BILL ANALYSIS �
Senate Appropriations Committee Fiscal Summary
Senator Christine Kehoe, Chair
AB 2026 (Fuentes) - California Film and Television Tax Credit.
Amended: August 27, 2012 Policy Vote: G&F: not available
Urgency: Yes Mandate: No
Hearing Date: August 29, 2012
Consultant: Mark McKenzie
This bill meets the criteria for referral to the Suspense File.
Bill Summary: AB 2026, an urgency measure, would extend the
applicability of the California Film and Television Tax Credit
(film tax credit) for two years, thereby authorizing the
allocation of an additional $100 million annually in tax credits
to qualified productions from July 1, 2015 until July 1, 2017.
Fiscal Impact:
Estimated tax revenue loss of $5.1 million in 2014-15, $22
million in 2015-16, and an additional $161 million in future
fiscal years as a result of extended tax credit benefits
(General Fund).
Extended staffing costs at the California Film Commission
of approximately $300,000 annually through 2016-17 for
continued administration of the credit program (General
Fund).
Estimated staff costs to the Legislative Analyst's Office
(LAO) of approximately $75,000, likely absorbable, to report
on the economic effects and administration of the credit
program.
Background: The February 2009 state budget agreement included a
package of legislation that consisted of both temporarily tax
increases (ABx3 3 (Evans), Chapter 18 of the 2009-10 Third
Extraordinary Session) and tax expenditure incentives intended
to create or retain jobs in California (AB x3 15 (Krekorian) and
SB x3 15 (Calderon) Chapters 10 and 17, respectively, of the
2009-10 Third Extraordinary Session). The latter bills are
identical, and both included provisions for an elective
single-sales factor apportionment formula, a new Jobs Tax
Credit, and the California Film and Television Tax Credit
AB 2026 (Fuentes)
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Program.
Existing law, beginning with the 2011 tax year, allows a 20
percent credit of qualified expenditures attributable to the
production of a qualified motion picture in California, or 25
percent of expenditures if the production is an independent film
or a television series that relocated to California. Qualified
motion pictures include the following productions in which at
least 75 percent of production days occur in state, or 75
percent of the production budget is incurred on services,
purchases, or rentals in California: feature films, movies of
the week, miniseries, new or relocated television series, and
independent films.
Existing law authorizes the California Film Commission (CFC) to
allocate $100 million in tax credits annually, with $10 million
dedicated each year for independent films, on a first-come
first-served basis, for each year from 2009-10 through the
2014-15 fiscal years. Projects that receive a credit allocation
must commence shooting within 6 months and complete production
within 30 months. CFC issues a credit certificate for qualified
expenses upon completion of the production. Any amounts
unallocated in a fiscal year, and any amounts allocated but not
certified, may be allocated in the following year. Credits may
be claimed for taxable years on or after January 1, 2011 and
unused credits may be carried over for six years. Certified
credits may be claimed by taxpayer directly, assigned to another
member of a unitary group, or applied against sales and use tax
liabilities. Tax credits certified for independent films may be
sold to an unrelated party.
Proposed Law: AB 2026 would authorize the CFC to allocate $100
million in tax credits for the 2015-16 and 2016-17 fiscal years.
The bill would also do the following:
Revise CFC's credit application to require an applicant
to report all members of a combined reporting group, if
known, and the names of all partners, as specified, that
have a financial interest in the applicant's qualified
motion picture.
Require the CFC to establish a procedure for an
applicant to report whether the applicant or other members
of the applicant's combined reporting group has produced a
qualified motion picture outside of California, and whether
that production was awarded a financial incentive for
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filming in that location.
Require the CFC, when possible, to obtain information
from an applicant not receiving a credit allocation about
whether the motion picture was completed, and if so, the
state or foreign jurisdiction in which the production was
filmed, and whether the motion picture received an
incentive from that jurisdiction.
Require the CFC to provide any and all application
materials to the LAO, upon request, as specified.
Require the CFC to annually provide a list of qualified
taxpayers and tax credit amounts to the LAO.
Require the CFC to annually post specified information
about individual tax credit allocations, including the
proposed number of production days in California, the
number of jobs that an applicant contends would be directly
created by the production, and the total amount of
qualified expenditures expected for the production, as well
as other information from the applicant.
