BILL ANALYSIS �
SB 1197
Page 1
Date of Hearing: August 29, 2012
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Felipe Fuentes, Chair
SB 1197 (Calderon) - As Amended: August 24, 2012
Majority vote. Tax levy. Fiscal committee.
SENATE VOTE : Not Applicable
SUBJECT : Income taxes: extension of the motion picture tax
credit program.
SUMMARY : Extends the operation of the California Motion Picture
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. Specifically, this bill :
1)Authorizes the California Film Commission (CFC) to allocate
annually the motion picture tax credits, under both the
Personal Income Tax (PIT) and the Corporation Tax (CT) Laws,
to qualified applicants for two additional fiscal years (FYs),
from July 1, 2015 until July 1, 2017.
2)Extend the existing $100 million-per-FY limitation on the
aggregate amount of motion picture tax credits that may be
allocated by the CFC in any FY, through and including the
2016-17 FY.
3)Requires the Legislative Analyst's Office (LAO) to do both of
the following:
a) Prepare a report evaluating the economic effects and
administration of the Film Tax Credit under the Sales and
Use Tax Law, the PIT Law and the CT Law.
b) Provide the report on or after January 1, 2016, to the
Assembly Committee on Revenue and Taxation, the Senate
Committee on Governance and Finance, and the public.
4)Authorizes the LAO to request and receive all information
provided by taxpayers applying for the Film Tax Credit to the
CFC, the Franchise Tax Board (FTB), and the State Board of
Equalization (BOE).
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5)Allows the CFC, the FTB, the BOE, and the Employment
Development Department, and all other relevant state agencies
to disclose to the LAO additional information, as requested by
the LAO, for purposes of preparing the LAO's report.
6)Provides that the information received by the LAO shall be
considered confidential taxpayer information, as specified.
7)Allows the LAO to publish statistics in conjunction with the
required report if the published statistics are classified to
prevent the identification of particular taxpayers, reports,
and tax returns and the publication of the percentage of
dividend received deductions.
8)Revises the type of information required to be included in an
application for a Film Tax Credit allocation.
9)Establishes a procedure for a qualified applicant to report to
the CFC, prior to the issuance of a credit certificate,
certain specified information, including a list of other
jurisdictions in which any member of the applicant's combined
reporting group, in the preceding calendar year, has produced
a qualified motion picture.
10)Specifies that certain tax information obtained by the CFC
from a qualified taxpayer prior to the issuance of a credit
certificate shall remain confidential, as provided.
11)Requires the CFC to post annually on its Internet website,
and make available for public release, specified information,
including a list of qualified taxpayers and the tax credit
amounts allocated to each qualified taxpayer by the
commission.
12)States that no reimbursement is required by this act for a
specified reason.
13)Takes effect immediately as a tax levy.
EXISTING FEDERAL LAW :
1)Allows a taxpayer to recover the cost of motion picture films,
sound recordings, copyrights, books and patents using the
income forecast method of depreciation. As an alternative,
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taxpayers may elect to deduct up to $15 million ($20 million
if the production expenses are incurred in certain distressed
areas) of the cost of any qualifying film and television
production, commencing prior to January 1, 2012, in the year
in which the expenditure is incurred.
2)Provides that "qualified film" productions are eligible for
the domestic production activities deduction. The amount of
the deduction is equal to a 9% deduction of so-called
"qualifying production activities income" (QPAI). The
deduction was phased in at 3% in 2005 and 2006, 6% in 2007
through 2009, and 9% in 2010 and thereafter. QPAI refers to
the net income from the license, sale, exchange, or other
disposition of any qualified film produced by the taxpayer.
The deduction is limited to 50% of the W-2 wages paid by the
taxpayer with respect to domestic production activities during
the taxable year, and is generally allowed for purposes of the
Alternative Minimum Tax (AMT). A "qualified film" is defined
as any motion picture film or video tape, excluding sexually
explicit films as defined in 18 United States (U.S.) Code
Section 2257, if at least 50% of the total production
compensation constitutes compensation for services performed
in the U.S. by actors, production personnel, directors, and
producers.
3)Does not allow any income tax credit for motion picture
production activities.
