BILL ANALYSIS                                                                                                                                                                                                    Ó
                                                                  AB 1839
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          (  Without Reference to File  )
          CONCURRENCE IN SENATE AMENDMENTS
          AB 1839 (Gatto and Bocanegra)
          As Amended  August 27, 2014
          Majority vote.  Tax levy
           
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          |ASSEMBLY:  |76-0 |(May 28, 2014)  |SENATE: |     |               |
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                                                  (vote not available)
          Original Committee Reference:    A.,E.,S.,T., & I.M.  
           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, 2016, and  
          authorizes the California Film Commission (CFC) to administer  
          the program and allocate the tax credits, subject to a $230  
          million cap in the first year (2015-16) and $330 million dollar  
          aggregate annual cap for each fiscal year from the 2016-17  
          fiscal year through and including the 2019-20 fiscal year.
           The Senate amendments  :
          1)Extends the film tax credit program to cover fiscal years  
            through 2019-20.
          2)Increases the limit upon the aggregate amount of new credits  
            issued under the film tax credit program to be allocated in  
            each fiscal year from $100 million provided by the Assembly to  
            $230 million for the 2015-16 fiscal year and $330 million per  
            fiscal year thereafter, (note that when the $230 million is  
            added to the $100 million provided in existing law for the  
            2015-16 fiscal year, the available funds for all future years  
            under the bill will be $330 million).
          3)Replaces the current once a year lottery allocation process  
            for distribution of credits to instead provide that credits  
            would be issued in two or more allocation cycles in amounts  
            and in the order generated through a competitive computation  
            and ranking of applicants based on a ratio formula of the  
            number of jobs created to the tax credit amount, as defined.
          4)Requires the CFC to allocate the credit amounts subject to the  
            following categories in order to insure like productions  
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            compete against each other under the jobs ratio formula:
             a)   Independent films shall be allocated 5%.
             b)   Feature films shall be allocated 35%.
             c)   A relocating television series shall be allocated 20%.
             d)   A new television series, pilots for a new television  
               series, movies of the week, miniseries, and recurring  
               television series shall be allocated 40%. 
          1)Requires applicants to include a statement which declares that  
            the tax credit is a significant factor in the applicant's  
            choice of location for the qualified motion picture.
          2)Changes the definition of relocating series, to one which has  
            a minimum production budget of at least $1 million dollars per  
            episode.
          3)Allows ongoing series to become eligible for the film tax  
            credits.
          4)Grants any television series based on a pilot that was issued  
            a credit a place at the top of the queue for allocations for  
            the life of that television series, as provided.
          5)Requires the CFC to audit final submissions for tax credits  
            and compare the jobs ratio figures contained in original tax  
            credit applications to those actual qualified expenditures,  
            and provides for discrepancies as follows:
             a)   If the CFC finds a reduction in actual qualified  
               expenditures of no more than 10% they shall reduce the  
               amount of credit allowed by an equal percentage, with  
               limited exception for reasonable cause, as provided.
             b)   In addition, if the CFC finds a reduction in actual  
               qualified expenditures by more than 20%, the CFC shall not  
               accept an application from that qualified taxpayer for one  
               year, with exceptions for reasonable cause, as provided.
             c)   Independent films would be treated differently, with any  
               reduction of 30% or more in actual qualified expenditures  
               reducing the amount of credit allowed by an equal  
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               percentage, plus subjecting them to a penalty of 10% of the  
               difference in requested tax credit allowance and actual  
               expenditures, with exceptions for reasonable cause, as  
               provided.
          1)Requires that or before July 1, 2019, the Legislative  
            Analyst's Office (LAO) shall provide to the Assembly Revenue  
            and Taxation Committee, the Senate Governance and Finance  
            Committee, and the public a report evaluating the economic  
            effects and administration of the tax credits allowed, as  
            provided.
          2)Urges the United States (U.S.) Department of Commerce and the  
            International Trade Commission to investigate and impose  
            sanctions on specified motion picture productions and elements  
            of production to combat unfair and illegal competition.
          3)Makes various findings and declarations related to the  
            entertainment industry, along with technical, conforming and  
            chaptering-out amendments.
           FISCAL EFFECT  :  According to the Senate Appropriations  
          Committee:
          1)The Franchise Tax Board (FTB) 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).
          2)$300 million the first FY, 2015-16 and $400 million each  
            fiscal year thereafter through 
          2018-19 (General Fund).  NOTE:  This bill was amended following  
            hearing in the Senate Appropriations Committee to reduce the  
            amount from $400 million down to $230 million for the 2015-16  
            fiscal year and $330 million per fiscal year thereafter.
          3)CFC will 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.
           AS PASSED BY THE ASSEMBLY  , 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:
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             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  
               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  
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                 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, 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 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.
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             b)   Declares, notwithstanding a) above, the CFC shall give  
               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 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.
           
          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  
          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.    
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          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.
          Film Los Angeles (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  
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          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.) 
          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                                         
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