BILL ANALYSIS Ó
AB 2026
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Date of Hearing: April 17, 2012
ASSEMBLY COMMITTEE ON ARTS, ENTERTAINMENT, SPORTS, TOURISM, AND
INTERNET MEDIA
Nora Campos, Chair
AB 2026 (Fuentes) - As Introduced: February 23, 2012
SUBJECT : Income taxes: Extension of film credits
SUMMARY : Extends for five years the requirement that the
California Film Commission (CFC) annually allocate tax credits
to qualifying motion pictures, as specified, through the
2019-20 fiscal year. Specifically, this bill :
1)Extends the requirement in law that that CFC annually issue
$100 million in tax credits to qualifying motion picture
productions, as specified, through the 2019-20 fiscal year.
(See Existing Law for a detailed explanation of the film tax
credit program).
2)Extends the limitation on the aggregate amount of credits that
may be allocated through the 2019-20 fiscal year.
EXISTING LAW :
1)Establishes a motion picture production tax credit, 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.
2)Defines "independent film" as a film with a budget between
$1million and $10 million produced by a non-publicly traded
company which is not more than 25% owned by publicly traded
companies.
3)Requires the CFC to administer a motion picture production tax
credit allocation and certification program, as follows:
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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.
4)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.
5)Requires that in order to be eligible for the credit, 75% of
the production days must take place within California or 75%
of the production budget is incurred for payment for services
performed within the state and the purchase or rental of
property used within the state.
6)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.
7)Requires that the CFC allocate $100 million of credit
authorizations each year during the period 2009-10 through
2015 on a first-come, first-served basis, with 10% of the
allocation reserved for independent films.
8)Declares that any unallocated amounts and any allocation
amounts in excess of certified credits may be carried over and
reallocated by the CFC.
9)Provides that qualifying taxpayers could claim the credit on
their tax return filed with the Franchise Tax Board (FTB)
under either the Personal Income Tax or Corporation Tax.
10)Provides further that taxpayers may use certified credits in
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a number of ways, they may;
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.
11)Specifies that the CFC will allocate $100 million of credit
authorizations each year during the period 2009-10 through
2015 on a first come first served basis.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's Statement :
According to the author, "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. This bill, 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)Current Film Production Tax Program :
The California Film & Television Tax Credit Program was
enacted as a part of an economic stimulus plan to promote
production spending, jobs, and tax revenues in California.
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The Program is administered by the CFC.
The credit first became available in July of 2009. Under
existing statute, a qualified taxpayer is allowed a credit
against income and/or sales and use taxes based on qualified
expenditures. The credit amounts to either 20% or 25% of
qualified expenditures, with a maximum of $500 million dollars
allocated total over the life of the program. The credit
cannot be used until January 1, 2011 and is not refundable.
The credit may be carried over for five years and may be
transferred to affiliates. Credits issued to independent
films ($1 million- $10 million qualified expenditure budget
that is produced by a company that is not publically traded
and in which a publically traded company does not own more
than 25% of the shares) may be transferred or sold to an
unrelated party.
To be eligible for the credit, a project must meet the 75%
test (production days or total production budget in
California) and must be a qualifying motion picture.
For the purposes of a 20% tax credit, a qualifying motion
picture is defined as:
a) A Feature Film ($1 million minimum- $75 million maximum
production budget),
b) A Movie of the Week or Miniseries ($500,000 minimum
production budget); or
c) A new television series licensed for original
distribution on basic cable ($1 million minimum budget,
one-half hour shows and other exclusions apply)
For the purposes of a 25% tax credit, a qualifying motion
picture is defined as:
a) A television series, without regard to episode length,
that filmed all of its prior seasons outside of California;
or
b) An independent film.
In the 2009-10 fiscal year, which was the initial year of the
program, $200 million was allocated. In each subsequent year
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until the 2013-14 fiscal year, CFC will allocate $100 million.