EXISTING STATE LAW :
1)Conforms to the use of the federal income forecast method of
depreciation for the recovery of costs of motion picture
films, sound recordings, copyrights, books, and patents, with
modifications.
2)Does not conform to the federal expensing provision for film
and television production.
3)Does not conform to the federal domestic production activities
deduction.
4)Allows a qualified taxpayer, for taxable years beginning on or
after January 1, 2011, a motion picture production tax
credit, under either the PIT or CT Law.
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5)Specifies that the amount of the tax credit is equal to
either:
a) 20% of the qualified expenditures attributable to the
production of a qualified motion picture, or;
b) 25% of the qualified expenditures attributable to the
production of a television series that relocated to
California, or an independent film.
6)Defines "independent film" as a film with a budget between $1
million and $10 million produced by a non-publicly traded
company that is not more than 25% owned by publicly traded
companies.
7)Requires the CFC to administer a motion picture production tax
credit allocation and certification program, as follows:
a) Taxpayers will first apply to the CFC for a credit
allocation, based on a projected project budget.
b) Upon receiving an allocation, the project must be
completed within 30 months.
c) The taxpayer must then provide the CFC with verification
of completion and documentation of actual qualifying
expenditures.
d) Based on that information, the CFC will issue the
taxpayer a credit certificate up to the amount of the
original allocation.
8)Defines a "qualified motion picture" as one produced for
general distribution to the public, regardless of the medium
that, that is one of the following:
a) A feature film with budgets between $1 million and $75
million;
b) A movie of the week with a minimum budget of $500,000;
c) A new television series produced in California with a
minimum production budget of $1 million licensed for
original distribution on basic cable;
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d) An independent film; or,
e) A television series that relocated to California.
9)Requires that 75% of the production days take place within
California or 75% of the production budget be incurred for
payment for services performed within the state and the
purchase or rental of property used within the state. In
addition, requires that the production of the qualified motion
picture be completed within 30 months from the date on which
the qualified taxpayer's application is approved by the CFC.
10)Declares that the credit is not available for commercial
advertising, music videos, motion pictures for non-commercial
use, news and public events programs, talk shows, game shows,
reality programming, documentaries, and pornographic films.
11)Requires the CFC to allocate $100 million of credit
authorizations each year during the period 2009-10 through
2014-15 FYs on a first-come, first-served basis, with 10% of
the allocation reserved for independent films.
12)Declares that any unallocated amounts and any allocation
amounts in excess of certified credits may be carried over and
reallocated by the CFC.
13)Provides that qualifying taxpayers could claim the credit on
their tax return filed with the Franchise Tax Board (FTB)
under either PIT or CT.
14)Provides that taxpayers may use certified credits as follows:
a) Claim it directly;
b) Assign it to another member of their unitary group, or;
c) Elect to apply the credit against their sales and use
tax liability.
15)In the case of credits attributable to an independent film,
the qualified taxpayer is allowed to sell a credit to an
unrelated party but is required to report to the FTB prior to
the sale of the credit all required information in the form
and manner specified by the FTB.
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16)Specifies that any unused credit may be carried forward to
each of the following six taxable years or until the credit is
exhausted, whichever occurs first. In the case where the
credit exceeds a qualified corporate taxpayer's liability, it
may elect to assign any portion of the credit to one or more
affiliated corporations for each tax year in which the credit
is allowed.
17)Requires the CFC to provide the FTB with a list of qualified
taxpayers and the tax credit amounts allocated to each
qualified taxpayer by the CFC.
FISCAL EFFECT : The FTB staff estimates that this bill will
result in an annual General Fund (GF) revenue loss of $5.1
million in FY 2014-15, $22 million in FY 2015-16, and an
additional $161 million in future FYs as a result of extended
tax credit benefits.
COMMENTS :
1)Arguments in Support . The proponents state that the film
production tax credit has been successful in its goal to
retain and increase film and television production occurring
in California. California's film tax credit "has a proven
track record of creating and retaining jobs in the film
industry," generating 41,000 new jobs and $2.2 billion in
economic activity since 2009. The proponents also emphasize
that the film tax credit is "one of few tax breaks in
California that has the appropriate accountability measures to
make sure it is effective." The program includes a five-year
sunset, an annual cap of $100 million and is targeted. The
proponents assert that an extension of the film tax credit
shows "California's commitment to long-term investment in the
film industry to encourage more production companies to invest
here" and would help California "compete with other states and
countries." The proponents conclude that this bill "is an
important step to regain the thousands of jobs lost in film
production over the years."