Require the LAO to provide a report to the public and
Legislature by January 1, 2016 that evaluates the economic
effects and administration of the tax credit program.
Authorize the LAO to request and receive all information
provided to the CFC and FTB, and Board of Equalization in
relation to the tax credit program, as specified.
Require the CFC, FTB, Board of Equalization, Employment
Development Department, and all other relevant state
agencies to provided additional information, as determined
by the LAO.
Authorize the LAO to publish statistics in conjunction
with the required report, and require specified taxpayer
information remain confidential, as specified.
Related Legislation: SB 1167 (Calderon), currently pending in
the Assembly, is identical to this bill, except for the urgency
clause. SB 1167 was approved by this Committee on August 16,
2012 on a vote of 7-0. The contents of SB 1167 have also been
amended into SB 1197 (Calderon) with the urgency clause. SB
1197 is pending a hearing in the Assembly Revenue and Taxation
Committee.
Staff Comments: Information available from the CFC on the film
tax credit program provides the following summary of activity:
2009-10: $172 million in credits allocated over two funding
cycles to 69 projects with estimated aggregate project
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expenditures of $1.1 billion.
2010-11: $124 million in credits allocated to 52 projects with
estimated aggregate project expenditures of $967 million.
2011-12: $104 million in credits allocated to 29 projects ($66
million of which is "reserved" for 11 pending projects) with
estimated aggregate project expenditures of $740 million.
2012-13: $100 million in credits allocated to 28 projects with
estimated aggregate project expenditures of $683 million
Demand for credits far exceeds supply; available allocations
were oversubscribed for all funding cycles, and the 2010-11,
2011-12, 2012-13 amounts were oversubscribed on the first day
of availability.
The CFC indicates that credit allocations to date have varied in
size; the smallest allocation was $74,000, while the largest was
$11 million. The average allocation amount is nearly $2.7
million.
The 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, supports 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 9 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
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
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elsewhere. Recently, the LAO responded to the Chair of 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
contends that the state and local tax revenue return would be
under $1.00 for every tax credit dollar, and perhaps well under
that amount in many years. Furthermore, the LAO notes that even
if the overall benefit were around $1.00 for each dollar of tax
credit, this figure includes local tax benefits, so the credit
would appear to result in a net decline in state revenues.
ABx3 15 and SBx3 15 both included an uncodified requirement that
the Business, Transportation and Housing (BTH) Agency report to
the Legislature by December 31, 2015 on the economic impact of
the film tax credit, six months after the primary allocations
cease. The BTH Agency is required to consider the number and
increase or decrease of qualified motion pictures produced in
the state, the total qualified wages paid or incurred in the
state, and the level of employment in the production industry.
Staff notes that these considerations alone are insufficient to
determine the impact the credit has had on the industry or the
broader economy in California.
The CFC was authorized to add 3 PY of staff in the fiscal year
following enactment of the film tax credit, but reports that 2
PY are currently dedicated to administering the program. The
Department of Finance reports that the CFC currently spends
$326,000 per year administering the tax credit program. AB 2026
would result in ongoing staffing costs of approximately $300,000
from 2015-16 through 2016-17. There would likely be some lesser
amount of ongoing costs to wind down the credit program.
Staff notes that allocations under the current film tax credit
program are authorized until July 1, 2015, and previously
authorized credits have only just begun to be claimed this year.
The Committee may wish to consider whether it is premature to
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extend a program that won't expire for nearly three years, and
whether continuing the film tax credit represents the highest
and best use of General Fund resources in a time of ongoing
budget deficits.
Recommended Amendments: Since the credit is intended to retain
movie production in California, and the credit is heavily
oversubscribed, staff recommends that the bill be amended to
delete provisions that provide for a first-come first-served
allocation process and instead require a competitive allocation
process that provides for more scrutiny of whether a project is
likely to be filmed elsewhere absent a subsidy. Currently, a
television series that relocated to California is the only type
of production that is required to make a finding that the
subsidy is the primary reason for filming in the state in order
to qualify for a tax credit allocation. According to film tax
credit regulations, these productions need only to self-certify
that they would have filmed elsewhere absent the credit.