BILL ANALYSIS �
SENATE GOVERNANCE & FINANCE COMMITTEE
Senator Lois Wolk, Chair
BILL NO: SB 1167 HEARING: 6/27/12
AUTHOR: Calderon FISCAL: Yes
VERSION: 6/4/12 TAX LEVY: Yes
CONSULTANT: Lui
FILM TAX CREDIT
Extends the California Motion Picture Tax Credit to July 1,
2020.
Background and Existing Law
In 1985, the Legislature established the California Film
Commission (CFC) to coordinate 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 Pro Tem, and Speaker of the Assembly to
sit on the CFC board.
In 2009, Governor Schwarzenegger signed the California Film
& Television Tax Credit Program (Film Tax Credit Program)
as a part of the 2009 Budget plan to promote film
production and create and retain jobs in California (SBX3
15, Calderon, 2009, and ABX3 15, Krekorian, 2009).
Qualified motion pictures, defined as: a) feature films
with budgets between $1 million and $75 million; b) movies
of the week with a minimum budget of $500,000; and c) new
television series with a minimum $1 million budget, may
apply for the credit. Also, 75% of the motion picture
shooting days must take place in California, or 75% of the
motion production budget must pay for services or the
purchase or rental or property within the state. Because
SBX3 15 authorized the CFC to allocate two years of credits
in the first year, each year's allocation is for the next
fiscal year's credits. For example, when CFC allocated
credits in July 1, 2012, it is for credits in FY 2013-14.
Last year, Governor Brown approved AB 1069 (Fuentes), which
extended the Film Tax Credit Program for one year to
2014-15.
Commercial advertising, music videos, motion pictures for
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non-commercial use, news and public events programs, talk
shows, game shows, reality programming, documentaries, or
sexually explicit films are not eligible. Any 5% owner of
the qualified taxpayer, defined as a taxpayer who has paid
qualified expenditures and has received a credit
certificate by the California Film Commission, or any
individual related to the taxpayer is ineligible for the
credit.
The CFC allocates $500 million -- $100 million in tax
credits annually -- from fiscal years (FY) 2009-10 to FY
2014-2015. The CFC must set aside $10 million credits each
FY 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 CFC must provide
FTB an annual list of qualified taxpayers and the tax
credit amounts allocated to each qualified taxpayer. 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.
Any unallocated credit from the previous FY may be carried
over and reallocated by the CFC. The process for applying
and receiving the tax credit follows:
Taxpayers apply to the CFC for the allocation and
submit the following information:
o The motion picture production budget,
o Number of production days,
o A financing plan for the production,
o The production's financing plan,
o Total wages paid and the amount of
qualified wages paid to each qualified
individual,
o The diversity of the workforce employed
by the applicant, and
o Any other information the CFC or
Franchise Tax Board deems relevant.
The CFC establishes criteria for allocating tax
credits, then it determines and designates applicant
eligibility.
The CFC processes and approves, or rejects,
applications on a first-come, first-serve basis.
If a project is approved for a credit, the project
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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. The
credit allows the taxpayer to claim the credit on their
file tax return with the Franchise Tax Board (FTB) under
the personal income tax or the corporate tax law. If the
project is awarded a tax credit, taxpayers may:
Claim the credit directly,
Assign the credit to another member of their
unitary group,
Independent taxpayers may sell the credits to other
taxpayers, or
Apply the credit against their sales and use tax
liability.
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. Even though credits were awarded
at the beginning of 2010, credits could not be claimed
until 2011.
Proposed Law
I. Extension. Senate Bill 1167 authorizes the California
Film Commission to allocate $100 million film tax credits
annually for five fiscal years, starting July 1, 2015 until
July 2020.
II. Application. SB 1167 requires an applicant to list on
its application:
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All members of a combined reporting group, if known
at the time of application; and,
The names of all partners in a partnership not
publicly traded or the names of all members of a
limited liability company classified as a partnership
not publicly traded for California income tax purposes
that have a financial interest in the applicant's
qualified motion picture.