A minimum $10 million of the annual finding is made available
for independent films
3)Findings of the Joint Oversight Hearing of Arts,
Entertainment, Sports, Tourism & Internet Media (AEST&IM) and
Revenue and Taxation Committees :
On March 21, 2011, a Joint Oversight Hearing of the Assembly
AEST&IM and the Assembly Revenue and Taxation Committees was
held on "California's Film Credit Under the Spotlight: A
Review of the Film and Television Tax Credit Program." (Note:
These findings were recently reconfirmed by the Revenue and
Taxation Committee Oversight Hearing on "Assessing Tax
Expenditure Programs in Light of California's Fiscal
Challenges" on February 22, 2012, where the Film Tax Credit
was analyzed.)
a) Run-away Production :
At the state level, "run-away productions" are film or
television productions that are developed for initial
exhibition or broadcast in California, but that are
actually filmed in another state or country in order to
achieve lower production costs.
A number of other states (forty at last count) have adopted
or are adopting measures, including tax credits, to attract
film production. Various entities (state & local
governments, non-profits, labor unions and the film
industry, among others) indicate that tax credits and other
incentives to produce films outside California have
resulted in film production moving out of California and
into other states and countries.
According to the Los Angeles Economic Development Commission
(LAEDC):
"Most people think of film production running away to
Canada, though Europe was a quite popular destination for a
while (and Romania is currently). However, run-away
production to other states has become a more significant
challenge to California's film industry. This trend
impacts not only production activities in the Los Angeles
area, but film commissions around the state that have also
been facing this competition. LAEDC tracked the location
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of major photography on feature film production from Ý2003
to 2005]. Two things stood out from this informal survey.
One, when productions leave California, the major studios
still tend to go offshore rather than to other states. In
many cases, these decisions are due to story
considerations, but the financial benefits are still
important components of the decision.
"The second trend is that independent producers are
increasingly going elsewhere in the U.S. Other states have
been busy offering new incentives or increasing the level
of existing incentives for filming in their jurisdictions.
More worrisome are the efforts to develop production
facilities to lure more of the production process. For
example, in New Mexico, there are plans to build a $60
million film, TV, and digital media production facility in
Albuquerque. New York is working on a studio complex.
"LAEDC conducted research for the CFC on the job and state
tax revenue implications of run-away production. On a
"mid-budget" film ($17 million), 304 direct and indirect
jobs were created and $1.2 million state sales and income
taxes were generated. For a "large budget" film ($70
million), 928 direct and indirect jobs were created, while
$10.6 million in state taxes were generated. These were
conservative estimates."
According to the CFC, "In 2003, 66% of studio feature films
were filmed in California. In 2009, only 38% of studio
films were filmed in state. San Francisco film and TV
production employment dropped 43% between 2001 and 2006.
"The Los Angeles region experienced a steady decline in
feature film production days in 11 out of the last 13
years. However, Film L.A., the permitting agency for Los
Angeles, reported that in 2010, feature film production
posted a 28.1% fourth quarter gain and a year-over-year
gain of 8.1%. "The annual increase can be wholly
attributed to California's Film and Television Tax Credit.
The Program attracted dozens of new feature film projects
to Los Angeles, which were responsible for 26% of local
feature production for the year. Were it not for these
projects, 2010 would have been the worst year on record,"
reported Film L.A. in their Jan. 11, 2011 release. These
numbers are an excellent early indicator that the incentive
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program is having an immediate impact on production levels
b) Testimony Presented to the Committees by the CFC Included
the Following Information on the Economic Impacts of the
Current Film Tax Credit Program :
To date, $300 million in tax credits have been allocated
(reserved) resulting in:
Total aggregate direct spending by Program projects: $2.2
billion Total wages paid / to be paid by Program projects:
$728 million Further, using the generic multipliers for
motion picture and video industries in California, the
broader economic impact of the Program is as follows:
i) Total Output (business revenues): $6.5 billion.
