Time was running out to pass new California bills in 2005 when a power broker in the State Capitol got a request from the action movie star in the governor’s office. Gov. Arnold Schwarzenegger wanted lawmakers to give Hollywood studios $50 million in tax breaks to help prevent the movie industry from leaving.
But Democrats preferred to restore funding that had been cut from schools and support for disabled people. Republicans in the governor’s own party objected to the notion of assisting one industry over others. The effort fell flat, as did similar proposals over the next few years.
Among many Democrats, said Fabian Núñez, who was the speaker of the California Assembly at the time, the thinking about Mr. Schwarzenegger’s plan went: “Why does he want to give corporate welfare to rich people? That doesn’t make any sense.”
Times have certainly changed.
California lawmakers, most of them Democrats, approved a budget on Friday that includes $750 million to subsidize movie and television production, doubling the size of the state’s incentive program while making cuts elsewhere to help close its $12 billion deficit. A bill to make the tax credits available to more types of productions is expected to be approved in the coming days.
Some economists object to film subsidies, saying they are a poor financial investment for states, while proponents say they are necessary to slow an exodus of productions. Over the past 10 years, production in Los Angeles has decreased by more than one-third, according to FilmLA data. One Hollywood studio is flying Americans to Ireland to film a game show, and “The Substance,” a best picture nominee, was filmed in France even though it is set in Los Angeles.
“Expanding this program will help keep production here at home, generate thousands of good paying jobs and strengthen the vital link between our communities and the state’s iconic film and TV industry,” Gov. Gavin Newsom, a Democrat, said in October when he announced his plan to increase the tax breaks.
Political realities help explain the turnabout. Labor unions that give valuable campaign support to Democrats have lined up behind tax credits for filming as other states and countries have lured productions away from California. And thousands of industry workers are desperate for relief after two Hollywood strikes in 2023 and this year’s destructive wildfires in the Los Angeles area.
“On the face of it, most Democrats would oppose a major reduction in the amount of taxes that the state’s bringing in, especially right now,” said Kim Nalder, a political science professor at California State University, Sacramento, who runs the Project for an Informed Electorate.
“But they want to support L.A., they want to support Hollywood, they’re concerned about the fire damage in the state,” she continued. “And then, you know, Hollywood’s a lot sexier than workers’ compensation or in-home health care.”
California started losing productions in the early 2000s after Canada and its provinces began offering tax incentives for studios to film there instead. Louisiana, New Mexico and other states soon joined the competition.
By 2005, Mr. Schwarzenegger was sounding the alarm. His initial efforts failed, experts say, in part because California was still producing lots of movies and television. But four years later, the industry found itself in a situation strikingly similar to now: The country was facing economic uncertainty, a writers’ strike had just ended, and Hollywood was feeling the effects of fleeing productions.
State lawmakers warmed up to Mr. Schwarzenegger’s idea and, in 2009, created a $100 million annual program for film credits that has since grown to $330 million a year. In the same budget increasing that allocation to $750 million, Mr. Newsom and legislators addressed the state’s deficit by dipping into reserves, cutting spending on health care for undocumented immigrants, reducing dental care for poor people and delaying some payments to public universities.
Some economists have long questioned the wisdom of subsidizing the movie and television industry. Horror movies, prestige dramas and superhero stories are not public goods, they argue. States do not get a percentage of the box office in exchange for investing in a successful film.
Michael Thom, a tax expert at the University of Southern California whose work has been critical of state funding, submitted testimony to California lawmakers this year that said “incentives fail to stimulate enough economic activity to justify their substantial cost.”
Industry advocates are unequivocal, however, that the government funding is worthwhile because it spurs other economic activity. Productions pay caterers to feed workers, hoteliers to house crews and dry cleaners to do laundry — all of which creates a ripple effect, they say.
“People look at Hollywood and they see the beautiful ball gowns and the glitz and think, ‘Oh they’re doing fine,’” said Ben Allen, a Democratic state senator who co-wrote the bill being considered.
But most of the industry’s jobs provide a middle-class lifestyle, he said, and many of those workers have been hurting. “We want to make sure they can keep doing what they love,” Mr. Allen said, “and keep this iconic industry thriving in our state.”
It may seem surprising that Democrats are promoting what some economists say is a form of trickle-down economics: corporations receiving significant tax breaks with the promise that workers will ultimately benefit. Liberals jeered the philosophy when it was championed by a Republican president, Ronald Reagan, a former California governor, Hollywood actor and union leader.
But labor unions have garnered the political support necessary to overcome those objections in California, where Democrats have controlled the State Capitol since Mr. Schwarzenegger left office in 2011.
At first, unions were divided. Camera workers, lighting technicians and makeup artists supported the subsidies, while unions representing teachers and other public employees considered them a drain on the state budget, which paid their salaries and funded essential services like health care and education. Over the years, unions came together to argue that the tax credits were a worthy investment to protect working-class jobs.
Rebecca Rhine, a top official at the Directors Guild of America and the president of a coalition that represents seven Hollywood unions, said keeping the focus on jobs had helped unify those groups.
“We recognize that it’s a sacrifice to take additional money and to put it into this program,” Ms. Rhine said. “And we acknowledge that to do that is sort of a vote of confidence in how important it is to keep this industry and jobs here.”
Unlike some other states, California’s program has stringent requirements that direct funding to the projects most likely to create those jobs. And it does not count the salaries of actors and directors when calculating the size of a tax credit, which is currently 20 to 25 percent of qualified spending. (The bill by Mr. Allen and Assemblyman Rick Zbur, a Democrat, would increase the credit to 35 to 40 percent.)
Charles Rivkin, the chief executive of the Motion Picture Association, said productions created thousands of jobs and pumped millions of dollars into local businesses. “Governor Newsom and the California Legislature know what study after study has proven true: Production incentives yield enormous returns for their local communities,” he said.
The support for helping Hollywood is overwhelming. The bill expected to get final approval passed the Assembly, 73-1. No opponents showed up to testify when it was heard in a committee this week, spurring a legislator to remark that the film tax credit once “wasn’t as popular as it is right now.”
There are a few political opponents. State Senator Roger Niello, a Republican, said in a statement that he voted against an identical measure because tax credits did not help the California economy.
“I cannot support a policy measure that cannot guarantee the return on investment,” he said, citing a report by the nonpartisan Legislative Analyst’s Office.
Patrick Button, an associate professor of economics at Tulane University who has published studies on film incentives that have raised questions about their efficacy, said California was a unique case as the home to so much of the industry. But J.C. Bradbury, an economics professor at Kennesaw State University who has studied incentive programs, argued that most Californians received no benefit from the subsidies.
“This is just a blatant transfer of wealth to the film industry,” Professor Bradbury said.
Tax breaks work inasmuch that they attract productions, but it is not clear whether giving money to Hollywood is the best use of tax dollars. Independent fiscal monitors for states like New York and Georgia have found meager returns on investment, as low as 15 or 19 cents on the dollar.
As competition across the country surges — New York just increased its incentive program to $800 million annually — some California politicians have expressed concern that studios and their lobbyists were pitting states against one another to chase ever greater tax breaks. In an interview, State Senator Christopher Cabaldon warned that lawmakers “can’t allow ourselves to be played.”
On Friday, he joined his fellow Democrats in the Legislature in approving California’s biggest subsidy yet for Hollywood.
Derrick Bryson Taylor contributed reporting.
Laurel Rosenhall is a Sacramento-based reporter covering California politics and government for The Times.
Matt Stevens is a Times reporter who writes about arts and culture from Los Angeles.
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