BILL ANALYSIS Ó ------------------------------------------------------------ |SENATE RULES COMMITTEE | AB 2026| |Office of Senate Floor Analyses | | |1020 N Street, Suite 524 | | |(916) 651-1520 Fax: (916) | | |327-4478 | | ------------------------------------------------------------ THIRD READING Bill No: AB 2026 Author: Fuentes (D), et al. Amended: 8/27/12 in Senate Vote: 27 - Urgency SENATE GOVERNANCE & FINANCE COMMITTEE : 6-0, 8/29/12 AYES: Wolk, Fuller, Hernandez, La Malfa, Liu, Yee NO VOTE RECORDED: Dutton, DeSaulnier, Kehoe SENATE APPROPRIATIONS COMMITTEE : 5-0, 8/29/12 AYES: Kehoe, Walters, Alquist, Price, Steinberg NO VOTE RECORDED: Dutton, Lieu ASSEMBLY FLOOR : 75-4, 8/16/12 - See last page for vote SUBJECT : Income taxes: credits: film: extension SOURCE : Author DIGEST : This bill authorizes the California Film Commission (CFC) to allocate $100 million film tax credits annually for five fiscal years (FYs), starting July 1, 2015 until July 2017. ANALYSIS : In 1985, the Legislature established the CFC to coordinate state and local governments' efforts at providing an environment conducive for the film industry. 21 members of the film industry, private sector, and state and local governments are appointed by the Governor, Senate Pro Tem, and Speaker of the Assembly to sit on the CFC CONTINUED AB 2026 Page 2 board. In 2009, Governor Schwarzenegger signed the California Film and Television Tax Credit Program (Film Tax Credit Program) as a part of the 2009 Budget plan to promote film production and create and retain jobs in California (SB 15X3 (Calderon),Chapter 17, Statutes of 2009, and AB 15X3 (Krekorian), Chapter 10, Statutes of 2009). Qualified motion pictures, defined as: (1) feature films with budgets between $1 million and $75 million; (2) movies of the week with a minimum budget of $500,000; and (3) new television series with a minimum $1 million budget, may apply for the credit. Also, 75% of the motion picture shooting days must take place in California, or 75% of the motion production budget must pay for services or the purchase or rental or property within the state. Because SB 15X3 authorized the CFC to allocate two years of credits in the first year, each year's allocation is for the next fiscal year's credits. For example, when CFC allocated credits in July 1, 2012, it is for credits in FY 2013-14. Last year, Governor Brown approved AB 1069 (Fuentes), Chapter 731, Statutes of 2011, which extended the Film Tax Credit Program for one year to 2014-15. I. Extension . This bill authorizes the CFC to allocate $100 million film tax credits annually for five FYs, starting July 1, 2015 until July 2017. II. Application . This bill requires an applicant to list on its application: All members of a combined reporting group, if known at the time of application; and, The names of all partners in a partnership not publicly traded or the names of all members of a limited liability company classified as a partnership not publicly traded for California income tax purposes that have a financial interest in the applicant's qualified motion picture. III. CFC . Before the CFC issues a credit certificate, it must establish a procedure for a qualified taxpayer to report to the CFC the following information: CONTINUED AB 2026 Page 3 If readily available, a list of the states, provinces, or other jurisdictions in which any member of the applicant's combined reporting group in the same business unit as the qualified taxpayer that, in the preceding calendar year, has produced a qualified motion picture intended for release in the United States market. Whether a qualified motion picture was awarded any financial incentive by the state, province, or other jurisdiction that was predicated on the performance of primary principal photography or postproduction in that location A "qualified motion picture" does not include any episodes of a television series that were complete or in production prior to July 1, 2009. This bill authorizes the CFC to allow qualified taxpayers that receive multiple credit certificates in a calendar year to file a single report on a calendar year basis. This bill requires the CFC to obtain, when possible, the following information from applicants that do not receive an allocation of credit: Whether the qualified motion picture that was the subject of the application was completed. If an application was completed, which state or foreign jurisdiction was the primary principal photography completed. Whether the applicant received any financial incentives from the state or foreign jurisdiction to make the qualified motion picture in that location. This bill requires CFC to provide the Legislative Analyst's Office (LAO), upon its request, any or all application materials or any other materials received from, or submitted by the, applicants, in electronic format when available. CONTINUED AB 2026 Page 4 This bill requires CFC to annually provide the LAO a list of qualified taxpayers and the tax credit amounts allocated to each qualified taxpayer by the CFC. The list shall include the names and taxpayer identification numbers, including taxpayer identification numbers of each partner or shareholder, as applicable, of