BILL ANALYSIS Ó
AB 1069
Page 1
ASSEMBLY THIRD READING
AB 1069 (Fuentes)
As Amended May 18, 2011
Majority vote. Tax levy
ARTS, ENTERTAINMENT, SPORTS 9-0 REVENUE & TAXATION 8-0
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|Ayes:|Campos, Olsen, Achadjian, |Ayes:|Perea, Donnelly, Beall, Charles |
| |Butler, Carter, Gatto, | |Calderon, Fuentes, Gordon, |
| |Mendoza, Monning, Silva | |Harkey, Nestande |
|-----+--------------------------+-----+-----------------------------|
| | | | |
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APPROPRIATIONS 16-1
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|Ayes:|Fuentes, Harkey, | | |
| |Blumenfield, Bradford, | | |
| |Charles Calderon, Campos, | | |
| |Davis, Donnelly, Gatto, | | |
| |Hall, Hill, Lara, | | |
| |Mitchell, Nielsen, | | |
| |Solorio, Wagner | | |
| | | | |
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|Nays:|Norby |
| | |
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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 FY is limited to $100
million, through and including FY 2018-19.
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3)Ensures that the film tax credit assigned to, or sold to, an
unrelated taxpayer may be claimed by that taxpayer as a "qualified
taxpayer."
4)Clarifies that the otherwise applicable limitation on the
utilization of credits by a disregarded entity does not apply and
that the disregarded entity may sell the film tax credit to an
unrelated taxpayer.
5)Deletes duplicative sections of the Revenue and Taxation Code
(R&TC).
6)Takes effect immediately as a tax levy.
FISCAL EFFECT : The Franchise Tax Board staff estimates 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 :
Author's statement . The author states that, "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."
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
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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.
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 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.
Maybe 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)
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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 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.
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
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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 to keep
production in California because of the various other benefits
connected with filming in California.
Maybe 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, page 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, page 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
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
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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, page 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.
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 years, and the fact that it is
uncertain whether the existing tax credit is effective in achieving
its goal, it may be prudent to postpone the consideration of the
extension until next year, once more data is available.
Double-referral . This bill is double-referred with the Assembly
Arts, Entertainment, Sports, Tourism, and Internet Media Committee
and passed out of that committee with a 9-0 vote. For a more
comprehensive analysis of this bill, please refer to that
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committee's analysis.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916) 319-2098
FN: 0001066