BILL ANALYSIS Ó
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 370 HEARING: 5/1/13
AUTHOR: Lieu FISCAL: Yes
VERSION: 4/8/13 TAX LEVY: No
CONSULTANT: Grinnell
INCOME TAX CREDITS: COMMERCIAL PRODUCTION
Enacts a tax credit for producing commercials in Los
Angeles, and another for the rest of the state.
Background and Existing Law
In 1985, the Legislature established the California Film
Commission (CFC) to co-ordinate 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 Committee on Rules, and
Speaker of the Assembly to sit on CFC's board.
California provides various tax credits designed to provide
incentives for taxpayers that incur certain expenses, such
as child adoption, or to influence behavior, including
business practices and decisions, such as research and
development credits and Geographically Targeted Economic
Development Area credits. The Legislature typically enacts
such tax incentives to encourage taxpayers to do something,
but for the tax credit, they would not otherwise do.
In 2009, the Legislature enacted the Motion Picture
Production tax credit (ABx3 15 (Krekorian)/SBx3 15
(Calderon, 2009) for qualified motion pictures, defined as:
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,
To be eligible for the credit, the taxpayer must have 75%
of the motion picture shooting days take place in
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California, or 75% of the motion picture production costs
incurred in the state. 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. In 2011, the Legislature extended the credit
until the 2014-15 fiscal years, but required an extensive
study of the credit by the Legislative Analyst's Office (AB
1069, Fuentes).
CFC allocates $500 million -- $100 million in tax credits
annually -- from fiscal years (FY) 2009-10 to FY 2013-2014.
CFC must set aside $10 million credits each fiscal year
for independent films, defined as a motion picture with a
minimum budget of $1 million and maximum budget of $10
million and is not publicly traded. The amount of the tax
credit is equal to either:
20% of the qualified production expenditures of a
motion picture; or
25% 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 must
submit specified information. CFC then grants applications
on a first-come, first-serve basis. If a project is
approved for a credit, the project must shoot within 6
months and be completed within 30 months from the date when
the application was approved by the CFC.
Before the CFC issues a taxpayer a credit certificate for
an amount not to exceed the original credit allocated, the
taxpayer must provide the 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.
CFC awards the credit after the production is completed and
the project certifies its expenditures with a CPA.
Taxpayers can claim the credit against the personal income
tax or the corporate tax law, or:
Assign the credit to another member of their
unitary group,
Apply the credit against their sales and use tax
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liability.
Taxpayers making independent films may sell the credits to
other taxpayers. If there is any unused credit, it may be
carried forward to each of future six taxable years, or
until the credit is exhausted. If the credit exceeds a
qualified corporate taxpayer's liability, the taxpayer may
elect to have any portion of the credit assigned to one or
more of its affiliated corporations.
Proposed Law
Senate Bill 370 enacts a credit against the Personal Income
Tax and the Corporation Tax for taxpayers producing a
commercial in the "studio zone," and another credit against
each tax for producing commercials outside the studio zone
but within the state.
The California Film Commission allocates the credits, but
the measure doesn't set forth criteria for allocation or
require first-come, first-served allocation as the Motion
Picture Production Credit. Instead:
First, CFC establishes a procedure for applicants
to file applications on or before April 1, 2014, and
each April 1 thereafter, on a form jointly designed by
CFC and FTB.
Second, the taxpayer provides CFC with its
production schedule for each commercial produced in
the state in the taxable year, total qualified
expenditures, total qualified wages paid, total
nonqualified expenditures, number of cast and crew
members hired for each commercial, number of vendors
used during the taxable year, and any other
information CFC requires.
Third, allocate credits subject to the annual cap.
Lastly, CFC establishes verification procedures and
audit requirements.
SB 370 allocates $15 million in tax credits in the 2012-13
fiscal years: $2 million for commercials shot outside the
"studio zone," and $13 million within it, which is defined
as the area within a circle of 30 miles in radius from the
intersection of Beverly Boulevard and La Cienega Boulevard
in Los Angeles, CA. CFC can allocate any unallocated
credits in each pot in the next fiscal year. If CFC
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allocates credits in amount that exceeds the cap in a
fiscal year, then it must reduce credits allocated on a pro
rata basis. However, if CFC doesn't allocate all the
credits, it increases previously allocated credits by up to
15%.