the qualified taxpayer. This bill requires the California Film Office to annually post on its Web site and make available for public release: A table, which includes all of the following information: o A list of qualified taxpayers and the tax credit amounts allocated to each qualified taxpayer by the CFC, o The number of production days in California the qualified taxpayer represented in its application would occur, o The number of California jobs that the qualified taxpayer represented in its application would be directly created by the production, and o The total amount of qualified expenditures expected to be spent by the production. A narrative staff summary describing the production of the qualified taxpayer as well as background information regarding the qualified taxpayer contained in the qualified taxpayer's application for the credit. This bill provides that information provided to the CFC constitutes confidential tax information pursuant to the franchise and income tax laws. IV. Study . This bill provides that the LAO must provide to the Assembly Revenue and Taxation Committee, the Senate Governance and Finance Committee, and the public, on or before January 1, 2016, a report evaluating the economic CONTINUED AB 2026 Page 5 effects and administration of the tax credits. This bill authorizes the LAO, in researching the reports, to: Request and receive all information provided to the CFC pursuant to state law. Request and receive all information provided to the Franchise Tax Board relating to the sale or assignment of credits. Request and receive all information provided to the board pursuant to state law. This bill also requires CFC, the board, the Franchise Tax Board, the Employment Development Department, and all other relevant state agencies to provide additional information, as specified by the LAO, as needed to research the reports. This bill provides that information received by the LAO pursuant to this section must be considered confidential taxpayer information and subject to the appropriate confidentiality requirements of the participating state agency. This bill authorizes the LAO to publish statistics in conjunction with the reports required, derived from information provided to the LAO, if the published statistics are classified to prevent the identification of particular taxpayers, reports, and tax returns and the publication of the percentage of dividends paid by a corporation that is deductible by the recipient. V. Urgency . This bill provides that an urgency statute is necessary because the film tax credit program is set to expire and to ensure that California remains competitive, to provide security to taxpayers that may apply to the program, and to retain many at-risk motion pictures. Comments CONTINUED AB 2026 Page 6 According to the Senate Governance and Finance Committee analysis, when 43 other U.S. states and overseas production companies offer enticing tax subsidies for film and TV productions, California loses big. Productions that leave the state to pursue other state or international incentives -- "runaway productions" -- translate to significant job and economic losses. California has a historical comparative advantage over other states, because of the long-established film industry and the high-paying talent pool that resides in state. Along with the state's natural beauty, clement weather, and high-tech media studios, a tax incentive retains and attracts production to California. However, with the credit set to expire in 2016, California's film industry will become uncompetitive, as other locations invest in and develop their own infrastructure and talent pools. Moreover, the state will no longer draw ancillary economic benefits from tourism. This bill's tax credit extension provides the necessary economic stability to retain and attract film industry productions back to California. This bill proposes to extend the existing film tax credit program for an additional two years until FY 2016-17. Last year, AB 1069 (Fuentes) extended the credit's sunset to 2015. Because the program allocated $200 million in credits in its first year, a sunset in 2015 means that credits are allocated in June 2014. Yet, that's still another two years before credits "run out." Previous legislation . This bill is not the first film industry related bill. This bill is identical to SB 1167 (Calderon) at the Assembly Desk and SB 1197 (Calderon) which is awaiting hearing in the Assembly Revenue and Taxation Committee. AB 1069 (Fuentes), Chapter 731, Statutes of 2011, passed last September extended the film tax credit to 2015. SB 1197 and SB 55X8 (Calderon, 2009) would have deleted the fiscal year limitation of the existing film production tax credit. Both were held in the Senate Revenue and Taxation Committee. AB 15X3 (Krekorian, 2009) established a $500 million tax CONTINUED AB 2026 Page 7 credit for specific expenditures on qualified productions. The bill limited allocations to $100 million credit each year. It was signed by Governor Schwarzenegger. AB 1696 (Bass, 2007) would have established a financial assistance program within the CFC to encourage filming motion picture and commercials in California. The bill