BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                  AB 1069
                                                                  Page  1

          Date of Hearing:  May 16, 2011

                     ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
                                Henry T. Perea, Chair

                AB 1069 (Fuentes) - As Introduced:  February 18, 2011

          Majority vote.  Tax levy.  Fiscal committee.

           SUBJECT  :  Income taxes:  extension of the motion picture tax 
          credit program. 

           SUMMARY  :  Extends the operation of the California Motion Picture 
          Tax Credit for five additional years, from July 1, 2014 until 
          July 1, 2019.   Specifically,  this bill  :  

          1)Authorizes the California Film Commission (CFC) to allocate 
            annually the motion picture tax credits, under both the 
            Personal Income Tax (PIT) and the Corporation Tax (CT) Laws, 
            to qualified applicants for five additional fiscal years 
            (FYs), from July 1, 2014 until July 1, 2019. 

          2)Specifies that the aggregate amount of motion picture tax 
            credits that may be allocated by the CFC in any FYis limited 
            to $100 million, through and including the 2018-19 FY. 

          3)Deletes duplicative sections of the Revenue and Taxation Code 
            (R&TC). 

          4)Takes effect immediately as a tax levy. 

           EXISTING FEDERAL LAW  :

          1)Allows a taxpayer to recover the cost of motion picture films, 
            sound recordings, copyrights, books and patents using the 
            income forecast method of depreciation.  As an alternative, 
            taxpayers may elect to deduct up to $15 million ($20 million 
            if the production expenses are incurred in certain distressed 
            areas) of the cost of any qualifying film and television 
            production, commencing prior to January 1, 2012, in the year 
            in which the expenditure is incurred.

          2)Provides that "qualified film" productions are eligible for 
            the domestic production activities deduction equal to a 9% 
            deduction of so-called "qualifying production activities 








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            income" (QPAI).  The deduction was phased in at 3% in 2005 and 
            2006, 6% in 2007 through 2009, and 9% in 2010 and thereafter.  
            QPAI refers to the net income from the license, sale, 
            exchange, or other disposition of any qualified film produced 
            by the taxpayer.  The deduction is limited to 50% of the W-2 
            wages paid by the taxpayer with respect to domestic production 
            activities during the taxable year, and is generally allowed 
            for purposes of the Alternative Minimum Tax (AMT).  A 
            "qualified film" is defined as any motion picture film or 
            video tape, excluding sexually explicit films as defined in 18 
            United States (U.S.) Code Section 2257, if at least 50% of the 
            total production compensation constitutes compensation for 
            services performed in the U.S. by actors, production 
            personnel, directors, and producers. 

          3)Does not allow any income tax credit for motion picture 
            production activities. 

           EXISTING STATE LAW  :

          1)Conforms to the use of the federal income forecast method of 
            depreciation for the recovery of costs of motion picture 
            films, sound recordings, copyrights, books, and patents, with 
            modifications. 

          2)Does not conform to the federal expensing provision for film 
            and television production. 

          3)Does not conform to the federal domestic production activities 
            deduction. 

          4)Allows a qualified taxpayer, for taxable years beginning on or 
            after January 1, 2011,  a motion picture production tax 
            credit, under either the PIT or CT Law. 

          5)Specifies that the amount of the tax credit is equal to 
            either:

             a)   20% of the qualified expenditures attributable to the 
               production of a qualified motion picture, or;

             b)   25% of the qualified expenditures attributable to the 
               production of a television series that relocated to 
               California, or an independent film.









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          6)Defines "independent film" as a film with a budget between $1 
            million and $10 million produced by a non-publicly traded 
            company that is not more than 25% owned by publicly traded 
            companies.  

          7)Requires the CFC to administer a motion picture production tax 
            credit allocation and certification program, as follows: 

             a)   Taxpayers will first apply to the CFC for a credit 
               allocation, based on a projected project budget. 

             b)   Upon receiving an allocation, the project must be 
               completed within 30 months. 

             c)   The taxpayer must then provide the CFC with verification 
               of completion and documentation of actual qualifying 
               expenditures.  

             d)   Based on that information, the CFC will issue the 
               taxpayer a credit certificate up to the amount of the 
               original allocation. 

