BILL ANALYSIS �
AB 1839
Page 1
Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 1839 (Gatto) - As Amended: March 19, 2014
Majority vote. Tax levy. Fiscal committee.
SUBJECT : Income taxes: qualified motion pictures.
SUMMARY : Creates a new Motion Picture Credit program (Motion
Picture credit), for taxable years beginning on or after January
1, 2016, and authorizes the California Film Commission (CFC) to
administer the program and allocate the tax credits for the
2016-17 fiscal year and each fiscal year (FY) thereafter,
through and including the FY 2020-21, as provided.
Specifically, this bill :
1)Allows a qualified taxpayer, as defined, under both the
Personal Income Tax (PIT) and the Corporation Tax (CT) laws, a
Motion Picture credit equal to an applicable percentage of the
qualified expenditures for the production of a qualified
motion picture in California. The credit is allowed for
taxable years beginning on or after January 1, 2016.
2)Prohibits a Motion Picture credit for any qualified
expenditures for the production of a motion picture in
California if a credit for those same expenditures has been
claimed under either Section 17053.85 or Section 23695 of the
Revenue and Taxation Code (R&TC) (the original "film tax
credit").
3)Defines a "qualified taxpayer" as a taxpayer who has paid or
incurred qualified expenditures and has been issued a credit
certificate by the CFC, as specified.
4)Defines "qualified expenditures" as amounts paid or incurred
for tangible personal property (TPP) purchased or leased, and
used, within this state in the production of a qualified
motion picture and payments, including qualified wages, for
services performed within California in the production of a
qualified motion picture.
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5)Specifies that the applicable percentage shall be as follows:
a) 20% of the qualified expenditures attributable to the
production of a qualified motion picture in California,
including, but not limited to a feature, up to
$100,000,000, or a television series in its second or
subsequent years of receiving a tax credit allocation.
b) 25% of the qualified expenditures attributable to the
production of either:
i) A qualified motion picture that is a television
series that relocated to California in its first year of
receiving a tax credit allocation; or,
ii) An independent film, as defined.
c) 25% of qualified expenditures relating to music scoring
or music editing attributable to the production of a
qualified motion picture in California.
6)Increases the applicable percentage by 5%, not to exceed a
maximum of 25%, if the qualified motion picture incurred or
paid the qualified expenditures relating to original
photography outside the Los Angeles zone, as defined.
7)Defines "Los Angeles zone" as an area within a circle 30 miles
in radius from Beverly Boulevard and La Cienaga Boulevard, Los
Angeles, California, and includes Agua Dulce, Castaic,
including Lake Castaic, Leo Carillo State Beach, Ontario
International Airport, Piru, and Pomona, including the Los
Angeles County Fairgrounds. The Metro Goldwyn Mayer, Inc.
Conejo Ranch property is within the Los Angeles zone.
8)Defines "original photography" as principal photography,
additional unit photography, and reshooting original footage.
9)Defines "qualified expenditures relating to original
photography outside the Los Angeles zone" as amounts paid or
incurred during the applicable period for TPP used or consumed
outside the Los Angeles zone and relating to original
photography outside the Los Angeles zone and qualified wages
paid for services performed outside the Los Angeles zone and
relating to original photography outside the Los Angeles zone.
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10)Defines a "qualified motion picture" to mean a motion picture
that is produced for distribution to the general public,
regardless of medium, that is one of the following:
a) A feature with a minimum production budget of $1
million.
b) A movie of the week or miniseries with a minimum
production budget of $500,000.
c) A new one-hour television series of episodes longer than
40 minutes each of running time, exclusive of commercials,
that is produced in California, with a minimum production
budget of $1 million per episode.
d) An independent film.
e) A television series that relocated to California.
f) A pilot for a new television series that is longer than
40 minutes of running time, exclusive of commercials, that
is produced in California, and with a minimum production
budget of $1 million.