failed passage on the Senate Floor. SB 359 (Runner, 2007), as part of the State Budget negotiations, 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. The bill would have allowed the credit to be claimed against the sales and use tax liability of the company in lieu of the franchise or income tax liability. The bill would have allowed credits to be carried over until exhausted. The Senate Revenue and Taxation Committee held the bill. AB 832 (Bass, 2007) would have created an unfunded grant program, as administered by the CFC, to encourage filming in California. The bill was held in the Assembly Appropriations 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. The bill was held in the Senate Revenue and Taxation Committee without a hearing. AB 777 (Nuñez), 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. The bill was held in the Senate Revenue and Taxation Committee without a hearing. FISCAL EFFECT : Appropriation: No Fiscal Com.: Yes Local: Yes CONTINUED AB 2026 Page 8 According to the Senate Appropriations Committee: Estimated tax revenue loss of $5.1 million in 2014-15, $22 million in 2015-16, and an additional $161 million in future fiscal years as a result of extended tax credit benefits (General Fund). Extended staffing costs at the CFC of approximately $300,000 annually through 2016-17 for continued administration of the credit program (General Fund). Estimated staff costs to the LAO of approximately $75,000, likely absorbable, to report on the economic effects and administration of the credit program. SUPPORT : (Verified 8/30/12) California Chamber of Commerce California Labor Federation California Stat Council of Laborers California Taxpayers Association California Teamsters Public Affairs Council Central City Association Chamber of Commerce, Los Angeles Area Cities of Brawley, El Centro, and Los Angeles County of Los Angeles Directors Guild of America, Inc. Film Liaisons in California Statewide Fullerton Chamber of Commerce Greater San Fernando Valley Chamber of Commerce Hollywood Chamber of Commerce Jess Talamantes, Mayor of Burbank Long Beach Area Chamber of Commerce Los Angeles Chamber of Commerce Motion Picture Association of America, Inc. Paramount Pictures Professional Musicians Local 47 SAG-AFTRA San Francisco Travel Association Southwest California Legislative Council Valley Industry and Commerce Association OPPOSITION : (Verified 8/30/12) CONTINUED AB 2026 Page 9 American Cancer Society (unless amended) American Heart Association (unless amended) California School Employees Association ARGUMENTS IN SUPPORT : The author states: 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 two-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. ARGUMENTS IN OPPOSITION : American Cancer Society (ACS) states: Movies deliver billions of images of smoking to young audiences and because of the casual relationship between depictions of smoking in the movies and the initiation of smoking among young people, the Centers for Disease Control and Prevention (CDC), as well as the World Health Organization (WHO), now recommend that state subsidies for movies be limited to tobacco-free movies. California has been a leader in the tobacco control movement. 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. A recent study conducted by the University of California San Francisco (UCSF) reported that from mid-2009 through 2011, California approved $75 million in subsidies for films including smoking (these films CONTINUED AB 2026 Page 10 grossed $1.1 billion at the box office). At the same time, the State's Tobacco Control and Prevention program is being funded at $70 million for Fiscal Year 2012 (only sixteen percent of the CDC recommended amount). Furthermore, a UCSF researchers then concluded, "If the California film subsidy program continues and the pattern of subsidies and smoking in films remains the same as in the past, films containing tobacco and subsidized by California taxpayers will contribute an estimated 17,000 new 12-17 year old smokers among the next cohort of 12-17 year old smokers in California, who will incur an estimated $270 million in smoking-induced costs. ACS had requested the bill be amended to prohibit films with tobacco imagery or reference to be eligible for a tax credit in order to remove our opposition. ASSEMBLY FLOOR : 75-4, 8/16/12 AYES: Achadjian, Alejo, Allen, Ammiano, Atkins, Beall, Bill Berryhill, Block, Blumenfield, Bradford, Brownley, Buchanan, Butler, Charles Calderon, Campos, Carter, Cedillo, Conway, Cook, Davis, Dickinson, Donnelly, Eng, Feuer, Fletcher, Fong, Fuentes, Furutani, Beth Gaines, Galgiani, Garrick, Gatto, Gordon, Gorell, Grove, Hagman, Halderman, Hall, Harkey, Hayashi, Roger Hernández, Hill, Huber, Hueso, Huffman, Jeffries, Jones, Knight, Logue, Bonnie Lowenthal, Ma, Mansoor, Mendoza, Miller, Mitchell, Monning, Morrell, Nestande, Nielsen, Olsen, Pan, Perea, V. Manuel Pérez, Portantino, Silva, Skinner, Smyth, Solorio, Swanson, Torres, Valadao, Wagner, Wieckowski, Williams, John A. Pérez NOES: Bonilla, Chesbro, Norby, Yamada NO VOTE RECORDED: Lara AGB/DLW:k 8/30/12 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END **** CONTINUED AB 2026 Page 11 CONTINUED