SB 370 allows two options for taxpayers where the amount of
credit exceeds their tax liability in a taxable year:
first, the taxpayer can claim a refund of 50% of the excess
in the first taxable year, then apply the remainder in the
following taxable year, and receive a refund for any
remainder. Second, the taxpayer may carry the entire
amount over the next five years. The bill continuously
appropriates funds to FTB to issue credit refunds.
The bill provides that the credit is equal to 15% of
qualified expenditures that exceed the qualified credit
base for producing a commercial in the "studio zone," equal
to the amount over $500,000 spent producing the commercial.
Outside the "studio zone," the credit base is equal to the
amount spent over $250,000.
CFC may issue rules and regulations necessary to establish,
processes, procedures, requirements, and rules to implement
the bill, and has the authority to allocate tax credits.
CFC must also provide FTB annually with a list of the
names, taxpayer identification numbers, qualified taxpayers
and the amount of tax credits it allocates to each.
The measure defines "qualified commercial," including those
made for the internet, mobile devices, and in-game, and
also sets forth exclusions from that definition, such as
productions with advertising components that exceed five
minutes, any program produced by political organizations,
or any production that have record-keeping requirements on
producers of visual depictions of sexually explicit
conduct. SB 370 defines "qualified taxpayer," as a
taxpayer principally engaged in the production of a
commercial, as defined. The measure also defines a
"qualified individual," as a person who performs services
during the production of a commercial, but excludes persons
related to the qualified taxpayer or part-owners.
Additionally, SB 370 imports definitions for "employee
fringe benefits," "qualified expenditures," as well as
treatment of pass-thru entities and S-Corporations from the
motion picture production credit; however, the measure's
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definition of "qualified wages" conforms to the motion
picture production credit, except by not explicitly
disallowing expenses related to use, reuse, clip use,
licensing, secondary markets, residual compensation,
creating ancillary products, wages paid or incurred to
acquiring or developing rights, and wages paid related to
financing, overhead, promotion, or distribution.
The bill also contains a legislative finding and
declaration justifying the necessity of a law to support
commercial production in Los Angeles.
State Revenue Impact
According to the Franchise Tax Board, SB 370 results in
revenue losses of $3.7 million in 2013-14, $15 million in
2014-15, and $20 million in 2015-16.
Comments
1. Purpose of the bill . According to the author,
"California has long been the capital of television
commercial production, being home to studios, a diverse
array of on-location sites, post-production facilities, and
the best trained creative and technical talent in the
world. 56% of all television commercial production once
took place in California. Despite all of the advantages
that made the Golden State so appealing for commercial
production, out of state incentive programs have
successfully eroded California's position. Since 2007,
California has lost over $250 million in direct commercial
production economic activity due to out of state incentive
programs. In addition to the international competition
from Canada, Australia and many EU nations, at least 28
other U.S. states offer meaningful financial incentives to
the commercial industry, successfully luring production and
post-production jobs and spending away from the Golden
State. SB 370 is designed to ensure we reclaim and protect
California's share of television commercial production and
the thousands of jobs associated with this industry. SB
370 mirrors the successful framework of New York's Empire
Commercial Production Tax Credit, passed in 2006,
recognizing the unique needs and business model of the
commercial production industry."
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2. Sure, but will it work ? Tax credits do two things:
First, they reward behavior that would have occurred
without the subsidy, so-called "deadweight loss." Some
commercial producers will receive a SB 370 tax credit that
would have filmed in California regardless of a credit for
production reasons. In these instances, the state receives
no marginal benefit, and transfers wealth from purposes it
would otherwise spend money on for government purposes to
the commercial producer. Second, some commercials will be
shot in California that wouldn't have but for the credit;
the significant incentive will lower production costs in an
amount necessary for producers to choose to shoot a
commercial in California instead of somewhere else. A
state with no commercial production should enact a credit
as great as it can because it has nothing to lose.
However, the Committee may wish to consider how many new
commercials will be produced in California that would have
been produced elsewhere because of SB 370 versus its
deadweight loss, assuming that California wants to enter
into zero-sum tax competition with other states.
