BILL ANALYSIS Ó
AB 1839
Page 1
Date of Hearing: May 21, 2104
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 1839 (Gatto) - As Amended: March 19, 2014
Policy Committee: AESTIMVote:7-0
Revenue & Taxation 8-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill creates a tax credit for qualified expenditures for
the production of qualified motion pictures in California for
taxable years beginning on or after January 1, 2016, and
authorizes the California Film Commission (CFC) to administer
the program and allocate the tax credits, subject to an
unspecified aggregate annual cap, for each fiscal year from FY
2016-17 through and including the FY 2020-21. Specifically,
this bill:
1)Allows a taxpayer that has paid or incurred qualified
expenditures and has been issued a credit certificate from the
CFC a credit for those expenditures equal to:
a) 20% of the qualified expenditures attributable to the
production of a qualified motion picture in California,
including, but not limited to a feature, up to
$100,000,000, or a television series in its second or
subsequent years of receiving a tax credit allocation.
b) 25% of the qualified expenditures attributable to the
production of either (i) a television series that relocated
to California in its first year of receiving a tax credit
allocation; or (ii) an independent film.
c) 25% of qualified expenditures relating to music scoring
or music editing attributable to the production of a
qualified motion picture in California.
d) An additional 5% of qualified expenditures, not to
exceed a maximum of 25%, if the qualified motion picture
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incurred or paid the qualified expenditures relating to
original photography outside the "Los Angeles Zone", which
the bill defines as an area within a 30 mile radius of the
intersection of Beverly and La Cienaga Boulevards in Los
Angeles.
2)Defines a "qualified motion picture" as:
a) One of the following motion pictures produced for
distribution to the general public:
i) A feature with a minimum production budget of $1
million.
ii) A movie of the week or miniseries with a minimum
production budget of $500,000.
iii) A new one-hour television series of episodes
longer than 40 minutes each of running time, exclusive of
commercials, that is produced in California, with a
minimum production budget of $1 million per episode.
iv) An "independent film," which it defines as a
motion picture with a minimum budget of $1 million and a
maximum budget of $10 million that is produced by a
company that is not publicly traded, and publicly traded
companies do not own, directly or indirectly, more than
25% of the producing company.
v) A television series that relocated to California.
vi) A pilot for a new television series that is
longer than 40 minutes of running time, exclusive of
commercials, that is produced in California, and with a
minimum production budget of $1 million.
b) Specifies that the motion picture must satisfy the
following requirements:
i) At least 75% of the principal photography days occur
wholly in California or 75% of the production budget is
incurred for payment for services performed or property
used within the state.
ii) Production of the qualified motion picture is
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completed within 30 months from the date on which the
qualified taxpayer's application is approved by the CFC.
iii) The copyright for the motion picture is
registered with the US Copyright Office pursuant to Title
17 of the US Code.
iv) Principal photography of the qualified motion
picture commences after the date on which the application
is approved by the CFC, but not later than 180 days after
the date of that approval, except for certain
extraordinary circumstances.
3)Requires the CFC to establish criteria and procedures for
applications and the allocation and certification of credits,
subject to the following limitations:
a) All applications must be approved or rejected on a first
come, first served basis.
b) The aggregate amount of credits issues cannot exceed an
annual unspecified cap, with any unused allocation or
uncertified credit amounts carrying forward to subsequent
fiscal years.
c) 10% of the unspecified aggregate annual amount or $20
million of tax credits, whichever is less, shall be set
aside each year for independent films.
d) $30 million of tax credits shall be set aside each year
for television series that relocate to California.
e) The CFC shall provide to the Legislative Analyst's
Office (LAO), upon request, any or all submitted
applications or materials, and shall annually provide the
LAO, FTB and the Board of Equalization (BOE) with a list of
qualified taxpayers and the tax credit amounts allocated to
each taxpayer.
f) The CFC shall annually post on its website and make
available for public release certain specified information
regarding the allocation of the tax credits.
4)Authorizes a qualified taxpayer to sell the tax credit
attributable to an independent film to an unrelated party, and
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provides the taxpayer to which a credit is sold will be
treated as a qualified taxpayer for purposes of the credit.
5)Allows any unused qualified motion picture credit to be
carried over to the following taxable years, and succeeding
five taxable years, if necessary, until the credit has been
exhausted.
6)Allows a qualified taxpayer to assign any portion of its
credit to one or more affiliated corporations, and provides
that the corporation to which a credit is assigned will be
treated as a qualified taxpayer for purposes of the credit.