2)How is a Tax Expenditure Different from a Direct Expenditure?
Existing law provides various credits, deductions, exclusions,
and exemptions for particular taxpayer groups. In the late
1960s, U.S. Treasury officials began arguing that these
features of the tax law should be referred to as
"expenditures," since they are generally enacted to accomplish
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some governmental purpose and there is a determinable cost
associated with each (in the form of foregone revenues). As
the Department of Finance notes in its annual Tax Expenditure
Report, there are several key differences between tax
expenditures and direct expenditures. First, tax expenditures
are reviewed less frequently than direct expenditures once
they are put in place. This can offer taxpayers greater
certainty, but it can also result in tax expenditures
remaining a part of the tax code without demonstrating any
public benefit. Secondly, there is generally no control over
the amount of revenue losses associated with any given tax
expenditure. Finally, once enacted, it generally takes a
two-thirds vote to rescind an existing tax expenditure absent
a sunset date. This effectively results in a "one-way
ratchet" whereby tax expenditures can be conferred by majority
vote, but cannot be rescinded, irrespective of their efficacy,
without a supermajority vote.
3)Tax Incentives: Do They Work? Generally, advocates for tax
incentives, such as Arthur Laffer and N. Gregory Mankiw, argue
that reduced taxes allow taxpayers to invest money that would
otherwise be paid in taxes to better use, thereby, creating
additional economic activity. "Supply-siders" posit that
higher taxes do not result in more government revenue;
instead, they suppress additional innovation and investment
that would have led to more economic activity and, therefore,
healthier public treasuries, under lower marginal tax rates.
Industry-specific credits complement this theory by lowering
tax costs for industries that provide positive multiplier
effects, such as stimulating economic activity among suppliers
and increasing economy-wide purchasing power resulting from
hiring additional employees.
Critics, however, assert that tax incentives rarely result in
additional economic activity. Companies locate in California
because of its competitive advantages, namely its environment,
weather, transportation infrastructure, access to ports,
highways, and railroads, as well as its highly skilled
workforce and world class higher education system. These
advantages trump perceived disadvantages resulting from
California's tax structure and other policies. Additionally,
critics argue that industry-specific tax incentives do not
actually effect business decisions; instead, enhanced credits
and deductions reward firms for investments they would have
made anyway. �See, e.g., D. Neumark, J. Zhang, and J. Kolko,
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Are Businesses Fleeing the State? Interstate Business
Location and Employment Change in California, (a PPIC report
showing that, while California loses jobs due to firms leaving
the state, these losses have a minimal effect on the economy);
D. Neumark and J. Kolko, Are California Companies Shifting
Their Employment to Other States? (finding that, while
California companies have shifted jobs to other states,
out-of-state firms have offset these losses by hiring more in
California)].
As noted by the LAO in the presentation at this Committee's
hearing "Assessing Tax Expenditure Programs in Light of
California's Fiscal Challenges" on February 22, 2012,
"policymakers should regard many TEPs �tax expenditure
programs] evaluations with skepticism." It was further
explained that, "Analysis of alternative uses of public funds
is difficult and often omitted entirely from? studies �of
TEPs]. These studies also usually rely on extensive and
sometimes subjective assumptions which, if changed, can
produce very different results? It is rare that the value of
TEPs can be demonstrated conclusively compared to these
alternate uses of tax dollars. If the Legislature wishes to
use TEPs, despite these challenges, it is important that TEPs
be used cautiously, structured carefully, and reviewed
regularly to consider if they operate in an effective and
cost-efficient manner."
4)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 2013-14 FY, but was extended by the
Legislature in 2011 for one additional year - until FY
2014-15. �AB 1069 (Fuentes) Chapter 731, Statutes of 2011].
Although a bill creating some sort of a tax incentive for the
motion picture and television production in California had
been introduced almost every legislative session long prior to
2009, the existing film tax credit program was initially
recommended by then Governor Schwarzenegger in his 2009-10
budget proposal.