11)Specifies that in order to qualify as a "qualified motion
picture," all of the following requirements must be satisfied:
a) At least 75% of the principal photography days occur
wholly in 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 in the
state;
b) Production of the qualified motion picture is completed
within 30 months from the date on which the qualified
taxpayer's application is approved by the CFC. A qualified
motion picture is deemed "completed" when the process of
post-production has been finished;
c) The copyright for the motion picture is registered with
the United States (U.S.) Copyright Office pursuant to Title
17 of the U.S. Code; and,
d) Principal photography of the qualified motion picture
commences after the date on which the application is
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approved by the CFC, but not later than 180 days after the
date of that approval, unless death, disability, or
disfigurement of the director or of a principal cast
member, an act of God, or other natural disaster, terrorist
activities, or government sanction has directly prevented a
production's ability to begin principal photography within
the prescribed 180-day commencement period.
12)Excludes from the definition of a "qualified motion picture"
commercial advertising, music videos, a motion picture
produced for private noncommercial use, a news program,
current events or public events program, talk show, game show,
sporting event or activity, awards show, telethon or other
production that solicits funds, reality television program,
clip-based programming if more than 50% is comprised of
licensed footage, documentaries, variety programs, daytime
dramas, strip shows, one-half hour episodic television shows,
or any production that falls within the recordkeeping
requirements of Section 2257 of Title 18 of the U.S. Code.
13)Defines "independent film" as a motion picture with a minimum
budget of $1 million and a maximum budget of $10 million that
is produced by a company that is not publicly traded and
publicly traded companies do not own, directly or indirectly,
more than 25% of the producing company.
14)Defines "qualified wages" as all of the following:
a) Any wages subject to withholding under Division 6
(commencing with Section 1300) of the Unemployment
Insurance Code that were paid or incurred by any taxpayer
involved in the production of a qualified motion picture
with respect to a qualified individual for services
performed on the qualified motion picture production within
this state;
b) The portion of any employee fringe benefits paid or
incurred by any taxpayer involved in the production of the
qualified motion picture that are properly allocable to
qualified wage amounts;
c) Any payments made to a qualified entity for services
performed in California by qualified individuals; and,
d) Remuneration paid to an independent contractor who is a
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qualified individual for services performed within this
state by that qualified individual.
15)Excludes from the definition of "qualified wages" expenses,
including wages, paid or related to all of the following:
a) New use, reuse, clip use, licensing, secondary markets,
or residual compensation or creation of any ancillary
product;
b) Acquisition, development, turnaround, or any rights
thereto;
c) Financing, overhead, marketing, promotion, or
distribution of a qualified motion picture;
d) Paid per person per qualified motion picture for
writers, directors, music directors, music composers, music
supervisors, producers, and performers, other than
background actors with no scripted lines.
16)Defines a "qualified individual" as any individual who
performs services during the production period in an activity
related to the production, as defined, of a qualified motion
picture.
17)Provide that a "qualified entity" means a personal service
corporation as defined in Section 269A(b)(1) of the Internal
Revenue Code (IRC), a payroll services corporation, or any
entity receiving qualified wages with respect to services
performed by a qualified individuals.
18)Requires the CFC to do all of the following:
a) Allocate the Motion Picture tax credits on and after
July 1, 2016, and before July 1, 2021;
b) Establish a procedure for applicants to file with the
CFC a written application, on a form jointly prescribed by
the CFC and the FTB for the allocation of the credit, as
specified;
c) Establish criteria, consistent with the prescribed
requirements, for allocating tax credits;
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d) Determine and designate applicants who meet the
specified requirements;
e) Process and approve, or reject, all applications on a
first-come-first-served basis;
f) Allocate an aggregate amount of credit, subject to an
annual unspecified cap, the unused allocation credit
amount, if any, for the preceding FY and any amount of
previously allocated but not certified credits;
g) Certify tax credits allocated to qualified taxpayers and
obtain, when possible, certain prescribed information from
applicants that have not received an allocation of the
credit;
h) Set aside the lesser of 10% of the unspecified aggregate
annual amount or $20 million of tax credits each fiscal
year for independent films, as specified;
i) Set aside up to $30 million of tax credit each fiscal
year for television series that relocated to California, as
specified;
j) Provide the Legislative Analyst's Office (LAO), upon
request, any or all application materials or any other
materials received from, or submitted by, the applicants,
in electronic format when available, as provided;
aa) Annually provide the LAO, the FTB, and the State Board
of Equalization (BOE) with a list of qualified taxpayers
and the tax credit amounts allocated to each qualified
taxpayer by the CFC, as specified; and,
bb) Annually post on its Internet Web site and make
available for public release certain specified information
regarding the allocation of the Motion Picture tax credit.
