‘Potentially Transformative’: Indie Studios Are Cautiously Optimistic About California’s New 35% Tax Incentive

In an attempt to reclaim its legacy as the heart of the global animation industry, California recently passed Assembly Bill 1138, which, for the first time, extends the state’s film and TV tax credit program to include animated features, series, and shorts. With a newly increased incentive rate of up to 35% and a more than doubled annual funding cap (now $750 million), the bill marks a significant shift in how the state supports its creative economy.

But what does this really mean for the independent animation producers who have weathered years of runaway production, rising costs, and industry contraction?

The short answer: cautious optimism.

A Long-Awaited Win for Animation

For decades, animation was curiously absent from California’s list of tax-incentivized productions, even as states like Georgia and countries like Canada, France, Ireland, and Spain attracted entire pipelines with generous subsidies. AB 1138 seeks to reverse that trend by providing tangible financial reasons for studios to keep, or return, production to the Golden State.

Emmy and Annie-winning The Dam Keeper and Oni: Thunder God’s Tale studio Tonko House co-founder Robert Kondo sees the bill as a practical benefit to his team’s production planning. “For Tonko House, our commitment has been to work with the individuals that best fit each project, regardless of location,” Kondo said. “This bill creates greater flexibility in our production planning by making the workforce in California a more financially viable option.”

He adds that while the bill is a good start, it isn’t enough to address the full scope of challenges faced by California’s animation sector: “To maintain and grow California’s animation community, it’s crucial to cultivate a diverse ecosystem of animation studios, from large to small… While this bill contributes towards that goal, in isolation, it cannot address the multitude of obstacles and rapid change that our local industry faces.”

Ben Kalina, COO of Titmouse, one of the largest independent animation studios in the U.S., echoes that sentiment. “The hope is that more projects will be greenlit,” Kalina said. “A lot of people say budgets are going down, but production budgets continue to rise as costs go up. From our point of view, it’s content budgets that are stretched. If there’s a tax credit that allows for more work to be made within the current content budgets, hopefully, we all have more work. And with a tax credit, the work needs to happen in the qualified location. So that means more work in California.”

For Smaller Studios, New Possibilities

For independent studios like KuKu Studios in Berkeley, producer of Netflix’s upcoming film In Your Dreams, the impact could be even more profound. Co-founder Alex Woo, who directs the Netflix family feature, calls the bill “potentially transformative” for small-scale operations looking to stay rooted in California’s storied creative landscape.

“As a Berkeley-based indie animation studio, the inclusion of animation in California’s tax credit program could be transformative for our business,” Woo said. “For the first time, animated projects are eligible for these incentives, and honestly, that opens new opportunities for how we approach project development and financing.”

Woo, whose studio has long prioritized local hiring and community-building, frames the bill as a critical lifeline after years of economic disruption. “Our goal has always been to hire locally and build on the legendary Bay Area filmmaking community that we’ve been fortunate enough to be part of,” he said. “Unfortunately, that community has been hit hard in recent years—by pandemic-induced industry changes, talent migration due to rising living costs, and the continued outsourcing of animation outside California and the U.S.”

Kalina agrees, noting that while earlier support might have softened the industry’s current struggles, action is still meaningful today. “I don’t think that it’s too little or too late,” he said. “It would have been nice if this started a few years ago, but right now it’s needed. There are so many reasons why work in the entire entertainment industry has slowed—I think if this happened five years ago, we’d still be feeling a slump now.”

While Woo acknowledges criticisms that the bill may be “too little, too late,” he emphasizes the need to act now: “We have to start somewhere. Yes, we’ve hemorrhaged production over the past decades, but the alternative to acting now is continuing to watch our industry infrastructure in California disappear.”

For KuKu Studios and other agile independents, the flexibility of the new incentive structure could be just what they need to greenlight projects that have been stalled or deemed financially unfeasible. “We have the ability to pivot quickly, continue hiring local talent, and structure projects around these incentives,” Woo said.

But Not All Credits Are Created Equal

Despite the headline-worthy 35% figure, not all industry veterans are ready to celebrate just yet.

Chuck Peil, head of strategic partnerships at The SpongeBob Movie: Search for SquarePants animation studio Reel FX, which operates Hollywood, Dallas, and Montreal, but does most of its work away from L.A., points out that the structure of California’s credit may limit its utility, particularly for the very independent producers it seeks to support.

“One of the most visible metrics is the percentage offered… but equally important is how the incentive is structured,” Peil said. “Cash rebates are generally considered the most advantageous format… In contrast, tax credits—unless they are transferable—tend to offer less immediate value.”

According to Peil, “There are some limits to our current understanding related to California’s new program regarding transferability. Whereby lower budgeted films under $10 million can qualify, if the budgets are higher than this, the advantage is more challenging, limiting the utility of the incentive for many producers. However, it does remain relevant to larger organizations such as Disney or Nickelodeon that can fully absorb the credit internally.”

Although best known for its adult animation work, Titmouse is plenty active in the kids and family space, too, and Kalina urges careful consideration of how eligibility is defined under the new credit, especially when it comes to supporting children’s programming. “We haven’t seen all the details of this tax credit yet, but having worked with tax credits in many locations, the most important part is flexibility in terms of qualified productions,” he said. “A credit that is too restrictive on the types of qualified productions (runtimes, budgets, broadcasters, etc…) will not support the industry’s growth. But it’s totally understandable that qualifications must exist to make sure credits go to legitimate productions.”

The executive, whose company animated Disney’s six-time Children’s & Family Emmy-nominated series Kiff, adds: “I do worry about children’s series qualifying, which are typically lower budgets. Children’s animated series are a huge part of this industry, and with budget thresholds, some may not qualify, which may mean that not as many jobs are created. We have the same issue with the New York tax credit, which has a half-hour runtime qualifier, but the New York industry creates a lot of 11-minute children’s and preschool series, which are not eligible for the tax credit.”

In other words, unless a studio has a substantial California tax liability, which many independents do not, the credit may not be as accessible or usable as it sounds on paper.

The Price of Doing Business in California

Peil also raises a point that every California-based producer knows too well: the state is expensive.

“Wage levels in LA can be up to 40% higher, based on our direct experience, than in alternative markets such as Dallas or Montreal,” he said, citing the elevated cost of living and operational expenses in Southern California.

That cost differential, coupled with the structural limitations of the tax credit, makes it difficult for many studios to justify a return to the state, even with the new law in place.

Still, Peil is not entirely dismissive. “While a strong incentive could eventually encourage companies to reopen offices in the state, rebuilding a robust production ecosystem may take a considerable amount of time… but again, better late than never.”

His recommendation? “If California genuinely intends to attract studios and rebuild its production base, it should consider offering a 35% cash rebate, payable upon the conclusion of production. This would be a far more compelling proposition.”

A Bigger Vision for the Future

For all four producers – Kondo, Woo, Kalina, and Peil – there’s consensus on one key point: AB 1138 is a good start, but real recovery will take more than just tax policy.

Woo envisions a California animation sector that honors its legacy while embracing new business models. “Preserving this tradition isn’t about clinging to the past—it’s about shaping the future,” he said. “The pioneering spirit of California is the primordial ooze from which all the artistic and technological innovations that created the world’s best animated films emerged.”

Kondo, too, sees value in nurturing a creative ecosystem that doesn’t just serve the biggest players: “It’s crucial to cultivate a diverse ecosystem of animation studios, from large to small, and the wide range of projects being produced here.”

And Peil, while pragmatic, sees a path forward, if the state listens to the real needs of the production community: “Better late than never,” he said. “But if we’re serious, we’ll need to go further.”