BILL ANALYSIS �
AB 1189
Page 1
Date of Hearing: January 7, 2014
ASSEMBLY COMMITTEE ON ARTS, ENTERTAINMENT, SPORTS, TOURISM, AND
INTERNET MEDIA
Ian C. Calderon, Chair
AB 1189 (Nazarian) - As Amended: March 21, 2013
SUBJECT : Income taxes: credits: qualified motion pictures
SUMMARY : Extends for five years the requirement that the
California Film Commission (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. Specifically, this bill :
1)Extends the requirement in law that that CFC annually issue
tax credits to qualifying motion picture productions, as
specified, through the 2021-22 fiscal year. (See Existing Law
for a detailed explanation of the film tax credit program).
2)Extends the limitation on the aggregate amount of credits that
may be allocated through the 2021-2022 fiscal year as follows:
a) $100 million in credits for the 2009-10 fiscal year and
each fiscal year thereafter, through and including the
2014-15 fiscal year.
b) $150 million in credits for the 2015-16 fiscal year.
c) $250 million in credits for the 2016-17 fiscal year and
each fiscal year thereafter, through and including the
2021-22 fiscal year.
EXISTING LAW :
1)Establishes a motion picture production tax credit, 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
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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
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
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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
1)Author's statement : According to information supplied by the
author, approximately 30 other U.S. states and overseas
production companies offer enticing tax subsidies for film and
TV productions. Most notably, the state of New York has
recently approved an aggressive $420 million film incentive to
increase and maintain film industry jobs in their state.
According to industry advocates, from 2004-11, film and TV
production in New York has risen 85% from 18 productions to
135. Productions and jobs that otherwise and potentially
could have stayed in California, he asserts.
"In addition, many states, such as Louisiana, have no cap on
this incentive at all, offering tax credits to any who would
like to come to their state to shoot a film, a television show
or even a pilot. Consequently, Louisiana's incentive has
vaulted the state to become the third largest production
destination within the US, creating more than 14,000 jobs and
overall more than $700 million in wages. The incentive
affords productions up to 30% on all costs, with no annual
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cap. By comparison, California only offers a $100 million
annual incentive to productions with a budget lower than $75
million.
"The result of this competition is, unfortunately, that
California is no longer the home to the majority of film
production. In the past decade, California's production has
dropped to less than the 50% of the entire nation's
production. In 2013, 11 of the 12 big action films expected
to be the greatest box office draws were filmed outside of
California. By contrast, in 2003, seven of the 12 summer
films that grossed over $100 million were shot primarily in
California.
"The decline of productions all over the state hurt the local
economies that no longer benefit from the business that the
film industry brings. Local economies stand to lose millions
in lost wages and business when producers decide to film
elsewhere. Overall, productions that leave the state to
pursue other state or international incentives - 'runaway
productions' - translate to significant job and economic
losses. In order to target productions most likely to leave
California for other incentives offered, provisions in this
bill create a greater appeal to do business in California."
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
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.
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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 the Assembly 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 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
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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
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
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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." (Important Questions to Ask in Evaluating a Film
Tax Incentive Program, Tax Foundation, March 2012).
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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
opposes this bill, based upon their belief that the program
takes money away from important programs, including education,
stating, "Over the past five years, the Legislature has faced
daunting budget cuts during the budget deliberations. Painful
cuts were made to vital programs that serve seniors and
children. The education budget is barely held together on the
premise that more revenues would materialize if voters passed
Proposition 30. Yet despite these cuts, which have not been
restored, we are able to give a tax break to the film
industry.
"The non-partisan Legislative Analyst's Office (LAO) has
provided many findings on the problems with this program.
Here are the key, major findings (in a recent evaluation of
the film tax program issued by the LAO for the Senate
Governance and Finance Committee):
"Assumptions Embedded in Methodology May Overstate
Results. The LAO found that recent studies overstate the
benefits. 'The lack of specific assumptions ... [which] is
a frequent problem with this type of study and may result
in the net benefit of the tax credit being dramatically
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over stated.' The LAO was referring to the recent study by
the Los Angeles County Economic Development Corporation
(LAEDC) touted by the industry.
"Some Productions Stayed in California without the Need
for a Tax Credit. The LAO also agreed with another study
(The UCLA-IRLE) that in reality "some waitlisted
productions proceeded anyway and were filmed in California
without the credit."
"Net Credit Benefit Likely Much Less Than Reported. A
major finding by the LAO is
that 'even if the combined state and local tax revenue
return is right around $1.00 for
every tax credit dollar, the slate 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'."
"Our schools have suffered from $20 billion in cuts over the
past several 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. For these reasons we must oppose AB 1189."
1)Prior and Related Legislation :
a) AB 286 (Nazarian) of the 2013-14 Legislative Session,
would expand the definition of qualified motion pictures
under the film tax program 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. AB 286 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
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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
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
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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,
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.
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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
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
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property, but which is currently unfunded.
2)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