19)Requires taxpayers to provide certain prescribed information
to the CFC in order to be eligible for the credit.
20)Specifies that information submitted by an applicant for the
Motion Picture tax credit is not a public record.
21)Limits that total aggregate amount of the Motion Picture
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credits that may be allocated in any fiscal year to an
unspecified amount.
22)Authorizes a qualified taxpayer to sell the Motion Picture
tax credit attributable to an independent film to an unrelated
party, as defined, but requires the taxpayer to report, prior
to the sale, specified information to the FTB, as prescribed.
23)Prohibits a qualified taxpayer from assigning or selling the
Motion Picture tax credit to the extent the credit is claimed
on the taxpayer's tax return.
24)Allows any unused Motion Picture credit to be carried over to
the following taxable years, and succeeding five taxable
years, if necessary, until the credit has been exhausted.
25)Allows a qualified corporate taxpayer to make an irrevocable
assignment of any portion of the Motion Picture credit to one
or more affiliated corporation for each taxable year, as
provided.
26)Provides that an affiliated corporation or an unrelated
party, to which the Motion Picture tax credit is assigned or
sold, is treated as a qualified taxpayer for purposes of the
tax credit.
27)Exempts from the Administrative Procedures Act any standard,
criterion, procedure, determination, rule, notice, or
guideline established or issued by the FTB, as provided.
28)States that the provisions of this bill are severable, which
means that if any provision or its application is held
invalid, the invalidity shall not affect other provisions or
applications that can be given effect without the invalid
provision or application.
29)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,
taxpayers may elect to deduct up to $15 million ($20 million
if the production expenses are incurred in certain distressed
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areas) of the cost of any qualifying film and television
production, commencing prior to January 1, 2014, 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, the original film production tax
credit, under either the PIT or CT Law.
5)Provides, in lieu of the credits allowed under either the PIT
or CT law, a credit against qualified sales and use taxes, as
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specified.
6)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 either a television series that relocated to
California or an independent film.
7)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.
8)Requires the CFC to administer a film 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.
9)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 or miniseries with a minimum budget
of $500,000;
c) A new television series produced in California with a
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minimum production budget of $1 million licensed for
original distribution on basic cable;
d) An independent film; or,
e) A television series that relocated to California.
10)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 as well as 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.
11)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.
12)Requires the CFC to allocate $100 million of credit
authorizations for the 2009-10 fiscal year (FY) and each FY
thereafter, through and including the FY 2016-17, on a
first-come, first-served basis, with up to 10% of the
allocation reserved for independent films.
13)Declares that any unallocated amounts and any allocation
amounts in excess of certified credits may be carried over and
reallocated by the CFC.
14)Provides that qualifying taxpayers could claim the credit on
their tax return filed with the Franchise Tax Board (FTB)
under either PIT or CT.
15)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.
16)In the case of credits attributable to an independent film,
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the qualified taxpayer is allowed to sell the tax 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.
17)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.
18)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.
19)Requires the LAO, on or before July 1, 2016, to provide this
Committee, the Senate Committee on Governance and Finance, and
the public a report evaluating the economic effects and
administration of the original film tax credit program, as
provided.
FISCAL EFFECT : Unknown
COMMENTS :
1)Author's statement : According to the author, "Hollywood is
internationally celebrated as home of the entertainment
industry, having established itself as a film-making locale by
the early 1900s. The entertainment industry creates hundreds
of thousands of good paying middle class jobs and billions in
economic activity throughout California each year, and
hopefuls still flock to the area with dreams of being
'discovered.' Unfortunately, the film industry's last big
peak occurred in 1997, and the steady, local jobs offered by
the industry have been under constant attack.