III. California Film Commission. Before the Commission
issues a credit certificate, it must establish a procedure
for a qualified taxpayer to report to the Commission the
following information:
If readily available, a list of the states,
provinces, or other jurisdictions in which any member
of the 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
A "qualified motion picture" does not include any
episodes of a television series that were complete or
in production prior to July 1, 2009.
SB 1167 authorizes the CFC to allow qualified taxpayers
that receive multiple credit certificates in a calendar
year to file a single report on a calendar year basis.
SB 1167 requires the CFC to obtain, when possible, the
following information from applicants that do not receive
an allocation of credit:
Whether the qualified motion picture that was the
subject of the application was completed.
If an application was completed, which state or
foreign jurisdiction was the primary principal
photography completed.
Whether the applicant received any financial
incentives from the state or foreign jurisdiction to
make the qualified motion picture in that location.
SB 1167 requires CFC to provide the Legislative Analyst's
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Office, upon its request, any or all application materials
or any other materials received from, or submitted by the,
applicants, in electronic format when available.
The bill requires CFC to 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.
The bill provides that information provided to the
California Film Commission constitutes confidential tax
information pursuant to the franchise and income tax laws.
IV. Study. SB 1167 provides that the Legislative
Analyst's Office must provide to the Assembly Committee on
Revenue and Taxation, the Senate Committee on Governance
and Finance, and the public, on or before January 1, 2015,
and on or before January 1, 2017, a report evaluating the
economic affects and administration of the tax credits.
SB 1167 authorizes the LAO, in researching the reports, to:
Request and receive all information provided to the
California Film Commission pursuant to state law.
Request and receive all information provided to the
Franchise Tax Board relating to the sale or assignment
of credits.
Request and receive all information provided to the
board pursuant to state law.
SB 1167 also requires CFC, the board, the Franchise Tax
Board, the Employment Development Department, and all other
relevant state agencies to provide additional information,
as specified by the Legislative Analyst's Office, as needed
to research the reports.
SB 1167 provides that information received by the
Legislative Analyst's Office pursuant to this section must
be considered confidential taxpayer information and subject
to the appropriate confidentiality requirements of the
participating state agency.
The bill authorizes the LAO to publish statistics in
conjunction with the reports required, derived from
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information provided to the Legislative Analyst's Office,
if the published statistics are classified to prevent the
identification of particular taxpayers, reports, and tax
returns and the publication of the percentage of dividends
paid by a corporation that is deductible by the recipient.
State Revenue Impact
No estimate.
Comments
1. Purpose of the bill . When 43 other U.S. states and
overseas production companies offer enticing tax subsidies
for film and TV productions, California loses big.
Productions that leave the state to pursue other state or
international incentives -- "runaway productions" --
translate to significant job and economic losses.
California has a historical comparative advantage over
other states, because of the long-established film industry
and the high-paying talent pool that resides in state.
Along with the state's natural beauty, clement weather, and
high-tech media studios, a tax incentive retains and
attracts production to California. However, with the
credit set to expire in 2016, California's film industry
will become uncompetitive, as other locations invest in and
develop their own infrastructure and talent pools.
Moreover, the state will no longer draw ancillary economic
benefits from tourism. SB 1167's tax credit extension
provides the necessary economic stability to retain and
attract film industry productions back to California.
2. Zero sum game . Opponents to the bill state that
extending the credit an additional five years means that
other state programs have less funding for education,
public safety, and other health and human service programs
that benefit the public at large. Film subsidies are
costly to the state but generous to a mobile industry that
can take advantage of different tax incentives and lower
labor costs. 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.
Because individual states compete for the same productions,
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state's varying film credit incentives become a zero-sum
game. It may make more sense for a film credit at the
national level. The Committee may wish to consider how
helping an industry's competitive advantage from other
states impacts the state's own program investments, like
education or public safety, which make California
competitive in different respect.
3. Transparent models . Under the California Treasurer's
office, the California Alternative Energy and Advanced
Transportation Financing Authority (CAEATFA) approves sales
and use tax exclusions (STEs) for eligible projects on
property utilized for the design, manufacture, production
or assembly of advanced transportation technologies or
alternative source products, components or systems (SB 71,
Padilla, 2010). On CAEATFA's website, any individual may
access an Excel spreadsheet listing of an applicant's name,
location, use of proceeds, estimated fiscal benefit,
estimated jobs, and the STE amount. The individual may
also review a list of approved applicants, CAEATFA's annual
report to the Legislature, and audit/disclosure reports.
