After a Historic Hollywood Tax Break, Is Moviemaking Coming Back to California?

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2:02It is Wednesday, July 9th. I feel like every week I read a new article. Hollywood is leaving Hollywood. The production exodus continues. That kind of stuff. Never mind that the exodus has been going on for more than two decades now, thanks to aggressive production incentives everywhere from Georgia to Michigan to the UK or Bulgaria. It's just that we're paying more attention now because the overall content recession is exposing the fact that not a lot of shows and movies are made in California. But last week, the state decided to do something about it, or at least it decided to do a little more than it had been doing.

2:36At the urging of Governor Newsom and a few key Democrats, interestingly, a lot of the same Democrats who once called production incentives corporate welfare, the state made two separate moves intended to give the major studios and independent producers a reason to stay in California. First, they increased the state's incentive cap from$330 million a year to$750 million a year, one of the biggest in the country. It's more than doubling it. Then they passed a bill raising the base credit for productions to 35%, with shoots that relocate from other states and countries eligible for up to 40%. That's money you get back on your spend in the state.

3:14They also expanded the kind of productions eligible to include animation and big competition series, So hopefully Rob Lowe won't have to go to Ireland to make his Fox game show. He's complained about that. There are some other new details, like the fact that the California incentive still doesn't cover above the line costs. So no deducting Tom Cruise's Mission Impossible payday. All of it begs the question, how much does this actually matter? Is California back? Are we going to start to see production trucks on every corner like we once did in L.A.? Or is this all too little, too late? The arms race to lure productions has already passed the state by.

3:50Today, we've got Joe Kianese. He's the SVP of Incentives and Entertainment Partners, been on the show before. That's the financial services company for the industry. We're going to go through what the new California plan offers and most importantly, what it doesn't offer. Fact check some of the press releases. Today, it's California's new incentives. Is the home of Hollywood finally ready to be a Hollywood player? From The Ringer and Puck, I'm Matt Bellany and this is The Town.

4:21Okay, we are here with Joe Kianese, who is the SVP of Incentives at Entertainment Partners and an expert on the various tax credit and incentive schemes from around the world. And I do use the term schemes there because it is very hard to discern what these new initiatives are and are not. There's a lot of press releases going around this past week after the California initiatives were passed. Fran Drescher, the president of SAG-AFTRA, called for a, quote, hot production summer. I don't know what that means. There were other press releases from the Entertainment Union Coalition talking about how we can look forward to our members getting back to work where they live.

5:06I want your opinion because you are the guy that people go to when they want to know what's real and what's not. Are you excited about this California initiative? Are you rolling your eyes? Are you somewhere in the middle? Like, what is this and what is this not? So I'm very excited about California. You are? I am. I am. They've made some pretty bold moves in terms of increasing the annual funding to$750 million a year. That's more than double than it was before. Pretty close to one of the highest in the country in terms of states that have annual funding caps. States like Georgia don't have annual caps.

5:42But right now, New York and California are on the top of the tier, New Jersey being the top three states with annual caps, offering anywhere between$750 and$100 million a year. The other big change for California is bumping up the credit from a basic credit from 20 % to 25%, so 35 % to 40%, which is huge. So how would that play out? Give me an example on, let's say, a$100 million movie. So$100 million movie, the base credit, I'm assuming it's all labor, they would get back a$35 million credit. What California also has is no caps on the credit or how much you can spend. So the only limitation, the only thing I'm disappointed in, and I was hopeful that it would happen, is the allowance of ATL.

6:26ATL is the actors, producers, directors, and to qualify. Above the line. Above the line, correct. That was never happening. You thought that was going to happen? No politician wants the impression that they're giving money to Tom Cruise. I agree. I think it will happen eventually. It happened in New York. It did happen in New York. You're right. New York said the same thing was ever going to happen. And then they allowed a handful of above the line positions to qualify this year under the governor's new budget. All ATL qualifies now. No caps except for an overall cap of 40 % of the New York spend.