"Since the late 90s, film production has been lured across
state lines to other states and nations that have sought to
attract the notoriety, tax revenues, and workforce. There are
now more than 40 states and numerous other countries that
offer incentives, almost all of which are substantially larger
than California's. In the last 15 years, film production has
dropped nearly 50% in California. In 2013, 21 of the 23 new
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prime time series were filmed outside of California. When
production leaves California, those left jobless are not the
top-tier talent, such as the actors and producers, who are
often shipped to the filming locations. Instead, the below
the line and behind the scenes workers take a hit, as do the
ancillary businesses that serve the production sites and
teams, such as the caterers, hotels, set construction
companies, restaurants, etc.
"In an effort to combat production flight, in 2009, the
Legislature passed the California Film and Television Tax
Credit Program to promote film production and create and
retain jobs in California. Since 2009, California has
allocated $100 million a year to eligible film and TV
productions that meet specific criteria. To date, more than
270 projects, contributing more than $4.75 billion in economic
activity and creating more than 51,000 jobs, have benefitted
from the program. Tax revenue generated from filming helps to
pay for teachers, police officers and infrastructure
throughout California.
"However, while California's incentive program has been fully
subscribed to, at least 43 other states and international
governments offer tax incentives for film and TV production.
As more and more states create attractive production incentive
programs, filming in California becomes less and less
attractive, and when the production goes elsewhere, so do the
jobs, tax revenue, local spending, and tourism that accompany
it.
"By creating a more robust and better targeted incentive
program, the California Film and Television Job Retention and
Promotion Act will help keep more feature and television
production in the state, guaranteeing thousands of well-paid,
highly-skilled jobs in our local economies."
2)Arguments in support . The proponents state that the existing
film production tax credit has been successful in its goal to
retain and increase film and television production occurring
in California. Thus, "in the first two years alone, the tax
credit program has generated more than 20,000 jobs and $3.8
billion in economic activity since 2009." According to the
proponents, the majority of the jobs generated by the credit
"went to 'below the line' workers, those who have good,
middle-class jobs working on sets, doing lighting, technical
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work, hauling props, and setting up locations. These are the
workers who are most hard-hit by job loss in the industry and
the least able to scrape by with no work."
The proponents argue that "California's existing incentive has
been successful in attracting feature films with a budget
below $75 million and one-hour television series that air on
basic cable channels. The CFC reports that 269 film and
television projects have qualified for the tax credit program,
resulting in spending of more than $4.7 billion in
California's economy, including $1.48 billion in wages to
California workers." However, the current program is not open
to large budget films and one-hour television series that are
seen on the networks, pay cable channels and Internet sites.
As a result," many of these projects are produced and the
thousands of good paying middle class jobs they generate are
located outside California." The proponents assert that "the
situation is similar with regard to television series." AB
1839 addresses this "by expanding the incentive program to
include large budget features, up to $100 million of qualified
expenditures, and to one-hour TV series, regardless of where
they are aired or broadcast." Finally, the proponents
conclude that "a healthy and strong film industry here in
California is critical to the survival of our businesses and
association. But the reality is that over the past decade we
have watched film and television production 'run away' from
California in favor of tax incentives offered first in Canada,
then in other countries like Australia and the UK, and
finally, and overwhelmingly, to other states. ? Thanks to the
Legislature and the Governor, we do have the current
California production incentive, without which the picture
would be much bleaker. But it is limited in both eligibility
and funding - only about 50 projects a year receive the
credit."
