Gov. Gavin Newsom’s Revised California Budget May Cap Film And TV Tax Credits, Cuts Pensions, Raises Taxes, Spends Reserves

On Thursday, California Governor Gavin Newsom proposed a revised $203 billion state budget that attempted to account for the $54 billion gap created by increased expenditures and decreased revenue resulting from the impact of the coronavirus.

The largest cut listed in a budget summary released by the state is the elimination of $2.4 billion in supplemental payments to the state’s largest public pension plans, CalPERS and CalSTRS.

The governor said that he and his staff would also have their salaries cut.

Newsom’s new budget spends California’s $16 billion rainy day reserve over the next three years.

For the entertainment industry, there was some good news. The governor extended the carryover period for film credits awarded under version 2.0 of the California Film and TV Tax Credit Program from 6 years to 9 years.

However, one of the governor’s budget proposals is to limit business incentive tax credits from offsetting more than $5 million of tax liability for 2020, 2021, and 2022. That would, apparently, limit the amount that could be claimed each year under the Film and TV Tax Credit Program.

After Newsom’s announcement, state officials contacted by Deadline seemed unsure of the new proposal’s effects. Representatives for the California Film Commission, which administers the incentives program, did not reply to request for comment on today’s budget.

However, a source close to events in Sacramento said that “all agencies are working to get some guidance from the Governor’s office” on the full fate of tax incentives in this belt tightening environment.

Version 2.0 of the $330 million tax credit program is due to expire on June 30, 2020. There was already a version 3.0 of the program set to take effect on June 30, offering the same $330 million per fiscal year, with some minor modifications.

For example, 13 films were granted allocations last November. Of those, three productions qualified for credits over $5 million. Those include the Damien Chazelle penned and directed Babylon, which Paramount picked up; The Little Shop of Horrors remake produced by David Geffen and Marc Platt; and Universal’s Dear Evan Hansen.

Going forward, it’s unclear how the tax incentive cap will impact big-ticket productions such as those.

The proposed budget will transfer $10.5 million dollars of California Arts Council funding to the General Fund in 2020-21 only.

Newsom then announced that new budget projections see unemployment peaking “north of 24 percent.”

The new $203.3 billion budget proposal would borrow money from internal accounts to help make up for the projected $54 billion budget deficit.

In addition to the rainy day fund, another account, The Safety Net Reserve, has $900 million in it, according to Newsom. The governor proposes spending half of The Safety Net Reserve this year and half next.

Proposition 98 created a $524 rainy day fund for education. All of that will be drawn down.

The governor said the state has seen a decline of 22.3 percent from Jan. in the general fund — which supports education, public safety, prisons and many social services. That fund now stands at $133.9 billion. 9.4 percent decrease in general fund. overall

Personal income tax, payroll tax and sales tax have fallen. “Our sales tax revenues are taking the biggest hit,” said Newsom. It’s a 22.3 percent hit between all three.

On May 8, Newsom revealed that, after it had a record $6 billion surplus in January, the state faces a $54 billion budget gap due to COVID-related setbacks. That budget gap figure combines estimated losses for the present fiscal year and the year that starts on July 1.

Education spending is set according to a calculation based on revenues. With anticipated tax payments going down, funding for schools would also drop. Revenues are anticipated to decline by about $32 billion. That would trigger an $19 billion drop in budgeted school spending, according to Newsom. The governor proposed using $4.4 billion in money from the CARES act to bridge that deficit.

Newsom announced the following revenue measures:

• A new tax on e-cigarettes based on nicotine content that will be deposited in a new special fund

• Suspend Net Operating Losses for 2020, 2021, and 2022 for medium and large businesses

• Limit business incentive tax credits from offsetting more than $5 million of tax liability for 2020, 2021, and 2022

• Require used car dealers to remit sales tax to the Department of Motor Vehicles with the registration fees.

• Require the use of market value for determining price for private auto sales.

An update from California’s Department of Finance last week showed that 4.2 million people had filed for unemployment since mid-March.

Also on the 8th, Newsom warned that the state’s official unemployment number was inaccurate and far too low, based on his own calculations. “We’re not at 14.7 percent,” he said.

Previously the governor, while pleading for $1 trillion in Federal aid to a group of western states, said he sees real unemployment surging beyond 20 percent “getting closer to 22, 3, 4, 5 percent very likely.”

On Thursday, a Newsom aide said that the state is estimating that 50 percent of hospitality and leisure jobs in the state have been lost.

At his Wednesday press conference, Newsom announced his budget includes over $200 million to increase wildfire preparation and protection. The state has seen a 60% jump in wildfires year-over-year, he said.