          8)Defines "qualified motion pictures" as one produced for 
            general distribution to the public, and include feature films 
            with budgets between $1 million and $75 million, movies of the 
            week with a minimum budget of $500,000, and new television 
            series with a minimum production budget of $1 million. 

          9)Requires that 75% of the production days take place within 
            California or 75% of the production budget be incurred for 
            payment for services performed within the state and the 
            purchase or rental of property used within the state.  In 
            addition, requires that the production of the qualified motion 
            picture be completed within 30 months from the date on which 
            the qualified taxpayer's application is approved by the CFC. 

          10)Declares that the credit is not available for commercial 
            advertising, music videos, motion pictures for non-commercial 
            use, news and public events programs, talk shows, game shows, 
            reality programming, documentaries, and pornographic films.

          11)Requires the CFC to allocate $100 million of credit 
            authorizations each year during the period 2009-10 through 
            2013-14 on a first-come, first-served basis, with 10% of the 
            allocation reserved for independent films. 








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          12)Declares that any unallocated amounts and any allocation 
            amounts in excess of certified credits may be carried over and 
            reallocated by the CFC. 

          13)Provides that qualifying taxpayers could claim the credit on 
            their tax return filed with the Franchise Tax Board (FTB) 
            under either PIT or CT.  

          14)Provides that taxpayers may use certified credits as follows;

             a)   Claim it directly;

             b)   Assign it to another member of their unitary group;

             c)   Sell the credits to other taxpayers, or;

             d)   Elect to apply the credit against their sales and use 
               tax liability.  

          15)Specifies that any unused credit may be carried forward to 
            each of the following six taxable years or until the credit is 
            exhausted, whichever occurs first.  In the case where the 
            credit exceeds a qualified corporate taxpayer's liability, it 
            may elect to assign any portion of the credit to one or more 
            affiliated corporations for each tax year in which the credit 
            is allowed. 

          16)In the case of credits attributable to an independent film, 
            the qualified taxpayer is allowed to sell a credit to an 
            unrelated party but is required to report to the FTB prior to 
            the sale of the credit all required information in the form 
            and manner specified by the FTB. 

          17)Requires the CFC to provide the FTB with a list of qualified 
            taxpayers and the tax credit amounts allocated to each 
            qualified taxpayer by the CFC. 

           FISCAL EFFECT  :  The FTB staff estimates that this bill will 
          result in an annual revenue loss of $11 million in FY 2013-13, 
          $49 million in FY 2014-2015, and $83 million in FY 2015-16, with 
          the estimated total revenue loss of $357 million for the 
          following FYs. 

           COMMENTS  :   








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           1)Author's Statement  .  The author provides the following 
            statement in support of this bill:

          "California suffered both job and financial losses as hundreds 
            of productions have left the state to seek incentives offered 
            elsewhere.  A phenomenon commonly referred to 'run-away 
            production.'  In addition to the international competition 
            from Canada, Australia and most EU nations, over 40 U.S. 
            states offer meaningful financial incentives to the film 
            industry successfully luring production and post-production 
            jobs and spending away from California.

          "In February 2009, the California Film & Television Tax Credit 
            Program was enacted as part of a targeted economic stimulus 
            package to increase production spending, jobs and tax revenues 
            in California.  AB 1069, in seeking a five-year extension to 
            the existing law, acknowledges that the Program has been 
            successful in its goal to retain and increase film and 
            television production occurring in California."

