BILL ANALYSIS �
AB 286
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Date of Hearing: January 7, 2014
ASSEMBLY COMMITTEE ON ARTS, ENTERTAINMENT, SPORTS, TOURISM, AND
INTERNET MEDIA
Ian C. Calderon, Chair
AB 286 (Nazarian) - As Amended: March 19, 2013
SUBJECT : Income taxes: credit: qualified motion pictures.
SUMMARY : This bill would expand the definition of qualified
motion pictures under the film tax program for which the
California Film Commission (CFC) annually allocates tax credits
by removing the cap on the production budget for feature films
and would limit the amount of qualified expenditures to $75
million, as specified. This bill would additionally revise the
amount of credits allocated by the CFC per fiscal year for a
qualifying television series, as specified, to provide that the
minimum production budget threshold is met by allowing
aggregation of two fiscal years expenditures. Specifically,
this bill :
1)Declares that the allowable credit against the "net tax" for
the production of a qualified motion picture in California of
a picture that is a feature, as provided, shall not exceed $75
million. (See Existing Law for a detailed explanation of the
film tax program.)
2)Removes the $75 million cap from the definition of "qualified
motion pictures" for feature films eligible for the tax credit
program.
3)Provides that for the 2013-14, 2014-15, and 2015-16 fiscal
years, the CFC shall offset the aggregate amount of credits
allocated to qualified motion pictures as specified, with an
allocation amount from the next fiscal year so that the total
aggregate amount of credits allocated meets the minimum $100
million requirement.
EXISTING LAW :
1)Establishes a motion picture production tax credit, equal to
either:
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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.
2)Defines "independent film" as a film with a budget between $1
million and $10 million produced by a non-publicly traded
company which is not more than 25% owned by publicly traded
companies.
3)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.
4)Defines "qualified motion pictures" as one produced for
general distribution to the public, and include 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 production budget of $1 million licensed
for basic cable and a television series that relocated to
California.
5)Requires that in order to be eligible for the credit, 75% of
the production days must take place within California or 75%
of the production budget is incurred for payment for services
performed within the state and the purchase or rental of
property used within the state.
6)Declares that the credit is not available for commercial
advertising, music videos, motion pictures for non-commercial
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use, news and public events programs, talk shows, game shows,
reality programming, documentaries, and pornographic films.
7)Requires that the CFC allocate $100 million of credit
authorizations each year during the period 2009-10 through
2017 on a first-come, first-served basis, with 10% of the
allocation reserved for independent films.
8)Declares that any unallocated amounts and any allocation
amounts in excess of certified credits may be carried over and
reallocated by the CFC.
9)Provides that qualifying taxpayers could claim the credit on
their tax return filed with the Franchise Tax Board (FTB)
under either the Personal Income Tax or Corporation Tax.
10)Provides further that taxpayers may use certified credits in
a number of ways, they may;
a) Claim it directly;
b) Assign it to another member of their unitary group;
c) Sell the credits to other taxpayers, or;
d) Elect to apply the credit against their sales and use
tax liability.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's statement : According to the author, "The California
Film & Television Tax Credit has been very successful in
promoting direct spending and job growth." He points to the
CFC's 2013 progress report, which reflects approximately $600
million in tax credits which have been allocated (reserved) to
eligible film and TV projects, resulting in estimated total
aggregate direct spending by Program projects of $4.75 billion
and $1.48 billion in estimated total qualified wages paid/to
be paid by Program projects.
The author believes that the need to expand the program and
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create more flexibility is very evident as the CFC is flooded,
on the first day the credit is made available, with hundreds
of applications from independent and studio producers who want
to produce in California. "Given that the California Film Tax
Credit is exhausted on the first day, this bill will give the
CFC more flexibility to issue available credits from the
succeeding year and allow more projects to be awarded a
credit," he asserts.
Finally, the author states, "It is crucial in today's economy
that the state provides the flexibility needed for the film
industry to strive as this prosperous industry contributes $38
billion dollars annually to California's economy through tax
revenue, jobs and tourism. In the last decade numerous
foreign countries and more than 30 states have created
generous and alluring film tax credits that regrettably
threaten California's longstanding fruitful industry.
Especially in California, where there is a long and rich
history of entertainment business and growth, it is imperative
that our state create competitive policies that offer
meaningful financial incentives to retain and lure production,
jobs and spending. AB 286's provisions provide the necessary
economic stability to retain and attract film industry
productions back to California by allowing big budget
productions with a budget larger than $75 million to apply for
a 20% tax credit for the first $75 million qualified
expenditures and allowing the CFC to allocate credits from the
succeeding year."
2)Current Film Production Tax Program : The California Film &
Television Tax Credit program was enacted as a part of an
economic stimulus plan to promote production spending, jobs,
and tax revenues in California. The Program is administered
by the CFC.
