BILL ANALYSIS Ó
Senate Appropriations Committee Fiscal Summary
Senator Kevin de León, Chair
AB 1839 (Gatto) - Income Tax: Qualified Motion Pictures
Amended: July 2, 2014 Policy Vote: G&F 6-0
Urgency: No Mandate: No
Hearing Date: August 11, 2014
Consultant: Robert Ingenito
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 1839 would enact an annual tax credit for
qualified motion picture production in the State. The amount of
the annual credit currently is not specified.
Fiscal Impact:
The Franchise Tax Board indicates that it would incur a
one-time implementation cost of $132,000 to develop,
program, test and create new tax forms and instructions
(General Fund).
Because the size of the annual tax credit has yet to be
determined in the bill, FTB is not able to develop an
estimate of the annual General Fund revenue loss.
The California Film Commission would incur increased
costs to administer the new tax credit program, adopt
regulations and report to the LAO and FTB, as specified.
These costs are unknown, but likely to be in the hundreds
of thousands of dollars annually.
Background: California law allows various income tax credits,
deductions, and sales and use tax exemptions to provide
incentives to compensate taxpayers that incur certain expenses,
such as child adoption, or to influence behavior, including
business practices and decisions, such as research and
development credits. The Legislature typically enacts such tax
incentives to encourage taxpayers to do something that but for
the tax credit, they would not do. The Department of Finance is
required to annually publish a list of tax expenditures,
currently totaling around $50 billion per year.
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In 1985, the Legislature established the California Film
Commission (CFC) to co-ordinate state and local governments'
efforts to provide an environment conducive for the film
industry. Twenty-one 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 board.
In 2009, the Legislature enacted a tax credit for qualified
motion picture production in California as part of the state
budget, directing CFC to allocate $100 million in credits
annually. Any unallocated credit from the previous year may be
carried over to the next year. Feature films with budgets
between $1 million and $75 million, movies of the week with a
minimum budget of $500,000, and new television series with a
minimum $1 million budget could apply for the credit. Minimums
were established, such that 75 percent of the motion picture
shooting days must take place in California, or 75 percent of
the motion production budget must pay for services or the
purchase or rental or property within the State. Both bills
enacting the credit directed CFC to allocate two years of
credits during the initial year; thus, each fiscal year's
allocation, for state budgeting purposes, is attributed to the
subsequent fiscal year's credits. For example, when CFC
allocated credits on July 1, 2014, it is for credits in 2015-16.
In 2011, the Legislature extended the program for one year, to
2014-15, then extended it again for two additional years until
2016-17. Because of the initial front-loading just described,
CFC cannot currently allocate credits after the planned July 1,
2015 date.
Commercial advertising, music videos, motion pictures for
non-commercial use, news and public events programs, talk shows,
game shows, reality programming, documentaries, or sexually
explicit films are not eligible for the credit. Any five
percent owner of the qualified taxpayer, defined as a taxpayer
who has paid qualified expenditures and has received a credit
certificate by CFC, or any individual related to the taxpayer is
ineligible for the credit.
Under current law CFC must set aside $10 million of credits each
year for independent films, defined as (1) a motion picture with
a budget between $1 million and $10 million, and (2) is not
publicly traded. CFC must provide FTB an annual list of
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qualified taxpayers and the tax credit amounts allocated to each
qualified taxpayer. The amount of the tax credit is equal to
either (1) 20 percent of the qualified production expenditures
of a motion picture; or (2) 25 percent of the qualified
expenditures of an independent film or a television series that
relocated to California.
Taxpayers apply to the CFC for the allocation and submit the
following information:
The motion picture production budget.
Number of production days.
A financing plan for the production.
The production's financing plan.
Total wages paid and the amount of qualified wages paid
to each qualified individual.
The diversity of the workforce employed by the
applicant.
Any other information the CFC or Franchise Tax Board
deems relevant.
CFC establishes criteria for allocating tax credits, then
determines and designates applicant eligibility. CFC processes
and approves, or rejects, applications on a first-come,
first-serve basis. Because of high demand for credits, CFC has
instituted a lottery, where lottery winners receive credit
reservations, and losers do not. If a project is approved for a
credit, the project must shoot within six months and be
completed within 30 months from the date when the application
was approved by the CFC.
Before CFC issues a taxpayer a credit certificate for an amount
not to exceed the original credit allocated, the taxpayer must
provide CFC with verified completion and documentation of actual
qualifying expenditures. Qualified expenditures are amounts
paid or incurred to purchase, or lease, tangible personal
property, wages, or services performed in the state, during the
motion picture production in California.