Last year, the Committee suggested language about an LAO
study and additional application criteria. SB 1167
incorporates many of the Committee's recommendations for
performance measures. To further the credit's
transparency, the Committee may wish to include the
following language:
On page 13, line 39, after "(h)", insert: (1)
On page 14, line 7, insert:
(2)(A) Notwithstanding subparagraph (g)(5), the
California Film Office shall annually post on its
website and make available for public release:
(i) A table which includes all of the following
information: a list of qualified taxpayers and the tax
credit amounts allocated to each qualified taxpayer by
the California Film Commission, the number of
production days in California the qualified taxpayer
represented in its application would occur, the number
of California jobs that the qualified taxpayer
represented in its application would be directly
created by the production, and the total amount of
qualified expenditures expected to be spent by the
production.
(ii) A narrative staff summary describing the
production of the qualified taxpayer as well as
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background information regarding the qualified
taxpayer contained in the qualified taxpayer's
application for the credit.
(B) Nothing in this subdivision shall be construed to
make the information submitted by an applicant for a
tax credit under this section a public record.
On page 26, line 1, after "(h)", insert: (1)
On page 26, line 9, insert:
(2)(A) Notwithstanding subparagraph (g)(5), the
California Film Office shall annually post on its
website and make available for public release:
(i) A table which includes all of the following
information: a list of qualified taxpayers and the tax
credit amounts allocated to each qualified taxpayer by
the California Film Commission, the number of
production days in California the qualified taxpayer
represented in its application would occur, the number
of California jobs that the qualified taxpayer
represented in its application would be directly
created by the production, and the total amount of
qualified expenditures expected to be spent by the
production.
(ii) 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.
(B) Nothing in this subdivision shall be construed to
make the information submitted by an applicant for a
tax credit under this section a public record.
4. Application . While conclusions about the credit's
efficacy remain divided, it is uncontested that the credit
is consistently oversubscribed. CFC selects its award
applicants by having projects submit their applications and
then placing those applications in a lottery. A lottery
system undermines the potential for the state to maximize
its return on investment. The Committee may wish to
convene a working group to determine and suggest a better
application and credit award structure. Further, the
Committee may wish to amend the bill's extension to 2 years
to take findings from the LAO study and recommendations
from the working group.
The working group may consider:
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Application criteria. The original intent of the
film tax credit was to retain at-risk production in
state. Is there a way to ensure that at-risk
productions, which are usually the most mobile, don't
leave? Should criteria exist to account for a
project's potential long-term economic impact or a
project's risk of leaving or return to California?
Ratio of studio versus independent film
applications. Though CFC roughly estimates half of
the approved projects to larger studios, and the other
half to independent companies, do large studios have
an unfair advantage over small independent film
projects? Larger studios have the ability to apply
queued projects for the credit while more staff-time
in small independent film projects must be dedicated
to file the CFC application. Larger studios may
submit more project plans than smaller projects and
inundate the lottery pool.
Allocation timeline. Unlike other states,
California allocates its $100 million in one day, each
year. This allocation period runs counter to
television development cycles and may inadvertently
encourage productions that have missed the lottery
deadline to apply to other states. The working group
should consider CFC accepting and reviewing
applications on a rolling basis and having an
allocation in the fall and spring.
5. The reviews . Economic findings of film tax credit vary
greatly. Some studies attest to the credit's large
potential benefit to the state, while others consider the
credit a boon to state coffers.
A Los Angeles Economic Development Council (LAEDC)
2011 economic impact study puts nearly 39% of national
motion picture and video industry employment and 60%
of labor industry in California. That amounts to
around 20 million jobs. The study further states that
the industry purchased $6.4 billion in goods and
service, $1.7 billion in advertising, and $1.5 billion
in rental or real estate services-an aggregate amount
of $15.4 billion spent on goods and services in
California. This study says that the credit returns
$1.13 for every $1 spent on the credit.