Second, allowing a new credit means that Californians must
take up front cuts in education, public safety, or other
health and human service programs that benefit the public
at large. Subsidies are costly to the state but generous
to a highly mobile industry that can leave to take
advantage of different tax incentives, lower labor costs,
and growing technological studios. When seeking to balance
difficult budgets, long-term economic development funds
should target specific programs that would be more likely
at producing long-term economic benefits, like investment
in human capital. The Committee may wish to consider if AB
1069 is a good investment.
3. We're different . The Committee hears many proposals
that promise that tax credits for a specific industry will
lead to employment growth in the state. SB 370 calls for
credits for commercial production companies, arguing that
credits will arrest commercials that could be made in
California from instead being produced in other states, and
induce more commercial production from other states because
of their high mobility, significant economic impact, and
cost structure in California. SB 370 would give producers
certainty that tax credits will reduce its costs in
California by a significant amount whenever the producer
makes the commercial in California, instead of an a
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project-by-project basis like the motion picture credit.
However, critics point out that commercials are produced in
three days, so any economic effect can't be that
significant. The Committee may wish to consider the case
for tax credits for the commercial production industry
versus other economic activity.
4. All together now . The Legislature enacted the motion
picture production credit, then extended it to 2014-15, but
capped the CFC's allocation of credit to $100 million and
compelled a study requirement. SB 370 enacts a very
similar credit capped at $15 million annually for
commercial productions. Why should the Legislature
authorize two similar credits allocated in isolation from
each other, when CFC could allocate credits to either
commercial productions or motion pictures based on its
assessment of the best return on the state's investment of
tax credits? That way, the state's efforts to provide tax
incentives to producers of media content can be
consolidated and deployed in an integrated way.
Additionally, should the Committee limit the state's total
fiscal risk to $100 million annually by placing the
commercial tax credit under the motion picture production
credit's cap? The Committee may wish to consider amending
SB 370 to consolidate the current program with the proposed
one, and whether it wants to maintaining the total $100
million cap or add the cost of the commercial credit onto
the current tab.
5. Performance measures . Most tax credit bills set forth
an economic indicator or series of economic indicators that
its author expects will improve as a result of a tax
credit. For example, bills heard by the Committee
exempting manufacturing equipment from the sales tax have
used:
Increased employment for manufacturing, research
and development, and associated industries,
Siting for new and expanded manufacturing and
research and development facilities in this state,
Capital investment in manufacturing equipment and
all other tangible personal property.
The now-expired Manufacturer's Investment Credit sunset in
2003 due to its failing to meet necessary levels of
employment in the manufacturing sector the Legislature
required be met for the credit to continue. However, SB
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370 doesn't set forth the indicators that it expects to
change as a result of the credit: change in days in
production, commercial production employment, or employment
in associated industries. Additionally, the measure
doesn't have a sunset. The Committee may wish to consider
how the state can determine the success or failure of SB
370's credit without compelling any performance standards
or sunset provision.
6. The angel of death . In Cutler v. FTB . 208 Cal.App.4th
1247 (2012), the Second District Court of Appeal ruled that
California Qualified Small Business Stock (QSB) deferral
and exclusion discriminated against interstate commerce in
violation of the dormant commerce clause of the United
States Constitution. The Court ruled that the QSB
exclusion unfairly treated interstate commerce by providing
a substantial benefit to taxpayers who buy stock in
corporations that maintain 80% of its payroll in California
during the period of time the taxpayer holds the stock,
citing decisions by the United States and California
Supreme Courts striking down taxes and tax benefits as
discriminatory that legislatures have enacted to help
in-state businesses. Because of Cutler , any tax incentive
for companies that incur expenses in California but not in
other states, such as SB 370, may violate the Constitution
and carry with it the risk that Courts may order refunds
requiring the state to retroactively and prospectively
grant the same incentives for investments California
taxpayers make in other states. The Committee may wish to
consider deferring action on new tax incentives until
Courts or Congress give states further direction regarding
what's allowed and what's not with in-state tax incentives,
and further determine the state's refund risk.
7. Never enough . Tax credits come in two flavors:
nonrefundable, where the taxpayer carries over to future
taxable years the value of a tax credit that exceeds their
tax liability, or refundable, where the state sends a check
to the taxpayer in the amount that the credit exceeds its
tax. California eliminated its last refundable credit
three years ago when it eliminated the ability of taxpayers
to obtain refunds of the Child and Dependent Care Credit
(SB 86, Committee on Budget, 2011). SB 370 allows
taxpayers refundable commercial production tax credits,
although refunds must be split in half over two years. Why
should commercial producers receive refundable tax credits
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when no other taxpayer in California can? The Committee
may wish to consider deleting SB 370's authorization for
refundable tax credits.