Each dollar of film production spending in California
generates total output (business revenues) of $2.95
statewide, including the initial dollar. Economic
output is the increase in gross receipts realized by
all firms as a result of direct and indirect economic
activity associated with the initial production
spending.
ii) Total Full Time Equivalent (FTE) jobs generated
by program projects: 40,996. Employment: Based on the
RIMS II input-output model for California, each $1
million of film production spending in state generates
18.65 FTE jobs statewide, including both direct
employment (on the production) and indirect employment
(people who owe their jobs to the purchases made by
the firms and people working on each production.)
iii) Total earnings generated by Program projects:
$1.8 billion. Earnings: Each dollar of film
production spending in California generates total
earnings of $0.81 statewide. These are the earnings
of the direct workers and indirect workers.
In addition to the economic figures above, the CFC
presented testimony which included the following testimony
about the motion picture industry's general contribution to
the state's economy, "The motion picture industry is an
essential source of economic activity, tax revenue, jobs
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and tourism for California contributing $38 billion dollars
annually to our state's economy and supporting nearly
250,000 well-paying direct jobs - with health benefits.
"For instance: An average $70 million dollar feature film
generates $10.6 million in state sales and income taxes.
The average daily shooting costs on a feature film or TV
series range from $100,000 to $250,000 per day. (That's
actual dollars that each production spends on groceries,
hotel rooms, gas, building supplies, props and payroll). A
typical film shooting outside of Los Angeles County will
spend on average $50,000 per day in a local community. The
average salary for production employees is $75,000, well
above the national average."
c) California Research Bureau (CRB) Data Demonstrates That
Loss of Feature Film Productions Drove Down Wages, Even
Though Production Days of Other Categories (Such as Reality
Television) Increased :
As background material for the Joint Oversight Hearing, and
in support of their testimony, the CRB prepared a briefing
packet that updated some basic data on employment, wages,
and production in California's movie and video production
industry; surveyed state Movie Production Incentive (MPI)
programs nation-wide; and surveyed the scholarly and
official state literatures on the operation and effects of
MPIs.
The CRB researchers offered their report with the caveat
that time and staffing constraints limited the
comprehensiveness of our response. The following is
excerpted from that document: "The industry as a whole
showed modest growth over the first half of the decade
through 2004, a flat trend through 2007, declined in
2008-9, followed by a sharp recovery in 2010. In
California outside of Los Angeles County, the industry
peaked in 2002, showed slow employment declines through
2007, and then rebounded in 2008-9.
"However, employment growth in Los Angeles County was
coupled with relative and absolute declines in average
industry wages. Los Angeles County movie industry
employees earned, on average, 27 percent more per month in
2000 than their non-L.A. counterparts ($4,279 - or $5,349
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in 2009 dollars, vs. $3,370 - $4,213 in 2009 dollars). In
2009, the average L.A. County industry employee earned 13
percent less per month than his non-L.A. counterpart
($3,754 vs. $4,232). Thus, in real terms, the L.A. average
has dropped 30 percent, declining almost every year,
whereas the non-L.A. County average grew by a scant 0.45
percent for the decade.
"The growth in jobs coupled with declining real wages in
the industry in Los Angeles County could be consistent with
a change in industry composition from higher paying feature
film work, to other lower paying work. Our brief displays
data by year and production subcategory, including
television, feature films, commercials, and a residual
category that includes student films, documentaries, still
photography shoots, music videos and other production
activities. This data shows that television and "other"
production activities (neither feature films nor
commercials) account for the large majority of total,
permitted production days in the L.A. area.
"Further, according to this data, feature film production
has declined since the beginning of the 2000s both in
absolute terms as well as in relative terms. Television,
which accounted for 23 percent at the start of the decade,
now takes more than 40 percent of the total production
days."
4)Arguments in Support :
The California Labor Federation offers the following in support,
"The continued erosion of our film industry has real
implications for workers and for the state's economy.
California has lost 10,600 entertainment industry jobs and
more than 25,000 related jobs. That has cost $2.4 billion in
wages and $4.2 billion in total economic output as film and TV
production has decreased in state. Not only does job loss
take a toll on those directly employed by the film industry,
but on the thousands of businesses and workers that serve the
industry. Movie production has a large multiplier effect -
for every film job created, 2.5 jobs are created in the
broader economy.
