dominates film and TV production nationally, leapfrogs from fifth place to second among states in financial incentives, behind New York ($420 million annually) but ahead of Louisiana ($236 million), Georgia ($140 million) and Florida ($131 million).

The LAO didn’t exactly argue against the advantages of tax credits to corporations as an incentive to operate in the state. It preferred broader corporate welfare that offers tax breaks and incentives for “all businesses to stay or relocate to California” rather than targeting a particular industry.

While the efficacy of offering incentives to entice corporations is questionable—the LAO itself warned that “film tax credit does not 'pay for itself' ”—the importance of the entertainment industry to California is not. Almost half of its relatively high-paying production and post-production jobs nationally, a combined 108,600 positions, are located in Los Angeles County. That's 3% of the county's jobs and still doesn't take into account an estimated 250,000-300,000 jobs in related industries.   

The new legislation replaces the unpopular lottery system that was used to select the lucky winners with one that considers how many jobs a project generates. The larger sum of money and new criteria makes it more likely that large studio projects will now qualify for tax credits.

A February report (pdf) from the Milken Institute found California lost 16,137 entertainment industry jobs (11%) from 2004 to 2012 while New York increased 25%. Despite the numbers, the institute did not recommend a tax credit.

“With film production showing itself to be increasingly mobile, California should not attempt to capture or keep productions that are looking for the highest possible incentives—that’s a game it can’t win.”

Instead, the report suggested the state continue to talk up and beef up its “strategic advantages—namely, serving as the headquarters of most studios, distributors, and producers; its role as home to the largest concentration of entertainment talent in North America; and its strong existing infrastructure.”

Ultimately, California would prevail, the report said, because, “Even states that show signs of being effective rivals, such as Louisiana and Georgia, lack either the population base or the effective concentration to be a full threat. Only New York has both in its favor, but it is burdened with costs higher than those of California.”

Earlier in the week, lawmakers in North Carolina, one of the first states to offer entertainment industry tax credits, voted not to renew their program, which paid out $61 million last year.

The Los Angeles Times said that 39 states continue to offer some form of incentives to production companies, but some are wavering. Iowa bailed in 2009 and, more recently, Michigan and New Mexico have reduced their incentives.

While others have slowed their pace, California has found a second wind.

–Ken Broder

To Learn More:

California Super-Sizes Its Film, TV Tax Credit Program (by Todd Cunningham, The Wrap)

Governor Approves Deal on $330M Film Tax Credit (by Allen Young, San Francisco Business Times)

California to Hike Film Tax Credits (by Richard Verrier, Los Angeles Times)

A Hollywood Exit What California Must Do to Remain Competitive in Entertainment— and Keep Jobs (by Kevin Klowden, Priscilla Hamilton and Kristen Keough, Milken Institute) (pdf)

State Analyst Warns of Film Tax Credit “Race to the Bottom” (by Ken Broder, AllGov California)