BILL ANALYSIS �
SB 1197
Page 1
( Without Reference to File )
SENATE THIRD READING
SB 1197 (Calderon)
As Amended August 24, 2012
Majority vote. Tax levy
SENATE VOTE :Vote not relevant
REVENUE & TAXATION 7-0
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|Ayes:|Fuentes, Harkey, Beall, | | |
| |Charles Calderon, | | |
| |Cedillo, Fletcher, Gordon | | |
| | | | |
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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)Extends 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 Revenue and Taxation Committee, the Senate
Governance and Finance Committee, and the public.
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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).
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 Web site,
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.
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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 :
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."
California Motion Picture Tax Credit Program: Background . In
February 2009, the California Film and 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
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is targeted, capped and allocated. In many respects, it is
similar to a grant program. It is effective only for six FYs,
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.
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.
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.
1)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. According to the CFC, in 2003, "66%
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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 credit program, the credit
generated more than $3.8 billion in economic output, has
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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.
2)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 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
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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.
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
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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.
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098
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