California’s Tax Rebates Spark Debate Over Business Incentives

California’s recent budget negotiations have brought to light a significant decision regarding tax incentives for the film and video industry. Governor Gavin Newsom and legislative leaders approved a substantial increase in state subsidies, agreeing to allocate $750 million for tax credits to encourage producers to film in California. This decision comes despite cuts to health and welfare programs, highlighting the state’s priorities in balancing its budget amid a multi-billion-dollar fiscal gap.

During the signing of Assembly Bill 1138 at a studio in Burbank, Newsom emphasized the need for California to remain competitive in the entertainment sector. “You’ve got to be competitive, and now we’re competitive,” he stated. He underscored that California’s identity is not about being the cheapest place to do business, but rather about being the best.

This film and video subsidy is just one example of how California’s state and local governments funnel financial resources into preferred economic sectors. The state’s tax systems include numerous “tax expenditures,” leading to a reduction in revenue by over $100 billion annually, equivalent to approximately 50% of the state’s general fund budget. In light of this, public employee unions and others are advocating for the closure of certain corporate tax breaks to alleviate the state’s chronic budget deficits.

At the local level, cities and counties have historically employed redevelopment strategies to promote investment in economically distressed areas. This practice redirected taxes from redevelopment zones back to developers. However, when Jerry Brown resumed the governorship in 2011, he successfully pushed for an end to redevelopment, which shifted more property taxes to public schools, thus balancing the state budget.

Nevertheless, local governments continue to explore alternative subsidy methods to stimulate investment. One prevalent strategy involves providing rebates on sales taxes to businesses that sell taxable goods and services. A recent report from the California Legislature’s budget analyst outlines two primary structures for these rebate subsidies. One approach incentivizes businesses to relocate from other communities, while the other enables retailers to change the legally-defined point of sale without altering their operational location.

In California, the overall sales tax ranges from 7.25% to 11.25%, with communities typically receiving back one percentage point from sales. However, the designated sales point can be manipulated, allowing cities to incentivize sales tax rebates to sellers. As physical store sales decline in favor of online transactions, the implications of designating a point of sale can be significant.

According to the report by Seth Kerstein from the Legislative Analyst’s Office, approximately $140 million in rebates is projected to flow from local governments to sellers during the 2023-24 fiscal year. Notably, a substantial portion of these rebates is directed towards online sellers and companies providing fuel for transportation services. This data became available following the enactment of a law requiring disclosure of local rebate agreements, which Newsom signed into law in 2024 after previously vetoing restrictions on such agreements.

The question now arises: are these tax rebate programs mutually beneficial business arrangements, questionable kickbacks, or a form of legal extortion? The blurred lines in California’s tax incentive landscape have sparked substantial debate among policymakers, economists, and the public. As the state continues to navigate complex financial dynamics, the implications of these rebate structures will remain a focal point in discussions surrounding fiscal responsibility and economic development.