The credit first became available in July of 2009. Under
existing statute, a qualified taxpayer is allowed a credit
against income and/or sales and use taxes based on qualified
expenditures. The credit amounts to either 20% or 25% of
qualified expenditures, with a maximum of $500 million dollars
allocated total over the life of the program. The credit is
not refundable. The credit may be carried over for five years
and may be transferred to affiliates. Credits issued to
independent films ($1 million - $10 million qualified
expenditure budget that is produced by a company that is not
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publically traded and in which a publically traded company
does not own more than 25% of the shares) may be transferred
or sold to an unrelated party.
To be eligible for the credit, a project must meet the 75%
test (production days or total production budget in
California) and must be a qualifying motion picture.
For the purposes of a 20% tax credit, a qualifying motion
picture is defined as:
a) A Feature Film ($1 million minimum - $75 million maximum
production budget),
b) A Movie of the Week or Miniseries ($500,000 minimum
production budget); or
c) A new television series licensed for original
distribution on basic cable ($1 million minimum budget,
one-half hour shows and other exclusions apply)
For the purposes of a 25% tax credit, a qualifying motion
picture is defined as:
a) A television series, without regard to episode length,
that filmed all of its prior seasons outside of California;
or
b) An independent film.
In the 2009-10 fiscal year, which was the initial year of the
program, $200 million was allocated. In each subsequent year
until the 2016-17 fiscal year, CFC will allocate $100 million.
A minimum $10 million of the annual finding is made available
for independent films.
3)Findings of Joint Oversight Hearings of Arts, Entertainment,
Sports, Tourism and Internet Media (AEST&IM) and Revenue and
Taxation Committees : The California Film Tax Credit has been
intensely studied by this Committee and the Assembly Committee
on Revenue and Taxation. On March 21, 2011, a Joint Oversight
Hearing of the Assembly AEST&IM and the Assembly Revenue and
Taxation Committees was held on "California's Film Credit
Under the Spotlight: A Review of the Film and Television Tax
Credit Program." Following this hearing, the Revenue and
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Taxation Committee held another Oversight Hearing "Assessing
Tax Expenditure Programs in Light of California's Fiscal
Challenges" on February 22, 2012, where the Film Tax Credit
was again analyzed. Most recently, the two committees held
another Joint Oversight Hearing, "A Review of the California
Film Tax Credit Program," on October 9, 2013. The findings of
these hearings regarding the effectiveness of the Tax Credit
Program have been fairly consistent. The following was taken
from the White Paper prepared for the October 9, 2013 Joint
Hearing.
a) Arguments of Program Proponents : A 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 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 Commission
(LAEDC) projected that, as a result of the California
incentive program, production in the state would likely
pick up in 2010. The projection by the LAEDC was bolstered
by a report from Film L.A. (the permitting agency for Los
Angeles). 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 could be
wholly attributed to the Film Tax Credit Program. The
Program attracted dozens of new feature film projects to
Los Angeles, and was responsible for 26% of the local
feature production for the year. According to the CFC,
these numbers are an early indicator that the Program is
having an immediate positive impact on production in
California.
The increase in production has resulted in increased
revenues to the state as well as an increase in jobs. As
reported by the CFC, approximately $600 million in tax
credits, including those conditionally allocated this year,
has been allocated since the enactment of the Program. The
total aggregate amount of direct spending is estimated to
be $4.7 billion, of which an estimated $1.48 billion is
attributable to qualified wages (excluding any wages for
actors, directors, writers, and producers). Based on
average aggregate spending by projects from each fiscal
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year, each $100 million of allocated tax credits will
generate $792 million in direct production spending and
cause productions to hire an estimated 8,500 cast and crew
members. (CFC, Progress Report, July 2013).
Proponents also argue that California has a comparative
advantage over other states because of its long established
entertainment industry. This industry has provided
California with a skilled workforce and ready
infrastructure. It has been argued that this 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.
b) Arguments of Program Opponents : Despite the apparent
success of increased film production and job growth, not
everyone agrees with this use of state funds, raising
several issues. Including, tax credits do not address the
underlying issues (e.g., higher tax rates, regulatory
impediments) that have led to California's sometimes
challenging business climate. (San Jose Mercury News,
Hollywood tax break prompts debate over economy, Tom
Verdin, August 2012). Addressing these underlying issues,
instead of allowing tax credits, may actually provide a
more sustainable long term solution to the problem. In
fact, according to a recent National Public Radio
broadcast, "[s]tudies by think tanks across the political
spectrum say states could get more bang for their buck with
a general tax cut." (Julie Rose, States Ponder Costs,
Benefit of Film Incentives, National Public Radio, Sept
2013). Additionally, having states compete against one
another is an unsustainable downward spiral that may
eventually cause California to spend more money than
necessary to retain or lure production. As noted by the
Tax Foundation, "subsidizing anything gets you more of that
thing." The appropriate question, therefore, is not
whether production is increased but "whether the benefits
of a given amount of net new job creation and the net new
investment exceed the cost." (Tax Foundation, Important
Questions to Ask in Evaluating a Film Tax Incentive
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Program, March 2012).
