Baywatch is coming home to Venice beach, CA.
After years of watching iconic productions flee the high costs of the Golden State for friendlier tax climates in places like Georgia, New York, and Canada, California celebrated a major legislative (possibly short lived) victory. The state’s Film Tax Credit Program (Program 4.0) has been dramatically expanded, more than doubling its annual allocation to a massive $750 million and offering generous credits up to 40% for relocating productions despite the $18 billion deficit announced this week.
On the surface, this is an undeniable political win. Governor Newsom hailed the move as reinforcing California’s status as the “entertainment capital of the world,” creating thousands of good-paying union jobs, and spurring an estimated $1.2 billion in economic activity per round of television awards alone. The state is buying back its cultural legacy, proving that Hollywood can, in fact, stay home.
However, beneath the shiny veneer of red-carpet photo ops and optimistic economic forecasts lies a deeply complex fiscal reality. While the credit expansion is a powerful tool to retain and attract specific projects, an economic analysis suggests that several structural and macroeconomic factors are likely to erode the real value of this massive investment, turning the $750 million expenditure into a costly, symbolic gesture that risks functioning more like corporate welfare than a durable, sustainable investment in California’s economic future.
The fundamental question is not whether the tax credit works to bring productions back, and whether the massive financial outlay represents a net positive for California’s millions of taxpayers.
“While the film industry is part of California’s story, the tax credit it receives is not the kind of economic policy that is good for our state.” – Senator Roger Niello
1. The Mirage of the Tax Credit: Structural Costs Remain Untouched
The primary mechanism of the California tax credit is simple: offer a substantial percentage (a base of 35%, up to 40-45% with bonuses for relocating shows and filming outside the Los Angeles Zone) back to production companies on their “qualified expenditures.” This is designed to level the playing field against states that offer similar, or even more aggressive, incentives.
But the field is anything but level. The 40% credit is generous on paper, but it doesn’t dismantle the core economic obstacles that drive productions away in the first place. The problem is twofold: the cost components that don’t qualify for the credit, and the embedded, fixed costs that no credit can overcome.
The Above-the-Line (ATL) Exclusion
The Film Commission intentionally excludes Above-the-Line (ATL) expenses—costs associated with major cast, directors, and producers—from the credit calculation. This is meant to focus the subsidy on “working class” Below-the-Line (BTL) jobs: crew members, technical staff, carpenters, electricians, and local hires.
While laudable in its intent, this exclusion means the credit tackles only a portion of the production budget. When a relocating show needs to pay a star millions of dollars, a cost that can dwarf the BTL wages, that entire ATL expense remains significantly higher in California than in non-union or right-to-work states. The credit only offsets the marginal cost, leaving the structural wage differential for high-value talent intact. For a studio making a multibillion-dollar investment decision, the overall financial burden, driven by ATL salaries and fixed infrastructure costs, still favors less expensive locales. The subsidy becomes a complex game of offsetting BTL costs while the ATL costs which are often the single largest variable and continue to push the overall budget past the tipping point.
Permitting and Regulatory Compliance
Beyond labor, California has notoriously high fixed costs related to regulatory compliance, environmental permitting, and complex local jurisdiction rules. Filming in Los Angeles requires navigating a maze of city and county agencies, often involving fees and timelines that add substantial time and complexity to a production schedule. Time, in Hollywood, is money. A production delay caused by a lengthy permit review can easily cost millions, wiping out the benefit of the tax credit.
Furthermore, infrastructure costs, such as renting soundstages and production offices in the highly concentrated Los Angeles area, are significantly higher than in nascent production hubs. These fixed infrastructure costs are essential for a major series, and the tax credit offers little relief for these core expenses. The reality is that the $750 million is used to make a high-cost environment marginally less expensive, not truly competitive with states that possess lower intrinsic operating costs.
2. The Invisible Tax of Inflation: Devaluing the Subsidy
The state’s commitment to the $750 million annual allocation is a fixed, dollar-denominated promise. In an economic climate marked by persistent inflation even after major peaks, that fixed value quickly deteriorates in real terms.
Recent economic forecasts project California’s Consumer Price Index (CPI) inflation to stabilize around 2.5% to 3.0% annually for the near future. While this is lower than the post-pandemic highs, it is still a relentless force that erodes purchasing power.
The Devaluation of Production Budgets
For a production company, inflation means the cost of every input rises: lumber for set construction, fuel for generators, wardrobe materials, and general operating expenses. A $100 million production budget that qualified for a 40% credit in 2025 will require a 3% higher budget to achieve the same physical output in 2026. If the credit percentage remains static at 40%, the real value of the benefit has shrunk relative to the production’s operational needs.
If the state wants the credit to maintain a consistent competitive advantage, the dollar value of the tax break should theoretically increase in pace with inflation. Since the allocation is fixed at $750 million through the end of the program, the state is effectively committing to a shrinking benefit over time. This makes the incentive less attractive to producers in the long run, and it puts stress on the California Film Commission, which must manage demand with a capped resource that is losing real-world buying power every fiscal year.