3)Argument in Opposition : The opponents state that "in the last
several years, K-12 education alone has taken over $20 billion
in cuts [not including] cuts that have hit the California
Community Colleges, CSU and the UC systems." The opponents
note that most of the independent research "reach the same
conclusion: film tax credits are not proven to prevent
runaway productions and they are a drain on scarce public
funds." They argue that "tax credits for special interest
groups, corporations, and others have, over the last decade,
depleted our General Fund of billions of dollars." The
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opponents maintain that "California cannot afford to continue
giving away tax credits that deplete the General Fund, because
this hurts funding for our schools," since "any reduction in
revenue to the State's General Fund ?would reduce Proposition
98 funding." They believe that the film tax credit for the
motion picture industry "contains the same problem as many tax
credits: it would reward activity which is otherwise taking
place, using state dollars that have no positive impact."
Thus, the opponents suggest converting this tax credit program
into a direct subsidy program. Finally, the opponents assert
that "California's film tax credit program should not conflict
with the public health priorities of our state and nation" and
urge the author to amend this bill to implement the
recommendations of the U.S. Centers for Disease Control and
Prevention and the World Health Organization to limit
subsidies for movies to only those that do not have
tobacco-related imagery.
4)Tax Incentives: Do They Work ? 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,
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 affect
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, Are Businesses
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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 Legislative Analyst Office (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."
5)California Film & Television 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. [SBX3 15 (Calderon), Chapter
17, Statutes of 2009-10 Third Extraordinary Session, and ABX3
15, (Krekorian), Chapter 10, Statutes of 2009-10 Third
Extraordinary Session.]
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.] In 2012, it was further extended for two
additional years - until FY 2016-17. [AB 2026 (Fuentes)
Chapter 841, Statutes of 2012.] Although a bill creating some
sort of a tax incentive for the motion picture and television
production in California had been introduced almost every
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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. The credit is effective only for
seven FYs, from FY 2009-10 until FY 2016-17. The CFC is
required to allocate and certify the credit on the first-come,
first-serve basis, up to $100 million every FY, of which $10
million are set aside for qualified expenditures incurred by
independent films. The credit is allowed to qualified
taxpayers to be used against the income and franchise taxes
under either the PIT or CT law. The tax credit is not
refundable, but the credit allocated to an "independent film"
may be transferred to an unrelated party. Existing law also
allows a qualified taxpayer to use the film tax credit to
offset qualified sales and use taxes.
As of June 2013, over $27 million of the film tax credits were
claimed against the sales and use taxes, and more than $34
million of the total tax credits were claimed against the
income and franchise tax liability.
6)How Different is the Proposed Motion Picture credit ? As noted
above, the original film tax credit program provides a 20% tax
credit for feature films with budgets between $1 million and
$75 million; for movies-of-the-week and mini-series with a
minimum budget of $500,000; and for one-hour television series
that air on basic cable channels. The current program
provides a 25% tax credit for any TV series, regardless of
where it airs, that relocates to California and for
independent films. The current program allocates $100 million
to qualified production annually, of which up to $10 million
is set- aside for productions made by independent (not
publicly traded) companies.
This bill proposes to expand the application of the new
program to additionally include: (i) a feature film with a
minimum budget of $1 million and no maximum (although the
amount of qualified expenditures would be limited to $100
million); (ii) any television series (with episodes longer
than 40 minutes) regardless of how it is distributed (basic
cable, premium pay cable, network, Internet), with a minimum
budget of $1 million per episode; (iii) a pilot for a TV
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series with a minimum $1 million budget and longer than 40
minutes; and, (iv) music scoring and editing for a qualified
production in California. A television series relocating to
California would, under the proposed credit, receive a 25% tax
credit for the first year of relocation to California and a
20% credit for subsequent years. Furthermore, a qualified
production filming outside the Los Angeles zone would receive
a 25% (an additional 5% increase) on expenditures incurred
outside the Los Angeles zone, as defined.
This bill would require the CFC to set-aside tax credits of up
to $30 million for TV series that relocated to California.
This bill would retain a set-aside requirement for independent
productions (non-publicly traded companies) of up to 10% of
the allocation or $20 million, whichever is less.
7)Is the Current Film Tax Credit Program Effective in Achieving
the Stated Goal ? 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. Thirty-seven states and several other
countries currently offer some sort of an incentive for film
and television production. 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. The main goal of the existing
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, and the degree of success, is still being debated.