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 FYs,
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from FY 2009-10 until FY 2014-15, 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 the first-come first-serve basis, up to $100 million
every FY.
5)Allocations of the Film Tax Credit . According to the CFC, in
FY 2009-10, $172 million in credits were allocated to 69
projects, with estimated aggregate project expenditures of
$1.1 billion. In the following FY, the CFC allocated $124
million in credits to 52 projects with estimated aggregate
project expenditures of $967 million. In FY 2011-12, $104
million in credits were allocated to 29 projects ($66 million
of which is "reserved" for 11 pending projects) with estimated
aggregate project expenditures of $740 million. In FY
2012-13, the CFC allocated $100 million in credits to 28
projects with estimated aggregate project expenditures of $683
million. The CFC indicates that credit allocations have
varied in size - the smallest allocation was $74,000, while
the largest was $11 million, with the average allocation
amount of $2.7 million. Demand for credits far exceeds
supply, and the 2010-11, 2011-12, 2012-13 amounts were
oversubscribed on the first day of availability.
6)Is the Film Tax Credit Program Effective in Achieving the
Stated Goal ? With the current financial state of the
California economy, all state programs affecting the GF are
under scrutiny to ensure that the programs are effectively
achieving desired results. The main goal of the Film Tax
Credit Program is to prevent runaway production and retain
production already being filmed in California. The Film Tax
Credit Program is a relatively new program, and whether the
Program has been successful in achieving its main goal is up
for debate.
a) Maybe it is. Undoubtedly, California companies face
higher costs of doing business - land, labor, and capital
are generally more expensive here. Furthermore, other
states and foreign countries have been fiercely competing
with California to lure motion picture and television
series production away from California. The high costs of
doing business in California, coupled with very generous
tax incentives provided elsewhere, force many motion
picture companies - that would otherwise seek to locate in
California - to lower-cost and lower-tax jurisdictions.
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According to the CFC, in 2003, "66% of studio feature films
were filmed in California." In 2009, however, only 38% of
studio films were filmed in the state, and San Francisco
film and TV production employment dropped 43% between 2001
and 2006.
California has a comparative advantage over other states
because of the long established entertainment industry.
The established industry has provided California with a
skilled workforce and available infrastructure. It has
been argued that the comparative advantage, when coupled
with an incentive program, should be effective in keeping
production in California, despite the fact that the
California tax credit is not as generous as that of other
states. In other words, an incentive program that is less
costly than those provided in other states has the ability
to keep production in California because of the various
other benefits connected with filming in California.
The recent report released by the Milken Institute states
that, although "it is still too early to know the real
impacts of the Film Tax Credit Program, there are some
encouraging signs" that the Film Tax Credit Program is
working. (K. Klowden, A. Chatterjee, and C. Flor Hynek,
Film Flight: Lost Production and Its Economic Impact on
California, Milken Institute, July 2010). Thus, in January
of 2010, the Los Angeles Economic Development Corporation
(LAEDC) projected that, as a result of the California
incentive program, production in the state should have
picked up in 2010. The projection by LAEDC was bolstered
by Film L.A. (the permitting agency for Los Angeles)
reports. Film L.A. reported that, in 2010, feature film
production posted a 28.1% fourth quarter gain and a
year-over-year gain of 8.1%. In Film L.A.'s January 11,
2011 release, it was reported that the increase can be
wholly attributed to the Film Tax Credit Program. The
Program attracted dozens of new feature film projects to
Los Angeles, which was responsible for 26% of the local
feature production for the year.
Furthermore, the CFC's July 2011 Progress Report on the
Film Tax Credit Program cites an economic impact study
conducted by the LAEDC on the first 77 projects that
received an allocation of tax credits. The 2011 study
concluded that during the first two years of the film tax
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credit program, the credit generated more than $3.8 billion
in economic output, has 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.
b) Maybe it is not . Critics, however, argue that the
economic benefits of film tax credits are often overstated
"while their costs are underestimated or completely
ignored." (M. Robyn, Tax Foundation, Film Production
Incentives: a Game California Shouldn't Play, p. 1, a
report presented at the Joint Oversight Hearing of the
Committee on Revenue and Taxation and the Committee on
Arts, Entertainment, Sports, Tourism, and Internet Media,
March 21, 2011).