Before CFC issues a credit certificate, it must establish a
procedure for a qualified taxpayer to report to it the following
information:
If readily available, a list of the states, provinces,
or other jurisdictions in which any member of the
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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
CFC must obtain, when possible, the following information from
applicants that do not receive an allocation of credit: (1)
whether the qualified motion picture that was the subject of the
application was completed, (2) if an application was completed,
which state or foreign jurisdiction was the primary principal
photography completed, and (3)
whether the applicant received any financial incentives from the
state or foreign jurisdiction to make the qualified motion
picture in that location.
CFC must 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. CFC also must annually
provide the LAO a list of qualified taxpayers and the tax credit
amounts allocated to each qualified taxpayer by the California
Film Commission. 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.
CFC must annually post on its website 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 California Film Commission.
o The number of production days in California
the qualified taxpayer represented in its application
would occur.
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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.
Current law requires CFC to provide specified information to the
LAO necessary to enable it to report to the Legislature on or
before January 1, 2016, evaluating the economic effects and
administration of the tax credits, as specified.
Proposed Law: This bill would enact a new motion picture
production credit to replace the current one. The new credit
would be structured largely similar to the existing one, and
begin in the 2016 taxable year. The bill would preclude
taxpayers from claiming both credits for the same expenses. The
measure currently does not specify the total amount CFC shall
allocate annually, but does authorize it to start allocating
credits in 2016-17 until July 1, 2021. CFC can add the amount
of unallocated from the previous year to the next year's
allocation.
The credit is substantially similar to the current one, with the
following differences:
The credit is equal to 20 percent of qualified
expenditures of a feature up to $100 million, and the bill
removes the current cap of $75 million on production
budgets. Thus, larger-budgeted movies would be eligible
under the bill than is the case under current law.
A television series that relocates to California must
have filmed at least its first two years outside California
to receive a tax credit allocation.
The credit is equal to 25 percent of qualified
expenditures if it's an independent film.
CFC must add five percent to the applicable percentage
(for a total of up to 25 percent) when the film pays or
incurs original photography expenses outside of the Los
Angeles zone, as defined.
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The measure allows 25 percent of the expenditures
relating to music scoring and music track recording
attributable to motion picture production in California,
and 25 percent of the expenditures relating to qualified
visual effects to qualify for the credit, so long as 75
percent or a minimum of $10 million in expenditures is paid
or incurred in California.
Allows production of pilots longer than 40 minutes,
exclusive of commercials, shot in California to qualify for
the credit.,
Modifies the definition for eligible television series
to include only new, television series of longer than 40
minutes, exclusive of commercials, with minimum production
budgets of $1 million per episode; the previous credit only
allowed for new television series licensed for distribution
on basic cable with total production budgets of $1 million.
The new credit would be allocated in the same first-come,
first-served order as the current credit, except that any new
one-hour television series that CFC has approved for a credit is
placed at the top of the queue in each subsequent year in the
life of the television series, as well as any television series
based on a pilot that received the credit. Additionally, CFC
shall set aside the lesser of 10 percent of its total amount
allocated or $20 million for independent films, and $30 million
per fiscal year for television series relocating to California.
The measure allows taxpayers to use the new motion picture
production tax credit to reduce tentative minimum tax, and to
apply the credit against any liability under the sales and use
tax law.
Staff Comments: As was this the case in the Assembly
Appropriations Committee, without knowing the proposed size of
the annual credit, it is not possible to inform policymakers
regarding the specific economic and fiscal impacts to the State.
To provide some current perspective, California's current film
tax credit ranks fifth in the nation in annual size, behind New
York ($420 million), Louisiana ($236 million), Georgia ($140
million), and Florida ($131 million). Put together, film tax
credits from all participating states nationwide amount to
roughly $1.5 billion annually. In 2002 only five states had tax
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incentives for film productions. By 2009, all but six had them.
But as noted below, the number of states offering the credit may
have peaked.
Demand for the State's film tax credit far exceeds supply.
Available allocations were oversubscribed for all funding cycles
thus far. Moreover, the last four cycles were oversubscribed on
the initial day of availability. In response, as noted earlier,
a lottery was deployed with respect to allocation of the
credits. The lottery assigns credits impartially and
transparently. Without it, credits would be awarded on a
first-come, first-served basis, thus allowing one applicant with
multiple projects to collect a disproportionate share of
credits. The lottery process is administered by CFC staff with
the participation and oversight of a state law enforcement or
fire safety officer. All applications received on the first day
are assigned a lottery ticket. All lottery tickets are included
in a random drawing of numbers by the state officer until each
project has been assigned a priority number. Applications
receive an initial reservation of credits based on their
qualified expenditure estimates until all $100 million in annual
tax credits are exhausted; all remaining applicants are placed
on a waiting list. After the first day, CFC continues to perform
a random selection process if more than one application is
received on any given day. Throughout the fiscal year, as
projects drop out or utilize less credits than initially
anticipated, credits are returned to the fiscal year "pot" and
are reallocated to waiting list projects.