           2)Arguments in Support  .  The proponents state that the film 
            production tax credit has been successful in its goal to 
            retain and increase film and television production occurring 
            in California.  Thus, since "its inception, the program has 
            generated 41,000 new jobs and $2.2 billion ? in direct 
            spending."  It helps California to stay competitive because, 
            when productions leave the state, only top tier talent is 
            flown to work on location.  As a result, many well-paying 
            production jobs with good benefits are lost and ancillary 
            businesses such as caterers, dry cleaners and restaurants are 
            negatively impacted.  The proponents assert that, given that 
            40 other states and many foreign countries are promoting 
            aggressive programs to attract motion picture production to 
            their jurisdictions, it is vital for California "to retain 
            this important engine that contributes ingenuity, talent, and 
            creativity to our economy."

          The proponents also emphasize that the film tax credit is "one 
            of few tax breaks in California that has the appropriate 
            accountability measures to make sure it is effective."  The 
            program includes a five-year sunset, an annual cap of $100 
            million and is targeted.  The proponents conclude that this 
            bill "gives California the needed competitive edge to keep its 
            heritage industry and will continue the successful momentum of 








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            the program."

           3)Tax Credits:  Do They Work?   Existing law provides various 
            credits, deductions, exclusions, and exemptions for particular 
            taxpayer groups.  In the late 1960's, U.S. Treasury officials 
            began arguing that these features of the tax law should be 
            referred to as "expenditures," since they are generally 
            enacted to accomplish some governmental purpose and there is a 
            determinable cost associated with each (in the form of 
            foregone revenues).  Generally, advocates for tax incentives, 
            such as Arthur Laffer and N. Gregory Mankiw, argue that 
            reduced taxes allow taxpayers to invest money that would 
            otherwise be paid in taxes to better use, thereby, creating 
            additional economic activity.  "Supply-siders" posit that 
            higher taxes do not result in more government revenue; 
            instead, they suppress additional innovation and investment 
            that would have led to more economic activity and, therefore 
            healthier public treasuries, under lower marginal tax rates.  
            Industry-specific credits complement this theory by lowering 
            tax costs for industries that provide positive multiplier 
            effects, such as stimulating economic activity among suppliers 
            and increasing economy-wide purchasing power resulting from 
            hiring additional employees. 

            Critics, however, state that tax incentives rarely result in 
            additional economic activity.  Companies locate in California 
            because of its competitive advantages, namely its environment, 
            weather, transportation infrastructure, access to ports, 
            highways, and railroads, as well as its highly skilled 
            workforce and world class higher education system.  These 
            advantages trump perceived disadvantages resulting from its 
            tax structure and other policies.  Additionally, critics argue 
            that industry-specific tax incentives do actually effect 
            business decisions; instead, enhanced credits and deductions 
            reward firms for investments they would have made anyway. 
            ÝSee, e.g., D. Neumark, J. Zhang, and J. Kolko, Are Businesses 
            Fleeing the State? Interstate Business Location and Employment 
            Change in California, (a PPIC report showing that, while 
            California loses jobs due to firms leaving the state, these 
            losses have a minimal effect on the economy);  D. Neumark and 
            J. Kolko, Are California Companies Shifting Their Employment 
            to Other States? (finding that, while California companies 
            have shifted jobs to other states, out-of-state firms have 
            offset these losses by hiring more in California)].  









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           4)How is a Tax Expenditure Different from a Direct Expenditure?   
            As the Department of Finance notes in its annual Tax 
            Expenditure Report, there are several key differences between 
            tax expenditures and direct expenditures.  First, tax 
            expenditures are reviewed less frequently than direct 
            expenditures once they are put in place.  This can offer 
            taxpayers greater certainty, but it can also result in tax 
            expenditures remaining a part of the tax code without 
            demonstrating any public benefit.  Secondly, there is 
            generally no control over the amount of revenue losses 
            associated with any given tax expenditure.  Finally, it should 
            also be noted that, once enacted, it generally takes a 
            two-thirds vote to rescind an existing tax expenditure absent 
            a sunset date.  This effectively results in a "one-way 
            ratchet" whereby tax expenditures can be conferred by majority 
            vote, but cannot be rescinded, irrespective of their efficacy, 
            without a supermajority vote.

