BILL ANALYSIS Ó
AB 1839
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ASSEMBLY THIRD READING
AB 1839 (Gatto and Bocanegra)
As Amended May 23, 2014
Majority vote. Tax levy
ARTS, ENTERTAINMENT, SPORTS 7-0 REVENUE &
TAXATION 8-0
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|Ayes:|Ian Calderon, Waldron, |Ayes:|Bocanegra, Harkey, Beth |
| |Bloom, Brown, Gomez, | |Gaines, Mullin, Nestande, |
| |Levine, Wilk | |Pan, Williams, Ting |
| | | | |
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APPROPRIATIONS 16-0
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|Ayes:|Gatto, Bigelow, |
| |Bocanegra, Bradford, Ian |
| |Calderon, Campos, Eggman, |
| |Gomez, Holden, Jones, |
| |Linder, Pan, Quirk, |
| |Ridley-Thomas, Wagner, |
| |Weber |
|-----+--------------------------|
| | |
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SUMMARY : 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, 2015, 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 the
2016-17 fiscal year through and including the 2020-21 fiscal
year. 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
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million, or a television series that relocated to
California that is 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. Limits credit allocations for
independent films to qualified expenses of up to $10
million.
c) 25% of qualified expenditures relating to music scoring
or music editing attributable to the production of a
qualified motion picture in California.
d) 25% of qualified expenditures relating to qualified
visual effects, as defined, paid or incurred in California.
e) An additional 5% of qualified expenditures, not to
exceed a maximum of 25%, if the qualified motion picture
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.
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iv) An "independent film," which it defines as a motion
picture with a minimum budget of $1 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
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 United States (U.S.) Copyright Office pursuant
to of the U.S. Code Title 17.
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) Declares, notwithstanding a) above, the CFC shall give
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priority in credit allocations to returning or renewed
television series, or series which follows a pilot which
received a credit under the program.
c) 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.
d) 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.
e) $30 million of tax credits shall be set aside each year
for television series that relocate to California.
f) 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, Franchise Tax Board (FTB) and the Board of
Equalization with a list of qualified taxpayers and the tax
credit amounts allocated to each taxpayer.
g) 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
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)Authorizes the CFC to promulgate emergency regulations to
implement its provisions.
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8)States that the provisions of the bill are severable.
9)Takes effect immediately as a tax levy.
10)Makes various technical and conforming changes.
FISCAL EFFECT : According to the Assembly Appropriations
Committee:
1)Potentially significant costs to CFC and FTB to develop
processes and regulations to administer the program.
2)Unspecified but substantial General Fund revenue decreases,
likely in the hundreds of millions of dollars annually, over
the duration of the program.
COMMENTS : According to the author, "Hollywood is
internationally celebrated as home of the entertainment
industry, having established itself as a film-making locale by
the early 1900s. The entertainment industry creates hundreds of
thousands of good paying middle class jobs and billions in
economic activity throughout California each year, and hopefuls
still flock to the area with dreams of being 'discovered.'
Unfortunately, the film industry's last big peak occurred in
1997, and the steady, local jobs offered by the industry have
been under constant attack.
"Since the late 90s, film production has been lured across state
lines to other states and nations that have sought to attract
the notoriety, tax revenues, and workforce. There are now more
than 43 states and numerous other countries that offer
incentives, almost all of which are substantially larger than
California's. By creating a more robust and better targeted
incentive program, the California Film and Television Job
Retention and Promotion Act will help keep more feature and
television production in the state, guaranteeing thousands of
well-paid, highly-skilled jobs in our local economies."
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
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scheduled to sunset in the 2013-14 fiscal year, but was extended
by the Legislature in 2011 for one additional year - until the
2014-15 fiscal year. [AB 1069 (Fuentes) Chapter 731, Statutes
of 2011]. 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 six
fiscal years, from 2009-10 until the 2014-15 fiscal year, and
only $600 million total has been allocated to this credit over
the life of the program. The CFC is required to allocate and
certify the credit on a first-come first-serve basis, up to $100
million every fiscal year.