The 2010 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.) The Los Angeles Economic Development Corporation
(LAEDC) also projected at that time 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
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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 could 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. The CFC stated that
these numbers were an early indicator that the incentive
program was having an immediate positive impact on production
in California.
The most recent 2013 CFC progress report shows that, including
the 2013 year's conditionally allocated tax credits,
approximately $600 million in tax credits has been allocated
(reserved) to eligible film and TV projects, resulting in
estimated total aggregate direct spending by the program
projects of $4.75 billion and estimated total qualified wages
paid (or to be paid) by the projects of $1.48 billion. (CFC,
Progress Report, Film and Television Tax Credit Program &
Competition for California's Entertainment Industry, July
2013). According to the CFC, each $100 million in tax credit
allocations allows an average of 45 projects to participate,
generating on average $792 million in direct production
spending, including $250 million in payroll for below-the-line
workers. Furthermore, for every $100 million in tax credits,
productions will hire an estimated 8,500 cast and crew members
and utilize 10,000 vendors. Collectively, they will also
employ more than 67,000 daily hires as extras. All in all,
the report concludes that the existing film tax credit program
has succeeded in attracting the target group: basic cable TV
series, mid-sized feature films and made-for-TV movies.
Several other reports issued by non-profit organizations have
come to a similar conclusion: the film tax credit program
encouraged in-state film production activity and staunch
runaway production. In turn, the increased in-state film
production resulted in increased revenues to the state as well
as an increase in jobs. For example, in March 2014, LAEDC
found that "for each dollar of tax credit certificate issued,
$1.11 was returned to local and state governments, which is
the real rate of return on the investment of public funds."
(California's Film and Television Tax Credit Program:
Assessing Its Impact, March 2014.) It has been estimated,
using generic multipliers for motion picture and video
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industries in California, that the broader economic impact of
the Film Tax Credit Program has resulted in total spending in
California of $1.9 billion, of which $1.2 billion qualified
for the film tax credits, for the first three FYs of program
funding. This activity generated $4.3 billion in economic
output and supported 22,300 jobs with labor income of $1.6
billion and state and local tax revenue of almost $248
million.
Similarly, a report issued by the UCLA Institute for Research on
Labor and Employment, in conjunction with a nonprofit think
tank - the Headway Project - verified the positive economic
impact of California's Film & Television Tax Credit Program,
finding that for every dollar in tax credits issued, $1.04 in
state and local tax revenues will be returned. (Headway
Entertainment, There's No Place Like Home Bringing Film &
Television Production Back to California.) The report
acknowledged a very strong correlation between tax credits and
where film and TV producers go to shoot their projects and
noted that, while tax credits are not the only factor in
deciding where a project should be shot, they appear to be the
most powerful. The authors of the study conclude that the
program "is creating jobs and is likely providing an immediate
economic benefit to the state."
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.) Some assert that money used
to subsidize the film industry "must come at the expense of
higher taxes or reduced public spending on other things,
reductions that also have multiplier effects." (C. Thornberg,
Time to Say No to Hollywood on Tax Subsidies, March 2014.)
The critics also 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.) To that end,
the LAO noted that the LAEDC findings related to the impact of
the film tax credit program on state and local revenues were
overstated because the LAEDC study had assumed that all credit
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recipients otherwise would have located in another state.
(LAO, Film and Television Production: Overview of Motion
Picture Industry and State Tax Credits, April 30, 2014, p.23.)
The LAO opinioned that the fiscal benefit of the film tax
credit to the state government was also overstated because it
included local tax revenue, fees for services and payments for
unemployment benefits. (Id.) The LAO also noted that rather
than singling out individual industries, the state should
endeavor to create the conditions that encourage all
businesses to stay or relocate to California, such as a
broad-based tax reductions or regulatory changes. (Id., p.
24.) Even though film productions greatly impact the broader
economy in California, it is not unique to the film industry;
other industries have a similar effect.