"California's film tax credit has a proven track record of
creating and retaining jobs in the film industry. According
to the California Film Commission, the tax credit program has
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generated 41,000 jobs and $2.2 billion in economic activity
since 2009. There are not just high paid actors and directors
the credit has helped. A large chunk of that money, $728
million, went to workers who have good, middle-class jobs
working on sets, doing lighting, technical work, hauling props
and setting up locations. These are the workers who are most
hard-hit by job loss in the industry and the least able to
scrape by with no work."
The California Taxpayers Association adds that, "An
extension of the credit would show California's
commitment to long-term investment in the film industry
to encourage more production companies to invest here;
and help California compete with other states and
countries. This is an important step to regain the
thousands of jobs lost in film production over the years.
Finally, The Motion Picture Association of America writes
to say, "AB 2026 provides a five-year extension of the
production tax credit. Motion picture and television
projects that might qualify for the production tax credit
must have certainty, beyond one or two years, of the
program's existence and continuity in order to consider
California as the location for their productions.
Without the ability to rely on the continued existence of
the Ýproduction tax credit], productions will likely
choose another of the states of foreign countries that
offer competitive incentives."
5)Argument in Opposition :
According to the American Heart Association , "?There are many
organizations interested in this issue and the opportunity AB
2026 provides to reduce the smoking prevalence among our
youth. California has been a leader in the tobacco control
movement. The State's Tobacco Control and Prevention program
is excellent and is a model program recognized both nationally
and internationally. It is incongruent to have such a strong
state program while at the same time providing subsidies for
movie productions that depict the use of tobacco which we know
will increase the use of tobacco among our youth.
?
"The AHA believes that California's film tax credit program
should not conflict with the public health priorities of our
state and nation. AB 2026 provides California with the
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opportunity to do this and implement the CDC and WHO
recommendations by limiting subsidies for movies to only those
that do not have tobacco-related imagery. It is for the
abovementioned reasons that the AHA is opposed unless amended
to AB 2026."
6)Prior Related Legislation :
AB 1069 (Fuentes), Chapter 731, Statutes of 2011, extended the
film production tax credit program for one year, until 2015,
under terms which are substantially similar to the measure
under current consideration.
SB 1197 (Calderon), of the 2009-10 Legislative Session,
deleted the fiscal year limitation on the existing film
production tax credit. Held in Senate Revenue & Taxation
Committee without a hearing.
SBX8 55 (Calderon), of the 2009-10 Legislative Session,
deleted the fiscal year limitation in the existing production
tax credit. Held in Senate Rules Committee without a hearing.
ABX3 15 (Krekorian), Chapter 10, Statutes of the 2009-10 Third
Extraordinary Session, established a five year $500M tax
credit for qualified expenditures on qualified productions.
Limited allocations to $100M/year.
AB 855 (Krekorian), of the 2009-10 Legislative Session,
established a film production tax credit. Held at the
Assembly Desk.
AB 1696 (Bass), of the 2007-08 Legislative Session,
established a financial assistance program within the CFC to
encourage filming motion pictures and commercials in
California and requires the Business, Transportation & Housing
Agency to report the economic impact of this program by
December, 2011. Failed passage on the Senate Floor.
SB 359 (Runner), of the 2007-08 Legislative Session, mega tax
credit bill which included motion picture production credit.
Part of State Budget negotiations. Created a credit for a
percentage of the wages paid of amounts paid to purchase or
lease tangible personal property in conjunction with the
production of a qualified motion picture. The credit is
certified and allocated by the CFC. The bill also allows the
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credit to be claimed against the sales and use tax liability
of the company in lieu of the franchise or income tax
liability. Finally, the bill allows the credit to be carried
over until exhausted. Held in the Senate Revenue and Taxation
Committee.
AB 832 (Bass), of the 2007-08 Legislative Session, created
unfunded grant program administered by the CFC to encourage
filming motion pictures and commercials in California. Held
on the Assembly Appropriations Committee Suspense File.
