BILL ANALYSIS Ó
AB 2026
Page 1
Date of Hearing: May 14, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Henry T. Perea, Chair
AB 2026 (Fuentes) - As Introduced: February 23, 2012
REVISED
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, 2015 until
July 1, 2020. 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, 2015 until July 1, 2020.
2)Extend the existing $100 million-per-FY limitation on the
aggregate amount of motion picture tax credits that may be
allocated by the CFC in any FY, through and including the
2019-20 FY.
3)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. The amount of
the deduction is equal to a 9% deduction of so-called
"qualifying production activities income" (QPAI). The
AB 2026
Page 2
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.
AB 2026
Page 3
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 a "qualified motion picture" as one produced for
general distribution to the public, regardless of the medium
that, that is one of the following:
a) A feature film with budgets between $1 million and $75
million;
b) A movie of the week with a minimum budget of $500,000;
c) A new television series produced in California with a
minimum production budget of $1 million licensed for
original distribution on basic cable;
d) An independent film; or,
e) A television series that relocated to California.
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
AB 2026
Page 4
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
2014-15 FYs on a first-come, first-served basis, with 10% of
the allocation reserved for independent films.
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, or;
c) Elect to apply the credit against their sales and use
tax liability.
15)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.
16)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.
17)Requires the CFC to provide the FTB with a list of qualified
taxpayers and the tax credit amounts allocated to each
AB 2026
Page 5
qualified taxpayer by the CFC.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual revenue loss of $5.1 million in FY 2014-15,
$22 million in FY 2015-16, with the estimated total revenue loss
of $473 million for the following FYs.
COMMENTS :
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 2026, 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
AB 2026
Page 6
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
the program."
3)Arguments in Opposition . The opponents state that "the
non-partisan Legislative Analyst Office has found this program
to be ineffective" and argue that "extending the credit by an
additional five years means that other vital state programs
like education, public safety, or other health and human
service programs would have to be reduced." The opponents
also assert that "California's film tax credit program should
not conflict with the public health priorities of our state
and nation" and urge the author to amend this bill to
implement "the CDC and WHO recommendations by limiting
subsidies for movies to only those that do not have
tobacco-related imagery."
4)How is a Tax Expenditure Different from a Direct Expenditure?
Existing law provides various credits, deductions, exclusions,
and exemptions for particular taxpayer groups. In the late
1960s, 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). 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
AB 2026
Page 7
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)Tax Incentives: Do They Work? 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, assert 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
California's tax structure and other policies. Additionally,
critics argue that industry-specific tax incentives do not
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)].
As noted by the Legislative Analyst Office (LAO) in the
presentation at this Committee's hearing "Assessing Tax
Expenditure Programs in Light of California's Fiscal
AB 2026
Page 8
Challenges" on February 22, 2012, "policymakers should regard
many TEPs Ýtax expenditure programs] evaluations with
skepticism." It was further explained that, "Analysis of
alternative uses of public funds is difficult and often
omitted entirely from? studies Ýof TEPs]. These studies also
usually rely on extensive and sometimes subjective assumptions
which, if changed, can produce very different results? It is
rare that the value of TEPs can be demonstrated conclusively
compared to these alternate uses of tax dollars. If the
Legislature wishes to use TEPs, despite these challenges, it
is important that TEPs be used cautiously, structured
carefully, and reviewed regularly to consider if they operate
in an effective and cost-efficient manner."
6)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. Originally, the program was
scheduled to sunset in 2013-14 FY, but was extended by the
Legislature in 2011 for one additional year - until FY
2014-15. ÝAB 1069 (Fuentes) Chapter 731, Statutes of 2011].
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
FYs, from FY 2009-10 until FY 2014-15, 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.
7)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
AB 2026
Page 9
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.
a) 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)
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.
AB 2026
Page 10
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.
Thus, as of last year, $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
AB 2026
Page 11
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.
b) 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, 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 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
AB 2026
Page 12
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 Mr. 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
television 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, it 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.
8)What is the Urgency ? This bill proposes to extend the
existing film tax credit program for an additional five years,
from FY 2014-15 until FY 2019-20. In light of the fact that
AB 2026
Page 13
the existing Program is not due to expire for another three
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. Furthermore, the
Committee may wish to consider requiring the LAO to conduct a
study to determine the program's efficacy.
9)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.
10)Related Legislation .
AB 1069 (Fuentes), Chapter 731, Statutes of 2011, extended the
film production tax credit program for one year, until July 1,
2015.
SB 1197 (Calderon), of the 2009-10 Legislative Session, would
have deleted sunset date of the film tax credit program. SB
1197 was held under submission in Senate Revenue & Taxation
Committee.
SBx8 55 (Calderon), of the 2009-10 Legislative Session, would
have deleted the sunset date of the film tax credit program.
SBx8 55 was held under submission in Senate Rules Committee.
ABx3 15 (Krekorian), Chapter 10, Statutes of the 2009-10 Third
Extraordinary Session, established the Film Tax Credit
Program.
AB 855 (Krekorian), of the 2009-10 Legislative Session, would
have established a film production tax credit. AB 855 was
held at the Assembly Desk.
AB 1696 (Bass), of the 2007-08 Legislative Session, would have
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. AB 1696 failed passage on the Senate Floor.
SB 359 (Runner), of the 2007-08 Legislative Session, mega tax
AB 2026
Page 14
credit bill would have 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. SB 359 was held under submission in
the Senate Revenue and Taxation Committee.
AB 832 (Bass), of the 2007-08 Legislative Session, would have
created unfunded grant program administered by the CFC to
encourage filming motion pictures and commercials in
California. AB 832 was held under submission by the Assembly
Appropriations Committee.
SB 740 (Calderon), of the 2007-08 Legislative Session, would
have 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 television series that
relocated to California or an independent film as defined. SB
740 was held under submission in Senate Revenue & Taxation
Committee.
AB 777 (Nunez), of the 2005-06 Legislative Session, would have
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. AB
777 was held under submission in the Senate Revenue & Taxation
Committee.
SB 58 (Murray), of the 2005-06 Legislative Session, would have
created a refundable income and a 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. SB 58 was held under submission in the Senate
Revenue & Taxation Committee.
Support
The California Labor Federation
California Chamber of Commerce
California Taxpayers Association
California Teamsters Public Affairs Council
Chamber of Commerce, Los Angeles Area
Film Liaisons in California Statewide (FLICS)
Motion Picture Association of America, Inc.
Jess Talamantes, Mayor of Burbank
SAG-AFTRA
AB 2026
Page 15
Opposition
California School Employees Association
The American heart Association (oppose unless amended)
The American Cancer Society (oppose unless amended)
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098