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. It is
unclear, however, whether the value of the benefits received
by the state from providing the film tax credit exceeds the
costs of the tax subsidy. According to the LAO, it is
difficult to evaluate the effectiveness of the film tax credit
(or any other policies adopted to encourage production in
California) and, thus, the Legislature should anticipate the
likelihood of having to make ongoing decisions regarding the
film tax credit without the benefit of conclusive evidence.
(Ibid.).
8)Should the Film Tax Credit Program be Extended ? While the LAO
report states that, generally, industry-specific tax
expenditures are not appropriate public policy and the film
tax credit effectiveness is difficult to evaluate, it
acknowledges that there are factors that might reasonably lead
the Legislature to extend or expand California's film tax
credit program. (Id., p.20.) Specifically, the LAO mentioned
the following three factors: (a) the motion picture industry,
including production and post-production, is a flagship
California industry; (b) the motion picture industry is a
major employer in Los Angeles, paying high wages; and, (c)
other states are aggressively competing for this industry and,
in some cases, industry representatives are threatening to
move production for this industry to other jurisdictions if
public subsidies are not provided. (Ibid.) The aggressive
interstate and international competition seems to be the most
compelling reason "because its focus is on correcting an
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economic distortion." (Ibid.). Thus, California may need to
provide subsidies to "level the playing field" and retain its
leadership position in the film and television industry.
9)Should the Scope of the Film Tax Credit Be Expanded ? Several
studies have confirmed that, despite the presence of the
California Film Tax Credit Program, production flight has
continued. (2013 CFC Report, p. 20; Milken Institute, "A
Hollywood Exit -What California Must Do to Remain Competitive
in Entertainment - and Keep Jobs".) While the program has
been effective in attracting basic cable TV series, mid-sized
feature films, and made-for-TV movies, the state continues
losing its market share of the film and television industry.
In 2014, Film L.A. researched the primary production location
of the top 25 live-action, feature-length films and found that
the number of the top 25 films produced in California (i.e.
where California was the location of principal photography)
has declined from 16 in 1997 to two in 2013. As concluded by
the LAO, while 1997 may "have been an anomalous year - the
average number of top 25 films made in California from 1998 to
2004 was 10 - the recent negative trend for large-budget films
is clear." (LAO Report, Overview of Motion Picture Industry
and State Tax Credits, April 30, 2014, p. 13.)
The LAEDC has also researched the locations of principal
photography for the 41 live-action, feature-lengths films,
with an estimated production budget of more than $75 million,
released between July 2012 and June 2013. Apparently, only
two of those 41 films were made entirely in California, nine
used this state as a secondary location; however, for 30
films, or 73%, principal photography occurred entirely outside
of California.
Film L.A. also released a recent study which found the impacts
of runaway production continue and will worsen without
expansion of the Film Tax Credit Program. (See California
Ranks Fourth in Total Live Action Film Project, Job and
Spending Counts.) "According to data provided to Film L.A. by
the CFC, from 2010-2013 a total of 77 film projects applied
for but were not awarded California state film incentive and
then went on to complete production. Most of these projects
fled the state; more than 66% of these projects eventually
filmed outside of California in places where (sic) incentives
were available?The loss for the California economy exceeded
$914 million." The report concludes, "California's film and
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television tax credit program is a good investment, but needs
to be extended and restructured to keep the entertainment
industry from fleeing the state."
The Milken Institute researchers noted that California cannot
win, and should not attempt to win, with an all-out tax
incentive race to enact the highest incentive program.
Rather, they suggested that California build on its strengths
of being the established global leader in film production and
preserve its core employment base and infrastructure. Their
recommendations, among others, included increasing funding and
a removal of the sunset date, in order to provide
predictability for the industry; capturing movies with budgets
over $75 million; encouraging production across the state;
dedicating a portion of the credit funding to hour-long
dramatic television, including miniseries, ensuring that
network television is explicitly included. The LAO
acknowledges that restricting eligibility to certain types of
film production may lead to distortions; however, it points
out that a broad expansion of the credit may significantly
increase the state fiscal impact. (LAO Report, Overview of
Motion Picture Industry and State Tax Credits, April 30, 2014,
pp. 21-22.)