           5)California Motion Picture Tax Credit Program:  Background  .  In 
            February 2009, the California Film & Television Tax Credit 
            Program (Film Tax Credit Program) was enacted as a part of an 
            economic stimulus plan to promote production spending, jobs, 
            and tax revenues in California.  Although a bill creating some 
            sort of a tax incentive for the motion picture and television 
            production in California had been introduced almost every 
            legislative session long prior to 2009, the existing film tax 
            credit program was initially recommended by then Governor 
            Schwarzenegger in his 2009-10 budget proposal.  Unlike other 
            proposals in the past, the existing film tax credit is 
            targeted, capped and allocated.  In many respects, it is 
            similar to a grant program.  It is effective only for five 
            fiscal years, from FY 2009-10 until FY 2013-14, and only $500 
            million total is allocated to this credit over the life of the 
            program.  The CFC is required to allocate and certify the 
            credit on the first-come first-serve basis, up to $100 million 
            every FY.  The credit cannot be used until January 1, 2011, 
            and is not refundable.  

           6)Is the Film Tax Credit Program Effective in Achieving the 
            Stated Goal  ?  With the current financial state of the 
            California economy, all state programs affecting the General 
            Fund are under scrutiny to ensure that the programs are 
            effectively achieving desired results.  The main goal of the 
            Film Tax Credit Program is to prevent runaway production and 
            retain production already being filmed in California.  The 








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            Film Tax Credit Program is a relatively new program, and 
            whether the program has been successful in achieving its main 
            goal is up for debate.  

              a)   May be it is.   Undoubtedly, California companies face 
               higher costs of doing business - land, labor, and capital 
               are generally more expensive here.  Furthermore, other 
               states and foreign countries have been fiercely competing 
               with California to lure motion picture and television 
               series production away from California.  The high costs of 
               doing business in California, coupled with very generous 
               tax incentives provided elsewhere, force many motion 
               picture companies - that would otherwise seek to locate in 
               California - to lower-cost and lower-tax jurisdictions.  
               According to the CFC, in 2003, "66% of studio feature films 
               were filmed in California."  In 2009, however, only 38% of 
               studio films were filmed in the state, and San Francisco 
               film and TV production employment dropped 43% between 2001 
               and 2006.

             The recent report released by the Milken Institute states 
               that, although "it is still too early to know the real 
               impacts of the Film Tax Credit Program, there are some 
               encouraging signs" that the Film Tax Credit Program is 
               working.  (K. Klowden, A. Chatterjee, and C. Flor Hynek, 
               Film Flight:  Lost Production and Its Economic Impact on 
               California, Milken Institute, July 2010).  Thus, in January 
               of 2010, the Los Angeles Economic Development Commission 
               (LAEDC) projected that, as a result of the California 
               incentive program, production in the state should have 
               picked up in 2010.  The projection by LAEDC was bolstered 
               by Film L.A. (the permitting agency for Los Angeles) 
               reports.  Film L.A. reported that, in 2010, feature film 
               production posted a 28.1% fourth quarter gain and a 
               year-over-year gain of 8.1%.  In Film L.A.'s January 11, 
               2011 release, it was reported that the increase can be 
               wholly attributed to the Film Tax Credit Program.  The 
               Program attracted dozens of new feature film projects to 
               Los Angeles, which was responsible for 26% of the local 
               feature production for the year.  The CFC stated that these 
               numbers are an early indicator that the incentive program 
               is having an immediate positive impact on production in 
               California.

               The increase in production has resulted in increased 








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               revenues to the state as well as an increase in jobs.  As 
               reported by the CFC, in FY 2009-10, $176 million in tax 
               credits were allocated to 70 projects.  The aggregate 
               amount of direct spending by the 70 projects is estimated 
               at $1.2 billion, of which $453 million is attributable to 
               direct qualified wages (excluded any wages for actors, 
               directors, writers, and producers), $430 million to 
               qualified non-wage expenditures, and $346 million to 
               non-qualified production expenditures (e.g. addition 
               spending that does not qualify for tax credits).  An 
               estimated 18,200 crew and 4,000 cast members have been or 
               will be hired by the approved projects and an additional 
               113,000 individuals will receive daily employment as 
               background players.  