7)States that the provisions of the bill are severable.
FISCAL EFFECT
1)Potentially significant costs to CFC and FTB to develop
processes and regulations to administer the program.
2)Unspecified but substantial GF revenue decreases, likely in
the hundreds of millions of dollars annually, over the
duration of the program.
COMMENTS
1) Purpose. According to the authors, Hollywood is
internationally celebrated as the home of the entertainment
industry, creating hundreds of thousands of middle class jobs
and billions of dollars in economic activity in California
each year. The authors contend that since 1997, these high
quality jobs have been under constant threat from incentives
offered by other states and countries seeking to attract film
industry activity. There are currently over 40 states and
many other countries offering film production incentives. The
authors contend over the past 15 years, film production in
California has decreased by nearly 50%.
In 2009, the Legislature passed the California Film and
Television Tax Credit Program to provide film production
incentives in California and combat production flight.
California currently provides an annual $100 million tax
credit to eligible film and TV productions. This bill extends
the credit beyond FY 2016-17, modifies the eligibility
criteria, and may increase the overall amount of the credit,
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though the final amount has yet to be determined.
2) Economic Impact. The CFC reports the 270 projects that
received a credit allocation have generated more than $4.7
billion of additional spending in California's economy,
including $1.5 billion in wages to California workers.
According to the CFC, each $100 million in tax credit
allocations allows an average of 45 projects to participate,
generating an average of $792 million in direct production
spending, including $250 million in payroll for below-the-line
workers (i.e., not actors and producers). Furthermore, for
every $100 million in tax credits, productions hire an
estimated 8,500 cast and crew members, utilize 10,000 vendors,
and employ more than 67,000 daily hires as extras. The report
concludes that the existing film tax credit program has
succeeded in attracting the target productions of basic cable
TV series, mid-sized feature films, and made-for-TV movies.
The current program is not open to large budget films and
one-hour television series that are seen on the networks, pay
cable channels, and websites. As a result, many of these
projects are produced outside California, taking with them the
thousands of middle class jobs they support. AB 1839 seeks to
address this by expanding the incentive program to include
large budget features of up to $100 million in qualified
expenditures and one-hour TV series, regardless of where they
are aired or broadcast.
Though there have been several studies conducted on the
overall economic benefit of film tax credit, results remain
inconsistent and vary greatly in the scope of benefit
measured. Recent efforts to create a meaningful measure of
"return on investment" for film tax credits place the return
at close to, or marginally better than, a break-even amount in
terms of overall economic activity and aggregate tax revenue
returned to the state and municipalities. More difficult is
measuring the broader impact of the film industry to
California's tourism industry and overall image or "brand,"
which may impact everything from California's global influence
to the popularity of its products. As a flagship industry of
this state, it may be difficult to compare the economic impact
of the film industry to less established locations.
3) Race to the Bottom? Opponents argue that film tax credits are
not proven to prevent productions from leaving California and
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are a drain on scare public funds. As other states and
countries offer ever more lucrative film production
incentives, California cannot continue to give away tax
credits in order to compete in this "race to the bottom."
Opponents contend the credit hurts schools by reducing
Proposition 98 funding, and otherwise depletes the General
Fund of needed tax receipts. Opponents also contend the tax
credit rewards activity that is already taking place, and that
the credit therefore has no marginal economic benefit to the
state.
4) Reasons to Compete. While the economic benefits remain
debatable, the Legislative Analyst Office's (LAO) most recent
report on the film tax credit highlighted three factors for
the Legislature to consider: (i) the motion picture industry
is a flagship industry for the state; (ii) the industry is a
major employer in Los Angeles, paying high wages; and (iii)
other states are aggressively competing for industry activity.
The LAO contends this competition may be the most compelling
reason to continue or expand the tax credit in order to
correct economic distortions created by other states and
maintain California's inherent advantage.
5) Amendments. The authors have proposed several amendments to
the bill to, among others: (i) conform to existing law by
allowing the credit to be used to reduce a recipient's tax
below the "alternative minimum tax" and therefore fully
monetize the credit; (ii) conform to existing law by allowing
the credit to be used for qualified sales and use taxes; (iii)
clarify the 25% credit for musicians; (iv) add a
post-production credit of an additional 5% for projects that
received a credit and conduct at least 75% of visual effects
work in California; (v) eliminate the $10 million cap on
independent films for eligibility; and (vi) automatically
renew TV series and pilots that received a credit and remain
eligible in subsequent years.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081