SB 740 (Calderon), of the 2007-08 Legislative Session, created
a film production credit equal to 100% of the direct revenues
attributable to the production or 125% of the revenues of the
productions in a TV series that relocated to California or an
independent film as defined. Held in Senate Revenue &
Taxation Committee without a hearing.
AB 777 (Nunez), of the 2005-06 Legislative Session, authorized
qualified motion picture tax credit in an amount equal to 12%
of the qualified production for qualified wages paid with an
additional 3% for qualified motion pictures. Created
refundable credit. Held in Senate Revenue & Taxation
Committee without a hearing.
SB 58 (Murray), of the 2005-06 Legislative Session, granted a
refundable income or corporation tax credit equal to 15% of
the amount of qualified wages paid and qualified property
purchased in the production of a qualified motion picture.
Held in Senate Revenue & Taxation Committee.
AB 261 (Koretz), of the 2005-06 Legislative Session,
re-established funding for the Film California First Program.
Gut and amended out in the Assembly Rules Committee and became
a transportation bill.
AB 1830 (Cohn), of the 2003-04 Legislative Session, authorized
tax credits between 2006 and 2012 in an amount equal to 15% of
qualified wages paid or incurred for services performed, with
respect to the production of each qualified motion picture.
Held in the Assembly Committee on Arts, Entertainment, Sports,
Tourism & Internet Media Committee without a hearing.
AB 1277 (Cohn), Chapter 662, Statutes of 2003, transferred
administrative authority over the CFC to the Business,
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Transportation & Housing Agency. This bill also created the
Film California First Fund, administered by the CFC, which
provided for reimbursements to local governments for their
costs in issuing permits for local filming of motion pictures.
In the last two state budget cycles, no General Fund monies
have been appropriated to operate this program.
AB 2410 (Frommer), Chapter 1042, Statutes of 2002, required
the CFC to report annually the number of motion picture starts
that occurred within the State of California. The bill also
required EDD to research and maintain data on film industry
employment, to determine the economic impact of the film
industry, to monitor film industry employment and activity and
competing states and countries, to examine the ethnic
diversity and representation of minorities in the
entertainment industry, to review the effect of federal, state
and local laws on the filmed entertainment industry and to
report that information to the legislature biannually,
provided that funds are appropriated by the legislature in the
annual Budget Act for these purposes.
AB 2747 (Wesson), of the 2001-02 Legislative Session, provided
a tax incentive to produce motion pictures within California.
Would offer tax credits to productions with a total cost of
qualified wages between $200,000 and $10 million for 15-25% of
wages paid to qualified individuals during the taxable year
with respect to qualified motion picture production depending
on the area. For each motion picture, the maximum amount of
wages per qualified individual that could be taken into
account when computing the credit was $25,000. Failed passage
in the Senate Appropriations Committee.
SB 2061 (Schiff), Chapter 700, Statutes of 2000, created the
State Theatrical Arts Resources (STAR) partnership which
offers surplus State property to filmmakers, where unused
State properties, such as health facilities and vacant office
structures, are available at no charge or "almost free" to
filmmakers.
AB 358 (Wildman & Kuehl), of the 1999-2000 Legislative
Session, provided a refundable income and corporation tax
credit for 10% of eligible wages paid for motion pictures and
TV programs produced in California. Held on the Senate
Appropriations Committee Suspense File.
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AB 484 (Kuehl), Chapter 699, Statutes of 1999, created the
Film California First program, housed at the California Film
Commission to reimburse certain film costs incurred by a
qualified production company when filming on public property,
but which is currently unfunded.
7)Double referral : Should this bill pass out of this committee,
it will be re-referred to the Assembly Committee on Revenue
and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
California Chamber of Commerce
California Labor Federation
California Taxpayers Association
California Teamsters Public Affairs Council
Film Liaisons in California Statewide
Los Angeles Area Chamber of Commerce
Motion Picture Association of America
Paramount Pictures
Valley Industry and Commerce Association
Opposition
American Heart Association
Analysis Prepared by : Dana Mitchell / A.,E.,S.,T. & I.M. /
(916) 319-3450