California Lawmakers Near Deal to Address Impact of Tax Cap on Film Credits

California lawmakers are closing in on a deal to help film producers who are facing new limits on their ability to monetize production tax credits.

The agreement falls short of the entertainment industry’s goal of a full exemption from a $5 million annual cap on corporate tax credits, according to multiple sources.

The state budget, approved in June, imposed the across-the-board limit for the next three years in a bid to stabilize state revenues. The Motion Picture Association and a coalition of Hollywood unions protested the measure, saying it would hamstring the state’s $750 million incentive for film and TV production by making it impossible for larger companies to redeem their credits.

Industry stakeholders and their allies in the Legislature — led by Assemblyman Rick Chavez Zbur and Sen. Ben Allen — have been pushing for a full carveout from the cap. But the deal, set to be announced this week, offers more limited relief.

According to sources familiar with the talks, the agreement would exempt tax credits for independent film productions, while creating a mechanism to accelerate refunds for studio projects.

Tax credits for independent films are transferable, meaning they can be sold to buyers who want to offset their state tax liability. But the fear is that they would be less valuable if buyers could claim only up to $5 million in credits per year. The agreement will resolve that concern, allowing indie film credits to remain fully monetizable.

The legislation would also extend the expiration date on old, non-refundable credits by five years — reducing the risk that they will go unclaimed. Some companies are carrying significant sums of old tax credits that they have been unable to use.

The compromise is not likely to completely satisfy Hollywood’s government relations teams, who see the cap as a betrayal of the promise of the $750 million expansion approved last year.

“There was a lot of fanfare over the expansion,” said one person involved in the process. “It feels like there was a commitment that was made and that was rescinded.”

Gov. Gavin Newsom’s office has also been in the negotiations over the legislative fix. The governor’s Office of Business and Economic Development declined to comment. The office of Senate president pro tem Monique Limón issued a statement in support of the film industry while referring other questions to the governor.

The $5 million cap is meant to help balance the budget by preventing large companies — particularly in Silicon Valley — from wiping out their state tax liability through research and development credits. In considering an exemption for some film tax credits, lawmakers have been mindful that tech companies would cry foul over a full carveout and demand a carveout of their own.

Lawmakers face an Aug. 31 deadline to pass bills this session.

Industry allies are expected to revisit the issue next session, as they also consider whether to reauthorize a $150 million incentive for soundstage construction, which has been fully depleted.