BILL ANALYSIS                                                                                                                                                                                                    Ó



                                                                      



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          |SENATE RULES COMMITTEE            |                  AB 2026|
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                                 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 
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          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:  

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                   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. 


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             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 

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             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
           

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          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 

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          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


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          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)


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          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 

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             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

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