Film L.A., the permitting agency for Los Angeles,
reported that in 2010, feature film production posted
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a 28.1% fourth quarter gain and a year-over-year gain
of 8.1%, which can be wholly attributed to the film
tax credit.
The February 2012 UCLA Institute for Research on
Labor and Employment (UCLA-IRLE) study finds that the
state may recoup as much as $1.04 per $1 of tax credit
allocated, not LAEDC's estimate of $1.13 because LAEDC
assumed that all productions applying for a subsidy
but not receiving one will leave the state. UCLA-IRLE
points that data showed that 8.4% of the total
production budgets, filmed in California without
getting a tax credit.
The UCLA-IRLE study finds that incentives do play a
role in production location decisions, but other
factors must also be considered. Significant labor
costs differences can also affect location decisions.
However, the potential labor savings from low-wage
states are mitigated by the huge cost of locating a
production out of state, and also by the lack of
available, skilled production crews, resulting in the
importing of labor from other states.
The UCLA-IRLE study concludes:
"While the economic benefit to the state may not be as
great as calculated by the LAEDC, the California tax
credit is creating jobs and is likely providing an
immediate economic benefit to the state. Furthermore,
it is keeping productions in the state, which will
serve to maintain California's long-run dominance in
the film and television industry. Given that the
industry is such a large part of California's economy,
we argue that it is important to maintain California's
status as an industry leader with a qualified
indigenous workforce."
In contrast, in a June 2012 letter to Senator Wolk,
the LAO finds that there has been considerable debate
about the extent to which runaway productions are a
problem. LAO writes that the UCLA-IRLE study also
notes that after initial boosts following
implementation of tax credits, most U.S. states now
have stopped seeing large increases in
production-related employment.
The LAO letter comments that the UCLA-IRLE report
states that the LAEDC study does not consider the
"opportunity cost" of the state using tax credit money
in this way?What would the return have been if a tax
credit dollar was spent instead on an alternative
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public or private purpose? The lack of specific
assumptions in this regard is a frequent problem with
this type of study and may result in the net benefit
of the tax credit being dramatically overstated.
The LAO adds that productions film in other states
generate economic activity in-state, which may result
in the economic and tax net benefits from the credit
program being overstate in the LAEDC and UCLA-IRLE
reports. Moreover, tourism related to the credit is
likely not significant.
LAO concludes, "Given the conclusion that the net
benefit of the credit program is likely less than
shown in the LAEDC study, the LAEDC's finding?is
likely overstated, as is its estimate of job gains
resulting from the credit program?�Even] if the
combined state and local tax revenue return is right
around $1.00 for every tax credit dollar, the state
government's tax revenue return would by definition be
less than $1.00 for every tax credit dollar. The
credit program, therefore, appears to result in a net
decline in state revenues."
6. "But for" test . The "but for" test is "but for the
action, the result would not have happened." But for the
credit, would productions have filmed in California? Some
productions that receive the tax credit may have filmed in
California regardless because of technological demands that
are only available in California studios or because certain
film talent demands filming in state. In these instances,
the state receives no benefit attributable to the subsidy.
The UCLA-IRLE study roughly estimates that about 8% of tax
credit production spending comes from productions that
would film in California even with no tax incentive. SB
1167 fails to address that the film tax credit rewards some
behavior that would have occurred without the subsidy.
7. Creative accounting . Perhaps the highest level of
creativity in Hollywood is the creative accounting, where
high worth studios show no profit. For example, Forrest
Gump, one of the highest grossing movie productions, showed
no profit. As a result, the film tax credit is not
actually a credit against the "net tax" because there is no
profit from which to write off the credit. Hollywood
studios use opaque accounting methods to budget and record
profits for film projects. Expenditures can be inflated to
reduce or eliminate the profit of the project thereby
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reducing the amount which the corporation must pay in
royalties or other profit-sharing agreements based on the
net profit. Further, studios create a LLC -limited
liability company -- so that no profit shows in the
corporation itself but instead, profit is attributed only
to the LLC. Also, the fact that independent projects can
sell the credit to another group further exacerbates the
creative accounting. By the terms of this bill's study,
the LAO will have the opportunity to review how the
assignability of this credit affects its efficacy.