Although "industry advocates long have argued that movie
production in California was in danger of being poached by
other states or countries through their use of �motion
picture tax incentives], employment and wage data for the
motion picture industry do not provide clear evidence that
any significant damage to the state's industry or economy
has resulted from efforts by other states to draw movie
production away from California in the past decade."
(Brian R. Sala, Acting Director, California Research
Bureau, Updated Information On Film Industry Incentives, a
report presented on March 11, 2011, at the Joint Oversight
Hearing of this Committee and Arts, Entertainment, Sports,
Tourism, & Internet Media Committee). In fact, it appears
that California's total film industry employment has grown
since 2000, from 36% to 38%, though it has had its ups and
downs. (M. Robyn's Testimony, p. 3).
Secondly, opponents argue that subsidies to the film and
television industry benefit production that would have
occurred in absence of the incentive and "much of the
subsidy represents a real loss of revenue with no net new
jobs to offset the cost." (M. Robyn's Testimony, p. 2).
In its 2009-10 Budget Analysis Series, the LAO noted that
the film tax credit is allocated on a first-come
first-serve basis, which undercuts the program's incentive
for production companies to change their location
decisions. The firms that are "absolutely committed to
producing in California would be among the first to apply
for credits - before firms that are considering an
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out-of-state location," and as a result, the credit "may be
even more likely that most similar programs to create a
windfall for committed in-state producers rather than be a
deciding factor for otherwise-undecided producers."
(2009-10 Budget Analysis Series, Film Production Credit,
February 5, 2009). As noted by Mr. Robyn from Tax
Foundation, in order for the film tax credit to be a
revenue gain for the state, "any net new jobs, or net jobs
saved, would have to generate enough tax revenue to
outweigh the revenue wasted on productions that would have
located in-state anyway." (M. Robyn's Testimony, p. 2).
While the LAEDC study concluded that the film tax credit
returns $1.13 for each dollar spent, the UCLA Institute for
Research on Labor and Employment (UCLA-IRLE) disagrees.
The UCLA-IRLE analyzed the LAEDC study and concluded that
the state may recover a more modest $1.04 to state and
local governments per dollar of tax credit (February 2012
report, Economic and Production Impacts of the 2009
California Film and Television Tax Credit). The UCLA-IRLE
study attributed the reduced benefit to the LAEDC
assumption that all productions that received a credit
allocation would have otherwise filmed elsewhere. Staff to
the Senate Governance and Finance Committee requested the
LAO to evaluate the conclusion reached by the UCLA-IRLE.
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 (LAO letter dated
June 13, 2012). The LAO found 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
concluded 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
noted 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.
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The film and television industry has been a large source of
employment and revenue for the state and losing the
industry could be detrimental to the California economy.
However, the question remains as to whether the value of
the benefits received by the state from providing the film
tax credit outweighs the costs of the tax subsidy.
7)Related Legislation .
AB 2026 (Fuentes), introduced in the 2011-12 legislative
session, would extend the film production tax credit until FY
2016-17. AB 2026 passed out of both Senate Governance and
Finance Committee and Appropriations Committee and is
currently pending on the Senate Floor.
SB 1167 (Calderon), of the 2011-12 Legislative Session, is
identical to this bill. SB 1167 is pending at the Assembly
Desk.
AB 1069 (Fuentes), Chapter 731, Statutes of 2011, extended the
film production tax credit program for one year, until July 1,
2015.
SB 1197 (Calderon), of the 2009-10 Legislative Session, would
have deleted sunset date of the film tax credit program. SB
1197 was held under submission in Senate Revenue & Taxation
Committee.
SBx8 55 (Calderon), of the 2009-10 Legislative Session, would
have deleted the sunset date of the film tax credit program.
SBx8 55 was held under submission in Senate Rules Committee.
ABx3 15 (Krekorian), Chapter 10, Statutes of the 2009-10 Third
Extraordinary Session, established the Film Tax Credit
Program.
AB 855 (Krekorian), of the 2009-10 Legislative Session, would
have established a film production tax credit. AB 855 was
held at the Assembly Desk.
REGISTERED SUPPORT / OPPOSITION :
Support
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California Taxpayers Association
California Labor Federation
Motion Picture Association of America, Inc.
Opposition:
None on file
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098