BILL ANALYSIS                                                                                                                                                                                                    Ó



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        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                     |
        |     |                          |
         -------------------------------- 
         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 



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