7:01And so New York is now very, very competitive in the ATL space. I look forward to Tom Cruise jumping off the Empire State Building in the next Mission Impossible. It will happen. So yeah, so California, in addition to more money, more credit, they've also expanded what qualifies. So animation now qualifies, competition shows qualify, and TV less than 30 minutes. Thank God. You know, Rob Lowe having to fly to Ireland to record his game show, that we were all on pins and needles there. We did not want Rob Lowe to have to fly to another country. And that's another big change that's happening outside the country, Matt, is like Ireland, for example, not only always allowed game shows, but they recently now allow reality TV to qualify.

7:44That's one thing here in California we did not change the rules to include. So we have scripted, we have competition shows, we've got animation, and we've got TV less than 30 minutes, but unfortunately, no reality. So Housewives and all that stuff, they're not getting any credits. Correct. Why do you think that didn't make it? I wish I could give you an answer. I think there were so many proposed changes. I think it's something that may change over time, just like ATL. I think in terms of everything they've done thus far, I'm very excited. I would say California is very competitive right now. The only thing that would have made it unstoppable is the ATL.

8:20I think the inclusion of ATL is critical. I think ATL drives BTL. You know, when you have projects with huge above the line, it usually means it's a big movie. And big movies usually bring a lot of above the line crew as well. Well, that gets to the post-production credit. What do they do for post-production? Because that's been a big issue where a lot of the outsourcing to Canada and other places, Australia, New Zealand, has really impacted the base post-production talent pool. in LA? I mean, California does not give you a post only, unfortunately. So you can get a bump or an uplift if you do your post here, but you cannot get post only.

8:57So it's your physical production and if you do your post here, I think you get a 5 % bump. Okay. So you get a benefit if you're doing both, but you're not going to shoot a movie elsewhere and then do the post here and get a credit. Correct. Which is what happens a lot of times in Canada. You have a lot of projects that shoot either in New York or in Georgia, and they'll bring the post to Canada. So they have significant post and visual effects credits. Okay. And shooting outside of LA got specific boosts, right? In order to get this through a legislature that is majority non-LA people, they had to specifically incentivize production outside of LA County.

9:39Am I right with that? That's correct. We've always had that. It's called the 30-mile zone. Anything time you shoot outside the 30-mile zone, you get a 5 % bump. So again, the base credit is 35%. And if you shoot outside that zone, you get 40%. Is Santa Clarita outside that zone? It is. Oh, so that's why it's there. Correct. Interesting. Okay, so you're bullish on this. Because I talked to someone at one of the major studios who does their budgeting. And this person was like, yeah, it's good. is it going to cause us to abandon the UK or all of a sudden start shooting, I don't want to give away what studio here, but start shooting major tentpole franchise A in the US?

10:23Maybe not. I think that goes back to the bubble line. UK is giving an incentive on a bubble line with no caps. So it's very difficult. They're also giving you a credit on your participation payments. So the UK makes it very lucrative to bring a large tenfold project to the UK. You're going to get all your talent costs and any sort of participation you're paying after the fact. It's hard to compete with that. Yeah, I have said some stuff on the show in the past about the UK tax credit, and I've mentioned the 40 % number. And I've had some pushback from people there saying, you know, maybe a couple projects qualify at 40%, but most do not.

11:03What is the nuance of the UK credit? So that 40 % is specific to independent film. So both the UK and Ireland now have a program specific to independent films. I can't remember the exact dollar amounts, but I believe it's anything less than 20 million pounds or less or euros or less. The UK does have other requirements. You have a UK director, producer, and a screenwriter, but you will get 40%. New York has tried to compete with that. New York just set up as part of also allowing their ATL. New York now has an Empire State independent film credit where you can also get between 30 % and 40 % with all your ATL qualifying.

11:41Oh, wow. The other big change for New York, which is huge for the independent producers, New York always had a very long tail in terms of how quickly that money came back, sometimes as long as 48 months. Under this new program, you can get the money back in the year and complete your project, which is very quickly. So that's going to be really important to the independent producer. I was going to say the indies love that because it's out-of-pocket expenses. They're not, you know, deep-pocketed studios. And I think with California's change, I think California's going to become a big hub for independent film.