8. Capped, allocated, sunset . California's film tax
credit provides one of most modest incentives compared to
other states. Unlike Massachusetts, Michigan,
Pennsylvania, or New Mexico, California's film tax credit
is not an open-ended subsidy or is it as generous as New
York's $420 million per year film incentive. California's
film credit requires that 75% of the shooting or the
production budget must be spent in-state, which directly
benefits the state's economy and businesses. But, the
credit only goes to productions with budgets less than $75
million. Also, the CFC only distributes the credit once
the shooting and production have been invested in the
state, and the project submits CPA audited cost reports.
The CFC requires that the project remains accountable to
specific timelines, so it is structured in a manner to show
immediate benefits. Doesn't a capped, allocated, and
sunset tax credit provide a stable and reliable business
environment to attract and retain entertainment projects
and jobs?
9. This is the beginning of a beautiful friendship . This
bill proposes to extend the existing film tax credit
program for an additional five years, from FY 2013-14 until
FY 2019-20. Just last year, AB 1069 (Fuentes) extended the
credit's sunset to 2015. Because of the program allocated
$200 million in credits in its first year, a sunset of 2015
means that credits are allocated in June 2014. That's
still another two years before credits run out. The
Committee may wish to amend the extension to 2018 instead
of 2020.
10. Glitz and glamour legislation . SB 1167 is not the
first film industry related bill.
The bill is identical to AB 2026 (Fuentes), which
is in Assembly Appropriations.
SB 1167 -- 6/4/12 -- Page 13
AB 1069 (Fuentes, 2011) passed last September
extended the film tax credit to 2015.
SB 1197 and SBx8 55(Calderon, 2009) would have
deleted the fiscal year limitation of the existing
film production tax credit. Both were held in the
Senate Revenue & Taxation Committee.
AB 15 3x (Krekorian, 2009) established a $500
million tax credit for specific expenditures on
qualified productions. The bill limited allocations
to $100 million credit each year. It was signed by
Governor Schwarzenegger.
AB 1696 (Bass, 2007) would have established a
financial assistance program within the California
Film Commission to encourage filming motion picture
and commercials in California. The bill failed
passage on the Senate Floor.
SB 359 (Runner, 2007), as part of the State Budget
negotiations, would have created a credit for a
percentage of the wages paid of amounts paid to
purchase or lease tangible personal property in
conjunction with the production of a qualified motion
picture. The bill would have allowed the credit to be
claimed against the sales and use tax liability of the
company in lieu of the franchise or income tax
liability. The bill would have allowed credits to be
carried over until exhausted. The Senate Revenue and
Taxation Committee held the bill.
AB 832 (Bass, 2007) would have created an unfunded
grant program, as administered by the California Film
Commission, to encourage filming in California. This
bill was held in the Assembly Appropriations Suspense
File.
SB 740 (Calderon), of the 2007-08 Legislative
Session, created a film production credit equal to
100% of the direct revenues attributable to the
production or 125% of the revenues of the productions
in a TV series that relocated to California or an
independent film as defined. Held in Senate Revenue &
Taxation Committee without a hearing.
AB 777 (Nu�ez), of the 2005-06 Legislative Session,
authorized qualified motion picture tax credit in an
amount equal to 12% of the qualified production for
qualified wages paid with an additional 3% for
qualified motion pictures. Created refundable credit.
Held in Senate Revenue & Taxation Committee without a
hearing.
SB 1167 -- 6/4/12 -- Page 14
Support and Opposition (6/21/12)
Support : Artists One Union; California Chamber of
Commerce; California Labor Federation; California Retailers
Association; California Taxpayers Association; California
Teamsters Public Affairs Council; Cities of Los Angeles and
Santa Clarita; County of Placer; Directors Guild of
America; Film Liaisons in California Statewide; Los Angeles
Area Chamber of Commerce; Motion Picture Association of
America, Inc.; NBC Universal; Paramount Pictures; San Diego
Film Commission; Screen Actors Guild - American Federation
of Television and Radio; Teamsters Local Union 399;
Vallejo/Solano County Film Office; Valley Industry and
Commerce Association; 6 individuals
Opposition : American Heart Association; American Lung
Association; California School Employees Association,
AFL-CIO; California Teachers Association.