8. Missing in action ? The motion picture production
credit requires taxpayer to collect information regarding
workforce diversity, a thorough LAO study requirement, and
a certification process for CFC to reconcile the taxpayer's
projected costs when applying for the credit and the
taxpayer's actual costs after production closes. The
Committee may wish to consider that if it does not simply
consolidate SB 370 into the motion picture production
credit, amending this measure to include these elements
required of movie producers getting tax credits.
9. Overkill ? The bill both provides that CFC can allocate
credit unused credits in previous years in future ones, and
to allocate credits up to 15% of the credit base to
qualified taxpayers. First, why should CFC allocate
credits to taxpayers that exceed their costs as a bonus for
something they've already done? Surely, there are better
ways to spend state funds. Additionally, the measure
doesn't state whether CFC should do the bonus allocation,
or apply the unused amount to the next allocation period,
or direct CFC to do one before it does the other. The
Committee may wish to consider the efficacy of the bonus
allocation, and whether it should amend the bill to
eliminate it and instead conform the process to the one
currently used by CFC when allocating film credits.
10. Location, location . SB 370 is actually two credits:
one for shooting within the Los Angeles-based studio zone,
and one for everywhere else. The bill allocates $13
million to the Los Angeles credit, but only $2 million
outside of it, based on traditional commercial production
patterns. However, from a statewide perspective, does it
matter where the commercial is produced? The Committee may
wish to consider whether the bill's geographic distribution
reflects the Committee's priorities.
10. Technicals . Committee staff recommends the following
amendments:
Replace references to "taxable year" with "calendar
years" in the definitional and allocation sections;
taxpayers often won't know their taxable years, and
CFC can't.
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Is an irrevocable election required for a
refundable credit?
Provide that qualified expenditures must be
incurred by the qualified taxpayers, and revise the
definition of "qualified taxpayer" as the person who
has been issued a credit under the bill by CFC. '
Replace "that falls within" with "to which" (Page
3, line 17; Page 8, Line 16; Page 13, Line 16; Page
18, Line 19)
Add "apply" after "Code" (Page 3, line 18; Page 8,
line 17; Page 13, line 17; Page 18, line 20)
Strike out "services, including qualified wages"
and insert "services." (Page 3, Line 22; Page 8, Lines
21 and 22; Page 13, Line 21, Page 19, Line 29)
Strike out "aggregate" (Page 6, line 12; Page 11,
line 12; Page 16, Line 32, Page 21, Line 21)
Strike out "to perform" and replace with "who
performs" (Page 15, line 32)
Correct allocation amount on Page 16, lines 31 and
32.
Strike out Page 16, line 35,
Support and Opposition (04/25/13)
Support : ACAFILMS; Association of Independent Commercial
Producers Inc.; 1st Ave Machine; Aero Film; Arts & Science;
Biscuit Filmworks; City of Big Bear Lake; Community Films;
County of Kern Board of Trade; Crossroads Films; Duck;
Durable Goods; Furlined; Gartner; GoFilm; Greendotfilms;
Harvest; Hello!; Heresy; Hungry Man; Imaginary Forces;
Imperial County Film Commission; Imperial Woodpecker;
Inland Empire Tourism Council/DiscoverIE; Inland
Empire Film Commission; Kaboom!; KFilms; Lookout
Entertainment; Marin Convention & Visitors Bureau; MILK;
MJZ; Monterey Film Commission;
Motiontheory; O Positive; Placer-Lake Tahoe Film Office;
Prettybird; Rabbit; Radical Media; RESET; Ridgecrest
Regional Film Commission; RSA Films; Sacramento Convention
& Visitors Bureau; Sacramento Film Commission; Slim;
Smuggler; Stardust Visions; Station Film, Inc.; Supply and
Demand Integrated; The Directors Bureau; The Sweet Shop
Film, LLC; Tool of North America;
Traveling Picture Show Company; Tulare County Film
Commission
SB 370- 4/8/13 -- Page 11
Opposition : California Teachers Association