12:12In fact, a few weeks ago, when the state announced the latest slew of projects that they've approved of the 48, I think 43 were independent projects in that$10 to$20 million range. Hmm, interesting. Yeah, I saw that list. Widely expected that the$100 million movie is probably the once upon a time in Hollywood spinoff that David Fincher is doing for Netflix, although Netflix is not confirming that. Netflix is horrible about confirming anything involving David Fincher, who is a crazy person about what is out there about his projects. But yeah, Netflix getting a credit to shoot that one in California.

12:47Right. I mean, again, I hate to keep sort of harping on the ATL, but I think that's a big change that over time, I hope California will. Why is that such a big deal? Why does the government need to give tax credits for the exorbitant, sometimes, salaries of actors and other above the line? Well, it can be, one, a significant percentage of the budget. And as I said before, why that's important to the state is those big budget films bring along with it a huge above the line. Right. So it's just a lure to get the bigger budgeted movies. Correct. If you are a film commissioner in Georgia, are you scared right now?

13:29They still have the uncapped incentive there. But amid this whole content recession, like how does the pecking order change right now? I would say that Georgia still offers a very competitive program, but in light of what New York and California have done, they now have some serious competition. The other big change that happened in California is now California is refundable. Before in California, unless you were an independent producer, you had to have an income tax or a sales tax liability in order to monetize your credit. It's now you can make the election to get that credit as a refundable tax credit.

14:06The only hiccup to that is you'll only get 90 % of it and it'll be paid back over a five-year period. Huh, why'd they do that? There were a lot of studios, a lot of producers who weren't able to tap into the California program because they did not have an income tax or a sales tax liability. So you're going to see a lot more players now that couldn't produce in California start producing. Well, that's the thing about this. And I think even people in the industry don't really understand how this works. They see the 750 million number and they're like, oh, great, my movie can just automatically get that.

14:37All we have to do is stay in California. But that's not how it works. There is a lottery system. Well, you explain how it works. There are actually application windows. In fact, one is happening right now. It started on Monday for TV. So what they do is there is an application window right now for TV. There'll be another one in August for feature film and independent film. Craig, get your application in for your coming-of-age story about a young boy and Steph Curry as his mentor. And it used to be more like a lottery. It's not really a lottery right now. Everybody is applying at the same time and who's producing similar type content.

15:12Where it becomes a bit subjective is there is a jobs ratio test that every applicant has to do. And typically, when you're part of the selection process, the projects that are showing that they're going to create or maintain the largest percentage of jobs have a higher percentage of being selected into the program. And is that an objective test? Is it a straight percentage? Or is there some fat cat dude sitting behind a desk with a cigar stamping his favorites? No, it's pretty straightforward. It's automated on the information website. And you do get penalized if you put in sort of very aggressive estimates.

15:51And at the end of the day, you don't meet those numbers, you can get penalized and get less of a percentage back. And if these are gross numbers that don't tie out at all, you can lose your entire credit. So you have to be pretty specific in terms of your estimates.

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17:48I think the momentum really picked up around the fires in LA and wanting to do something for a region that had so many people hit so hard by a disaster. And I think that was a big momentum builder. And then the industry got on board and some of these studios finally showed some interest after literally decades of doing nothing and just following the money. The local government in LA finally woke up to this issue and I think they've been asleep at the wheel for a long time. What's your sense of what the difference maker was this time? I think you're right. I think fires had a lot to do with pushing us over to being approved.

18:29I think you had a lot of people that not only lost their homes, but that weren't working. Well, the content recession in general, which is independent from the fires, but post strikes and the whole industry is hurting, etc. Yeah. But if you're in a position where you don't have a home and you're wondering where you're going to work and there's no jobs for here in California, it would be really no reason for you to stay and rebuild here. So you'd probably be looking elsewhere and moving to a place like Georgia or New York or wherever the work is. In fact, even Texas right now just approved more money for Texas as well.

18:58They have$300 million a year and a grant program that's offering between 25 % and 31%. So they're aggressively getting into the game as well. And I know New Mexico has done a lot. Netflix moved there. West Coast hub there. Netflix is building in New Jersey as well. There's this whole Mark Wahlberg effort to bring productions to Nevada. Is that going anywhere? I saw Warner Brothers pulled out of that. Not only that, but that bill did not pass. And in Nevada, the legislation sessions were every two years. So that two years ago, it didn't pass. It didn't pass again this time around. Oh, sad for Mark Wahlberg.