               Further, in FY 2010-2011, $121 million in tax credits were 
               allocated to 43 projects.  The estimated aggregate direct 
               spending by the 43 projects is $969 million.  Over $275 
               million is directly attributed to qualified wages and $315 
               million to qualified non-wage expenditures.  An estimated 
               7,500 crew and 2,100 cast members have been or will be 
               hired by the approved projects and an additional 59,000 
               individuals will receive daily employment as background 
               players.

               Thus, to date, $300 million in tax credits have been 
               allocated which has resulted in a total aggregate of direct 
               spending of $2.2 billion and total wages paid/to be paid of 
               $728 million. It has been estimated, using generic 
               multipliers for motion picture and video industries in 
               California, that the broader economic impact of the Film 
               Tax Credit Program has resulted in business revenues of 
               $6.5 billion, full time equivalent jobs of 40,996, and 
               earnings of $1.8 billion.

               California has a comparative advantage over other states 
               because of the long established entertainment industry.  
               The established industry has provided California with a 
               skilled workforce and available infrastructure.  It has 
               been argued that the comparative advantage, when coupled 
               with an incentive program, should be effective in keeping 
               production in California, despite the fact that the 
               California tax credit is not as generous as that of other 
               states.  In other words, an incentive program that is less 
               costly than those provided in other states has the ability 








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               to keep production in California because of the various 
               other benefits connected with filming in California.

              b)   May be it is not  .  Critics, however, argue that the 
               economic benefits of film tax credits are often overstated 
               "while their costs are underestimated or completely 
               ignored." (M. Robyn, Tax Foundation, Film Production 
               Incentives: a Game California Shouldn't Play, p. 1, A 
               Report Presented at the Joint Oversight Hearing of the 
               Committee on Revenue and Taxation and the Committee on 
               Arts, Entertainment, Sports, Tourism, and Internet Media, 
               March 21, 2011).  

             Although "industry advocates long have argued that movie 
               production in California was in danger of being poached by 
               other states or countries through their use of Ýmotion 
               picture tax incentives], employment and wage data for the 
               motion picture industry do not provide clear evidence that 
               any significant damage to the state's industry or economy 
               has resulted from efforts by other states to draw movie 
               production away from California in the past decade." (Brian 
               R. Sala, Acting Director, California Research Bureau, 
               Updated Information On Film Industry Incentives, a report 
               presented on March 11, 2011, at the Joint Oversight Hearing 
                                        of this Committee and Arts, Entertainment, Sports, Tourism, 
               & Internet Media Committee).  In fact, it appears that 
               California's total film industry employment has grown since 
               2000, from 36% to 38%, though it has had its ups and downs. 
               (M. Robyn's Testimony, p. 3).  

             Secondly, opponents argue that subsidies to the film and 
               television industry benefit production that would have 
               occurred in absence of the incentive and "much of the 
               subsidy represents a real loss of revenue with no net new 
               jobs to offset the cost."  (M. Robyn's Testimony, p. 2).  
               In its 2009-10 Budget Analysis Series, the Legislative 
               Analyst Office (LAO) noted that the credit is allocated on 
               a first-come first-serve basis, which undercuts the 
               program's incentive for production companies to change 
               their location decisions.  The firms that are "absolutely 
               committed to producing in California would be among the 
               first to apply for credits - before firms that are 
               considering an out-of-state location," and as a result, the 
               credit "may be even more likely that most similar programs 
               to create a windfall for committed in-state producers 








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               rather than be a deciding factor for otherwise-undecided 
               producers."  (2009-10 Budget Analysis Series, Film 
               Production Credit, February 5, 2009).  As noted by M. Robyn 
               from Tax Foundation, in order for the film tax credit to be 
               a revenue gain for the state, "any net new jobs, or net 
               jobs saved, would have to generate enough tax revenue to 
               outweigh the revenue wasted on productions that would have 
               located in-state anyway." (M. Robyn's Testimony, p. 2).  
               However, no data is yet available to determine the extent 
               of the film and TV production that would have occurred in 
               the state in the last two years in the absence of the film 
               tax credit. 
               