Opponents have argued that subsidies to the film and
television industry benefit production that would have
occurred in the absence of the incentive and that "much of
the subsidy represents a real loss of revenue with no net
new jobs to offset the cost." (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
AEST&IM Committee, March 21, 2011). Furthermore, in its
2009-10 Budget Analysis Series, the LAO noted that the
credit is allocated on a first-come first-served 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 than 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).
4)Opposition : The California School Employees Association
oppose this bill, based upon their concern that, "Our schools
have suffered from $20 billion in cuts over the past five
years. Teachers and classified employees have been laid off
by the tens of thousands and many more are furloughed. Every
dollar we lose in state revenues means less funding for
schools and other vital programs for seniors and children.
The passage of Proposition 30 helped our schools and colleges
avoid an additional $6 billion in cuts. These funds are meant
to stabilize our schools, not to restore those cuts. While
our schools struggle to recover from the devastating cuts,
giving out more tax breaks to an industry known for their
creative accounting goes in the wrong direction."
5)Implementation Issues With AB 286 Attempt to Expand Qualifying
Television Series : This bill provides, that for the 2013-14,
2014-15, and 2015-16 fiscal years, the CFC shall offset the
aggregate amount of credits allocated to qualified motion
pictures defined pursuant to clauses (iii) and (v) of
subparagraph (A) of paragraph (15) of subdivision (b) with an
allocation amount from the next fiscal year so that the total
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aggregate amount of credits allocated to qualified motion
pictures defined pursuant to clauses (i), (ii), and (iv) of
subparagraph (A) of paragraph (15) of subdivision (b) meets
the minimum $100 million required by subparagraph (A) of this
paragraph.
What these cross references refer to are found under the
definition of "qualified motion picture," where
(b)(15)(A)(iii) refers to, "A new television series produced
in California with a minimum production budget of $1 million
licensed for original distribution on basic cable." While
(b)(15)(A)(v) refers to, "A television series that relocated
to California," which the law defines as, "a television
series, without regard to episode length or initial media
exhibition, that filmed all of its prior season or seasons
outside of California and for which the taxpayer certifies
that the credit provided pursuant to this section is the
primary reason for relocating to California."
Under the existing law, there is no monetary threshold for a
returning series to qualify for the film tax credit program.
Therefore, inclusion of this category may cause confusion.
More troubling is the workability of the proposal to allow
aggregation of two fiscal years of expenditures for new cable
television series, in order to reach the minimum production
budget of one million dollars required to qualify for the film
credit program. How is this to work? The concern is raised
because of the high failure rate of television series, which
65% of all programs. (Ocasio [May 17, 2012], TV Success Rate:
65% Of New Shows Will Be Canceled & Why It Matters,
Screenrant,
http://screenrant.com/tv-success-rate-canceled-shows-aco-172162
/2/).
If the CFC must accept applications for low-budget series
prior to their first year of production, it seems very likely
that the finite resources of the CFC will be tied up in
commitments to series which may never see the second year of
production, and therefore never become "qualified motion
pictures." Conversely, if a new series must wait until after
the second year of production, or as the language of this bill
puts it, "the next fiscal year," in order to present the CFC
with their aggregated total expenditures, this would seem to
thwart the goal of the provision which is to encourage
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development of new California-based television programs.
6) Prior and Related Legislation :
a) AB 1189 (Nazarian) of the 2013-14 Legislative Session,
would extend for five years the requirement that CFC
annually allocate tax credits to qualifying motion
pictures, as specified, through the 2021-22 fiscal year and
would also extend and increase the limit on the aggregate
amount of credits that may be allocated through the 2021-22
fiscal year. AB 1189 is currently pending before this
committee.
b) AB 2026 (Fuentes), Chapter 841, Statutes of 2012,
extended the film production tax credit program for two
additional years, until 2017.
c) AB 1069 (Fuentes), Chapter 731, Statutes of 2011,
extended the film production tax credit program for one
year, until 2015.
d) SB 1197 (Calderon), of the 2009-10 Legislative Session,
deleted the fiscal year limitation on the existing film
production tax credit. SB 1197 was held in Senate Revenue
& Taxation Committee without a hearing.
e) SBX8 55 (Calderon), of the 2009-10 Legislative Session,
deleted the fiscal year limitation in the existing
production tax credit. SBX8 55 was held in Senate Rules
Committee without a hearing.
f) ABX3 15 (Krekorian), Chapter 10, Statutes of the 2009-10
Third Extraordinary Session, established a five year $500M
tax credit for qualified expenditures on qualified
productions. Limited allocations to $100M/year.
g) AB 855 (Krekorian), of the 2009-10 Legislative Session,
established a film production tax credit. AB 855 was held
at the Assembly Desk.
h) AB 1696 (Bass), of the 2007-08 Legislative Session,
established a financial assistance program within the CFC
to encourage filming motion pictures and commercials in
California and requires the Business, Transportation &
Housing Agency to report the economic impact of this
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program by December, 2011. AB 1696 failed passage on the
Senate Floor.
i) SB 359 (Runner), of the 2007-08 Legislative Session,
mega tax credit bill which included motion picture
production credit. Part of State Budget negotiations.