Financial Strain on State Budgets
Crucially, inflation strains the general fund of the state, which is needed to cover the cost of the tax credits. As tax revenues struggle to keep pace with the rising costs of essential services like healthcare, pensions, and infrastructure maintenance, the $750 million dedicated to film subsidies begins to represent a far greater strain on the state’s fiscal flexibility. This leads directly to the core issue of opportunity cost.
“The economic benefits of film tax credits are often exaggerated and misunderstood, while their costs are underestimated or completely ignored.”- Tax Foundation (policy analysis / think tank)
3. The True Cost: Opportunity and Taxpayer Burden
Dedicating three-quarters of a billion dollars every year represents a massive economic opportunity cost. When the state chooses to spend $750 million on film subsidies, it simultaneously chooses not to spend those funds on other vital public services.
The Trade-Offs for Public Funds
What could $750 million achieve if redirected? It could fund tens of thousands of units of affordable housing, bridge critical infrastructure gaps, hire thousands of new public school teachers, or significantly expand mental health services. The argument that the film credit generates economic activity does not negate the fact that most public spending from building a bridge to hiring a nurse also generates jobs and economic activity.
The difference lies in the return on investment (ROI). The film credit operates as a targeted subsidy for a specific, profitable industry, whereas investments in general public goods like roads or education provide broad-based, non-excludable benefits to the entire populace.
Refundability: A Direct Cash Payment
The expansion of Program 4.0 is particularly costly because it introduced a key provision: refundability. Producers allocated credits may now elect to receive a portion of their credit as a refund over a five-year period if they have no current California income tax or sales tax liability. This feature is often necessary to compete with other states, but it changes the nature of the subsidy entirely.
Before refundability, a tax credit was a “tax expenditure”, money the state chose not to collect. With refundability, the state is making a direct cash outlay from the general fund to the production company. It transforms a deferred liability into an immediate, tangible cost. This shift means that the full $750 million is no longer just a reduction in tax revenue; it is a direct line item expenditure, paid by the broader California taxpayer base, thereby making the cost absorber the general resident, not just the producing entity.
This massive taxpayer commitment is further complicated by the political pressure to maintain it. Once an industry becomes dependent on a subsidy, cutting it is politically toxic, even if the fiscal justification is weak. The $750 million figure is now likely a political floor, not a negotiated ceiling, locking the state into a fixed, expensive commitment for the foreseeable future.
4. Questionable ROI: Separating Activity from Revenue
Proponents of the tax credit frequently cite the metric of “economic activity” to justify the expenditure. The recent round of 17 television projects, including Baywatch, is projected to generate $1.2 billion in statewide economic activity. While this sounds impressive, it is critical to understand the definition and limitations of this metric.
Gross Spending vs. Net Tax Revenue
Economic activity refers to the gross spending that occurs within the state. If a production spends $100 million in California, that is $100 million in economic activity. However, if the state grants a 40% tax credit on that spending, the public sector has essentially paid $40 million to secure $100 million in spending.
The real measure of success for the state budget is net new tax revenue. This is the tax money collected that would not have been collected had the project filmed elsewhere. Economic studies conducted on film tax credits across the nation including those by state legislative analysts often conclude that the fiscal return on investment (ROI) is far less than one dollar for every dollar spent. In many cases, these programs return as low as 20 to 30 cents on the dollar, meaning the state is essentially paying between 70 to 80 cents for every dollar of “new” activity.
While the film industry provides jobs (and the recent round is estimated to create 5,165 cast and crew jobs), the sheer cost of the subsidy suggests that achieving the same job creation via alternative public works or infrastructure spending would be significantly more fiscally efficient.
“Critics of these programs also suggest that tax dollars would be better spent on housing, education and other pressing issues, rather than in effect subsidizing entertainment studios.”- L.A.Times
The “But-For” Test
The central flaw in the ROI calculation is the “but-for” assumption: that but for the tax credit, the production would not have filmed in California. For high profile, place specific content like Baywatch, which is intrinsically tied to the California brand, a portion of that spending might have occurred in the state anyway, regardless of the incentive. This means the state is paying the full credit on some expenditures that were already “captured,” further diminishing the net return on investment. The $750 million allocation is, in part, paying for what the state’s natural cultural advantages already provide.
A Policy of Symbolism
California’s doubling down on film tax credits is an understandable, emotionally resonant policy decision. It’s a way for the state to symbolically reclaim its identity as the global home of cinema, signaling to the world and its highly unionized workforce that “Hollywood is back.”
But symbols carry a high price tag. Persistent high structural costs, coupled with the corrosive effect of inflation on a fixed dollar subsidy, and the massive, difficult-to-justify opportunity cost of the funds, suggest the policy risks functioning primarily as an expensive form of corporate welfare.
If the goal is truly durable, sustainable economic growth in the creative sector, the state should pivot away from simply competing on subsidies. Instead, it should focus on dismantling the underlying structural disadvantages: streamlining permitting, reducing regulatory burdens, and investing in core infrastructure that benefits all businesses.
The Baywatch reboot is a great victory for the California Film Commission, but the taxpayer must look beyond the spectacle and question whether the $750 million is the most effective way to secure a sustainable future for the Golden State’s economy. Until the true return on this massive investment proves to be significantly higher than industry averages suggest, this bold expansion will remain a policy of costly symbolism.