19:35He won't be able to drive from his compound in the desert. I would say the other state that is really being the most aggressive right now is New Jersey. The governor last week just made some further modifications to the program. They are in it for the long run. They definitely want to attract larger productions. And so they've upped the percentage for larger productions. They upped the amount of money for what they call studio partners, those who have facilities in the state who plan on producing larger projects. So New Jersey continues to up their game. That might get a little boost if New York City elects a Democratic socialist as mayor.

20:11Has Momdani said anything about the aggressive tax incentives to lure productions there? Is he pro or anti? I imagine he might call that corporate welfare. I have not seen anything so far. But at the end of the day, these are jobs. Well, but the Democrats in California have come full circle on that. There were a lot of Democrats that refused to act on this issue because they called it corporate welfare and because they said, why in a state of tens of millions of people that have all kinds of industries, why should we care about this particular one? And why should we subsidize it when others would love to have that kind of largesse directed towards them?

20:53I guess I can't disagree with that logic at the end of the day. It's a reality situation. Like you can you can stand on a soapbox and stand on your principles and great. You can feel good about yourself, but you're looking at an exodus of these jobs and these producers where other states are not saying that. And the only thing I wonder is if this isn't just a race to the bottom, like the anti-production incentive people say, like, where does it end? Does Georgia now get even more aggressive? We'll see. I mean, I've been hearing that same line for over 20 years now. The race is the bottom, but it continues to go up and up and up.

21:32It continues to go deeper and deeper. We've got 40 states with incentives right now, over 100 countries. Here in the U.S. over the last five years, it's been a lot of positive legislation to keep programs going or bring back programs. In fact, Wisconsin that had a program that they just continued in 2013 just brought back their program. Alaska, that had a program as well, has got some pending legislation to bring back their program as well. So I think everyone's finally acknowledging that these are job creation acts. These are incentives that actually may appear to be corporate welfare, but what they are doing is creating jobs that are mobile, that can go anywhere in the world, and they need to be incentivized to stay in the state and stay in the country.

22:14And what role do these studios have? They're all based here, headquartered here. The agencies headquartered in L.A. The infrastructure of Hollywood is still in L.A. Yet the studios have been the ones that have caused this. They have been the ones that have followed the money and gone elsewhere to shoot their movies with no apologies and no regret at all. Do you sense that the feeling at the studios has changed at all? Or are they just going to take whatever money they can and if it's in California, great. If it's in the UK or Georgia, also great. There's no real incentive to build back the industry in Southern California beyond what is given to them.

23:01I think there's always been an interest to keep projects here if possible. You think so? I don't. Give me an example of a movie that's shot in LA just because. It's usually either the money is incentivizing or the filmmaker or star demands it. I would say it's wishful thinking. I think every time a project is greenlit, a budget is done for California. A budget's done for New York. A budget's done for Canada. A budget's done for the UK. At the end of the day, you're going to end up going to the jurisdiction that meets your creative needs. That's going to give you a subsidy that reimburses you for your costs.

23:34Joe, is LA still competitive from a facilities perspective, like sound stages, post-production, hubs? From a volume and quality standpoint, is LA still considered a great place to shoot? It is, and it continues to grow with studios. Yeah, they're empty these days. Right. But there's lots of new studios being built all over and a lot of renovations happening at existing studios as well. So I think that's also part of it is that they are rebuilding not only the incentive program, but trying to rebuild the whole infrastructure here as well. One thing that is in this California bill that we didn't talk about yet, and I think could be perhaps a kind of secret booster, is applying the credits to television episodes less than 20 minutes, shorter form content.

24:20And if you're looking at the growth areas for content right now, it's short form. It's professional YouTube creators and TikTok people. Are those kinds of productions going to get tax credits down? If they meet the minimum spend requirement, which at the end of the day is as long as 75 % or more of the project is shot in the state and it's a million dollars or more spend, it should qualify. So Mr. Beast doing a video at Disneyland, that would qualify. Remember, we're also going to go back to unscripted, it doesn't qualify. So if he's producing unscripted content, it wouldn't qualify. Okay, so none of these YouTube or TikTok videos qualify.