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 credit is certified and allocated by
the CFC. The bill also allows the credit to be claimed
against the sales and use tax liability of the company in
lieu of the franchise or income tax liability. Finally,
the bill allows the credit to be carried over until
exhausted. SB 359 was held in the Senate Revenue and
Taxation Committee.
j) AB 832 (Bass), of the 2007-08 Legislative Session,
created unfunded grant program administered by the CFC to
encourage filming motion pictures and commercials in
California. AB 832 was held on the Assembly Appropriations
Committee Suspense File.
aa) 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.
SB 740 was held in Senate Revenue & Taxation Committee
without a hearing.
bb) AB 777 (Nunez), 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. AB 777 was held in
Senate Revenue & Taxation Committee without a hearing.
cc) SB 58 (Murray), of the 2005-06 Legislative Session,
granted a refundable income or corporation tax credit equal
to 15% of the amount of qualified wages paid and qualified
property purchased in the production of a qualified motion
picture. SB 58 was held in Senate Revenue & Taxation
Committee.
dd) AB 261 (Koretz), of the 2005-06 Legislative Session,
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re-established funding for the Film California First
Program. AB 261 was a gut and amend out in the Assembly
Rules Committee and became a transportation bill.
ee) AB 1830 (Cohn), of the 2003-04 Legislative Session,
authorized tax credits between 2006 and 2012 in an amount
equal to 15% of qualified wages paid or incurred for
services performed, with respect to the production of each
qualified motion picture.
AB 1830 was held in this Committee without a hearing.
ff) AB 1277 (Cohn), Chapter 662, Statutes of 2003,
transferred administrative authority over the CFC to the
Business, Transportation & Housing Agency. This bill also
created the Film California First Fund, administered by the
CFC, which provided for reimbursements to local governments
for their costs in issuing permits for local filming of
motion pictures. In the last two state budget cycles, no
General Fund monies have been appropriated to operate this
program.
gg) AB 2410 (Frommer), Chapter 1042, Statutes of 2002,
required the CFC to report annually the number of motion
picture starts that occurred within the State of
California. The bill also required EDD to research and
maintain data on film industry employment, to determine the
economic impact of the film industry, to monitor film
industry employment and activity and competing states and
countries, to examine the ethnic diversity and
representation of minorities in the entertainment industry,
to review the effect of federal, state and local laws on
the filmed entertainment industry and to report that
information to the legislature biannually, provided that
funds are appropriated by the legislature in the annual
Budget Act for these purposes.
hh) AB 2747 (Wesson), of the 2001-02 Legislative Session,
provided a tax incentive to produce motion pictures within
California. Would offer tax credits to productions with a
total cost of qualified wages between $200,000 and $10
million for 15-25% of wages paid to qualified individuals
during the taxable year with respect to qualified motion
picture production depending on the area. For each motion
picture, the maximum amount of wages per qualified
individual that could be taken into account when computing
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the credit was $25,000. AB 2747 failed passage in the
Senate Appropriations Committee.
ii) SB 2061 (Schiff), Chapter 700, Statutes of 2000, created
the State Theatrical Arts Resources (STAR) partnership
which offers surplus State property to filmmakers, where
unused State properties, such as health facilities and
vacant office structures, are available at no charge or
"almost free" to filmmakers.
jj) AB 358 (Wildman & Kuehl), of the 1999-2000 Legislative
Session, provided a refundable income and corporation tax
credit for 10% of eligible wages paid for motion pictures
and TV programs produced in California. AB 358 was held on
the Senate Appropriations Committee Suspense File.
aaa) AB 484 (Kuehl), Chapter 699, Statutes of 1999, created
the Film California First program, housed at the California
Film Commission to reimburse certain film costs incurred by
a qualified production company when filming on public
property, but which
is currently unfunded.
7)Double-referral : Should this bill pass out of this committee,
it will be re-referred to the Assembly Committee on Revenue
and Taxation.
REGISTERED SUPPORT / OPPOSITION :
Support
Valley Industry and Commerce Association
Opposition
California School Employees Association
Analysis Prepared by : Dana Mitchell / A.,E.,S.,T. & I.M. /
(916) 319-3450