From a fiscal perspective, the critical downside to the film tax
credit in general, and the lottery in particular, is the extreme
likelihood that some of the projects that win the lottery (and
thus receive the tax credit) would have been filmed in the State
even if they had not won the lottery, thereby weakening the
credit's effectiveness as an economic development tool. Since
the credit is intended to maximize movie production (and
employment) in California, and the credit is heavily
oversubscribed, it is critical to know whether a project is
likely to be filmed elsewhere absent a subsidy.
It is of critical importance to this Committee that, like all
tax credits, the film tax credit be successful in its objective
of creating and retaining employment in the State. The analysis
and calculation of the numbers, however, is more complicated
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than generally realized. On the one hand, one dollar of film
spending trickles through the economy and creates more economic
activity. For instance, if a film production spends one dollar
on wages for a worker, that worker will take that income and
spend it in the economy, creating income for others, and so on.
The additional economic activity generated by a dollar of
spending is known as an economic multiplier. But the fact that
film productions impact the broader economy is not unique to
this industry. Other industries have a similar effect.
Thus, spending public dollars on film tax credits means forgoing
other opportunities, and these missed opportunities have their
own economic multipliers. If, instead of giving the current $100
million annually film producers, those funds were spent on
social assistance programs or returned to the taxpayers, that
spending would also trickle through and impact the broader
economy. In other words, both the public and private spending
opportunities that are forgone in favor of film tax credits
would have their own economic impacts and their own multiplier
effects. Some may have an economic multiplier greater than film
production, some less, but again, the film industry is not
unique in its ability to stimulate broader economic activity.
The fact that the film industry impacts the broader economy
alone is not enough to justify choosing the film industry over
other uses of taxpayer dollars. Lawmakers need to weigh the
benefit of film tax credits against other possible uses of the
same revenue.
CFC's July 2011 Progress Report on the California Film and
Television Tax Credit Program cites an economic impact study
conducted by the Los Angeles Economic Development Corporation
(LAEDC) on the first 77 projects that received an allocation of
tax credits. The study concluded that during the first two
years of the film tax credit program, the credit generated more
than $3.8 billion in economic output, supported over 20,000 jobs
in California, and will return $200 million to state and local
governments. The study indicates that the credit returns $1.13
for each dollar spent on the credit. Staff notes, however, that
the study is based on an analysis of only nine productions, and
assumes that productions would not have taken place absent the
incentives. There does not appear to be sufficient data to
support the assumed benefits. Studies conducted on film
industry tax incentives provided in other states conclude that
state revenues generated per dollar of tax incentive ranged from
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a low of $.13 for Louisiana to $1.10 for New York.
Staff to the Senate Governance and Finance Committee requested
the LAO to evaluate a February 2012 report on the film tax
credit performed by staff members of the UCLA Institute for
Research on Labor and Employment (UCLA-IRLE), which analyzed the
LAEDC study and its conclusions. In short, the UCLA-IRLE study
concluded that state may recover a more modest $1.04 to state
and local governments per dollar of tax credit, and attributed
the reduced benefit to the LAEDC assumption that all productions
that received a credit allocation would have otherwise filmed
elsewhere. Recently, the LAO responded to the Governance and
Finance Committee after reviewing both the LAEDC study and the
subsequent UCLA-IRLE study, and concluded that both studies
overstate the economic benefits. The LAO notes that the
underlying economic modeling relies on numerous unknown
assumptions, that the sampling of projects is not
representative, that the LAEDC study incorrectly assumes that
productions would not have filmed here absent the credit, that
the studies failed to account for employment in California for
productions that film elsewhere, and that the LAEDC study fails
to consider the opportunity costs of the state using tax credit
money in this way instead on some other program. The LAO
analysis suggests that the state tax revenue return is about 65
cents for every tax credit dollar.
The National Conference of State Legislatures reports that over
the past few years, several states, including Arizona, Idaho,
Indiana, Iowa, Kansas, Missouri and Washington have begun to
end, suspend or shrink their film tax credit programs. To the
extent this trend continues amongst other states, and California
maintains or even increases the size of its annual credit, it
could lock-in and increase the probability it will award credits
to films that would have been produced in the State on the
natural.
The bill proposes to continue the current policy of
transferability with respect to film tax credits for independent
film producers, as defined. These producers can sell credits to
other companies that owe taxes to the State, irrespective of
their line of business, with no corresponding increase in
economic activity. Given up to $20 million of the credit in the
bill could be set aside for independent film producers, the
fiscal impact of this proposal is significant.
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