Should the Film Tax Credit Program be Extended? A recent LAO
report states that, generally, industry-specific tax
expenditures are not appropriate public policy and the film tax
credit effectiveness is difficult to evaluate, it acknowledges
that there are factors that might reasonably lead the
Legislature to extend or expand California's film tax credit
program. (LAO Report, Overview of Motion Picture Industry and
State Tax Credits, April 30, 2014, p.20.) Specifically, the LAO
mentioned the following three factors: a) the motion picture
industry, including production and post-production, is a
flagship California industry; b) the motion picture industry is
a major employer in Los Angeles, paying high wages; and, c)
other states are aggressively competing for this industry and,
in some cases, industry representatives are threatening to move
production for this industry to other jurisdictions if public
subsidies are not provided. (Ibid.) The aggressive interstate
and international competition seems to be the most compelling
reason "because its focus is on correcting an economic
distortion." (Ibid.). Thus, California may need to provide
subsidies to "level the playing field" and retain its leadership
position in the film and television industry.
Should the Scope of the Film Tax Credit Be Expanded? Several
studies have confirmed that, despite the presence of the
California Film Tax Credit Program, production flight has
continued. (2013 CFC Report, p. 20; Milken Institute, "A
Hollywood Exit -What California Must Do to Remain Competitive in
Entertainment - and Keep Jobs".) While the program has been
effective in attracting basic cable TV series, mid-sized feature
films, and made-for-TV movies, the state continues losing its
market share of the film and television industry.
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Film L.A. released a recent study which found the impacts of
runaway production continue and will worsen without expansion of
the Film Tax Credit Program. (See California Ranks Fourth in
Total Live Action Film Project, Job and Spending Counts.)
"According to data provided to Film L.A. by the CFC, from
2010-13 a total of 77 film projects applied for but were not
awarded California state film incentive and then went on to
complete production. Most of these projects fled the state;
more than 66% of these projects eventually filmed outside of
California in places where (sic) incentives were available? The
loss for the California economy exceeded $914 million." The
report concludes, "California's film and television tax credit
program is a good investment, but needs to be extended and
restructured to keep the entertainment industry from fleeing the
state."
The Milken Institute researchers noted that California cannot
win, and should not attempt to win, with an all-out tax
incentive race to enact the highest incentive program. Rather,
they suggested that California build on its strengths of being
the established global leader in film production and preserve
its core employment base and infrastructure. Their
recommendations, among others, included increasing funding and a
removal of the sunset date, in order to provide predictability
for the industry; capturing movies with budgets over $75
million; encouraging production across the state; dedicating a
portion of the credit funding to hour-long dramatic television,
including miniseries, ensuring that network television is
explicitly included. The LAO acknowledges that restricting
eligibility to certain types of film production may lead to
distortions; however, it points out that a broad expansion of
the credit may significantly increase the state fiscal impact.
(LAO Report, Overview of Motion Picture Industry and State Tax
Credits, April 30, 2014, pp. 21-22.)
Recent Amendments. The major policy changes contained in recent
amendments may be briefly summarized as follows:
1)Moves up the effective date of the new production incentives,
to allow expenditures incurred after January 1, 2015, to
qualify. However, the bill would provide that the CFC could
not issue any film tax credits based on the new incentives
until after July 1, 2016.
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2)Requires the CFC to allocate tax credits at least twice a
year, currently there is an annual application process.
3)Includes a 5% post-production increase for visual effects,
which would now be 25%, and defines "qualified visual effects"
as, "visual effects where at least 75% or a minimum of
$10 million of the qualified expenditures for the visual effects
is paid or incurred in California."
Visual effects would be defined to mean, "The creation,
alteration, or enhancement of images that cannot be captured
on a set or location during live action photography and
therefore is accomplished in post-production. It includes but
is not limited to, matte paintings; set extensions; computer
generated objects, characters and environments; compositing
(combining two or more elements into a final image); and wire
removals. It does not include fully animated projects,
whether created by traditional or digital means."
4)Lifts the $10 million cap on qualified independent films, in
order to allow bigger budget independent films to apply for
the tax credit program, and would instead cap the amount of
the allowed allocation for each independent film to $10
million.
5)Clarifies that returning or renewed television series,
including one which is picked up from a pilot that received a
production tax credit, may receive priority allocation in
credit allocation. This provision codifies existing CFC
practice.
6)Gives the CFC authority to issue emergency regulations in
order to implement the new program.
7)This bill also makes various technical and conforming changes.
Please see the policy committee analysis for full discussion of
this bill.
Analysis Prepared by : Dana Mitchell / A.,E.,S.,T., & I.M. /
(916) 319-3450
AB 1839
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