California Lawmakers Settle on Partial Film Carveout From Tax Credit Cap

California lawmakers have agreed on a partial carveout for the film and TV industry from a state cap on tax credits.

The bill, AB 186, was unveiled on Friday evening. It addresses concerns raised in June by the Motion Picture Association and a coalition of entertainment unions, who argued that the cap threatened to undermine the state’s $750 million tax incentive program.

The state budget seeks to stabilize revenues by preventing corporations from claiming more than $5 million a year in tax credits for the next three years. Industry stakeholders argued that the measure had the unintended consequence of hamstringing Hollywood’s recovery by limiting the ability of studios to use state incentives for in-state production.

The MPA and the Entertainment Union Coalition have signed on to the agreement. As Variety reported on Aug. 18, the deal falls short of their request for a complete exemption for film tax credits from the $5 million cap.

Instead, the legislation will accelerate the payback period for studios that elect to refund their credits for cash. Under existing law, studios can choose to get cash back instead of claiming the incentives as a credit against tax liability — but at the cost of a 10% discount, with a payback period of five years. The deal will accelerate that period to just two years and reduce the haircut to 5%.

The agreement also fully exempts credits for independent film — which account for 10% of the $750 million program — from the cap.

“It meaningfully improves the situation,” said Kathleen Thompson, vice president of tax incentives at Cast & Crew, a production services company. “They threw a bone to both the studios and to independents.”

The deal also extends the expiration date of non-refundable tax credits issued prior to 2025 by up to five years. That provision is meant to help studios that are still sitting on millions of dollars of old, unused credits, and were at risk of having them expire after nine years.

The bill is authored by Sen. Ben Allen and Assemblyman Rick Chavez Zbur, who also wrote the bill that increased the incentive program to $750 million last year. In a statement, Zbur said that the fix will provide “greater stability and certainty” for production workers.

“It does not address every challenge facing this highly competitive and mobile industry, and there is more work to do in the coming months, but this is an important step toward ensuring film and television remain a cornerstone of California’s economy,” Zbur said.

The deal is almost identical to an earlier version that circulated in Sacramento last week. A fact sheet accompanying that version said that it would “mitigate some of the impacts” of the tax credit cap. The only significant difference that a provision to make it easier to claim credits against sales tax — which had been sought by studios — was dropped.

The compromise is the result of complex negotiations among industry unions, studios, legislative leaders and the office of Gov. Gavin Newsom. State leaders resisted an industry-specific carveout because it would have led to calls for similar consideration for the tech industry.

The bill must be approved by both houses by midnight on Monday, and is expected to do so.