             The LAO was also concerned with a "horizontal inequity" 
               created by this credit, meaning that similarly situated 
               taxpayers are treated differently.  The program is likely 
               to create inequities in the way film companies are treated: 
                some firms may be approved for credits while other equally 
               qualified firms may be denied simply because they did not 
               apply soon enough.  

             Finally, the LAO report mentioned that it was unclear why 
               "the film industry deserves special treatment" while other 
               industries, for which production costs are higher in 
               California than in some other locations, are left out.  The 
               LAO stated that the film tax credit, as proposed in 2009, 
               would "arbitrarily favor some film producers over others" 
               and that, rather than singling out individual industries, 
               "the state should endeavor to create the conditions that 
               permit all businesses to thrive."  Even though film 
               productions greatly impact the broader economy in 
               California is not unique to the film industry; other 
               industries have a similar effect.  

             The film and television industry has been a large source of 
               employment and revenue for the state and losing the 
               industry could be detrimental to the California economy.  
               However, the question remains as to whether the value of 
               the benefits received by the state from providing the film 
               tax credit outweighs the costs of the tax subsidy. 

           7)What is the Urgency  ?  This bill proposes to extend the 
            existing film tax credit program for an additional five years, 
            from FY 2013-14 until FY 2018-19.  In light of the fact that 
            the existing program is not due to expire for another two 








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            years, and the fact that it is uncertain whether the existing 
            tax credit is effective in achieving its goal, the Committee 
            may wish to postpone the consideration of the extension until 
            next year, once more data is available.   

           8)Double-referral  . This bill is double-referred with the 
            Assembly Committee on Arts, Entertainment, Sports, Tourism, 
            and Internet Media and passed out of that Committee with a 9-0 
            vote.  For a more comprehensive analysis of this bill, please 
            refer to that Committee's analysis. 


           REGISTERED SUPPORT / OPPOSITION  :   

           Support 
           
          American Federation of Television and Radio Artists
          California Labor Federation
          California State Council of Laborers
          California Taxpayers Association
          California Teamsters Public Affairs Council
          Directors Guild of America
          Film Musicians Secondary Markets Fund
          IATSE Local 44 - Affiliated Property Craftpersons
          IATSE Local 80 - Motion Picture Studio Grips/Crafts Service
          IATSE Local 600 - International Cinematographers Guild
          IATSE Local 695 - Sound Technicians, Television Engineers, Video 
          Assist Technicians, and 
              Studio Projectionists
          IATSE Local 700 - Motion Picture Editors Guild
          IATSE Local 705 - Motion Picture Costumers
          IATSE Local 706 - Make Up Artists & Hair Stylists Guild
          IATSE Local 728 - Motion Picture Studio Electrical Lighting 
          Technicians
          IATSE Local 729- Motion Picture Set Painters and Sign Writers
          IATSE Local 767 - Motion Picture Studio First Aid Employees
          IATSE Local 800 - Art Directors Guild and Scenic, Title, and 
          Graphic Artists
          IATSE Local 871 - Script Supervisors/Continuity, Accountants and 
          Allied Production 
              Specialists Guild 
          IATSE Local 884 - Motion Picture Studio Teachers and Welfare 
          Workers
          IATSE Local 892 - Costume Designers Guild
          International Brotherhood of Teamsters, Local 399








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          Motion Picture Association of America
          Professional Musicians - Local 47, American Federation of 
          Musicians
          Recording Musicians Association
          Screen Actors Guild
          Unite Here

           Opposition 
           
          None on file
           
          Analysis Prepared by  :  Oksana Jaffe / REV. & TAX. / (916) 
          319-2098