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 credits in 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. Thus, California's existing
comparative advantage should be factored in when considering
the expansion of the tax credit program. The question, of
course, remains as to whether the expanded application of the
new Motion Picture tax credit will strike the right balance
between being too generous and being ineffective.
10)The Tentative Minimum Tax (TMT). This bill does not
expressly add the Motion Picture tax credit to the list of tax
credits that may be used to reduce a taxpayer's "regular tax"
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beyond the "tentative minimum tax" or TMT. As such, the lack
of express authorization may prevent full monetization of the
proposed credit by taxpayers. While, as a general rule, tax
credits may not be used to reduce the regular tax below the
TMT, existing law provides an exception for certain types of
credits, such as for example, the research and development
credit and the existing film tax credit, which may be used to
reduce a qualified corporate taxpayer's "regular" tax
liability beyond the tentative minimum tax.
11)The Sales and Use Tax Liability . As noted above, existing
law allows qualified taxpayers to offset not only their income
or franchise tax but also their qualified sales and use taxes.
(R&TC Section 6902.2.) This bill, however, only allows
qualified taxpayers to utilize the Motion Picture tax credit
against the taxes imposed either under the PIT law or the CT
law; it is silent with respect to the sales and use tax law.
If the author's intent is to allow taxpayers to utilize the
credit against their qualified sales and use taxes, the author
may wish to amend the bill to expressly provide for such
authorization.
12)The LAO Reporting Requirement. The original film tax credit
program requires the LAO to prepare a report evaluating the
economic effects and administration of the program on or
before January 1, 2016. The Committee may wish to consider if
a similar requirement for the LAO to report to the Legislature
regarding the proposed Motion Picture tax credit prior to its
expiration should be also included in this bill.
13)FTB Implementation Concerns. The FTB staff notes in its
analysis of this bill that this bill allows an additional 5%
credit for qualified expenditures relating to original
photography outside the Los Angeles Zone but fails to provide
a quantitative measure of qualified expenditures. The FTB
staff notes that it is possible that "a taxpayer could perform
one day of original photography outside the Los Angeles zone
and increase the applicable percentage by 5% for all qualified
expenditures."
14)Double-referral . This bill is double-referred to the Assembly
Committee on Arts, Entertainment, Sports, Tourism, and
Internet Media and this Committee. This bill passed the
Committee on Arts, Entertainment, Sports, Tourism and Internet
Media on a 7-0 vote.
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15)Related Legislation .
AB 2700 (Nazarian), introduced in the current legislative
session, would establish a post-production tax credit under
both the PIT and CT laws, for taxable years beginning on or
after January 1, 2015, to be allocated by the California Film
Commission on or after July 1, 2015, and before July 1, 2020,
in an amount equal to 25% of qualified post-production costs,
as defined, for qualified motion pictures, as defined.
Support
Affiliated Property Craftspersons Local 44
American Federation of Musicians, Local 47, of the
United States and Canada, AFL-CIO/CLC
Animation Guild, Local 839 IATSE
Antelope Valley/North Los Angeles County Film Commissioner
AFSME District Council 36
Association of Talent Agents
CBS Television Studios
California Chamber of Commerce
California Film & Television Production Alliance
California Hotel and Lodging Association
California Labor Federation
California State Council of Laborers
Central City Association
City and County of San Francisco
City of Beverly Hills
City of Burbank
City of Cerritos
City of Culver City
City of Hemet
City of Long Beach
City of West Hollywood
City of West Hollywood Film Liaison
Councilmember, 2nd District, City of Los Angeles
Councilmember, 7th District, City of Los Angeles
County of San Bernardino
Directors Guild of America, Inc.
Entertainment Union Coalition
Film Independent
FilmL.A., Inc.
Fox Entertainment
Friends of the San Francisco Film Commission
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Greater Palm Springs Convention & Visitors Bureau
High Desert Film Alliance
Home Box Office
IATSE Local 800 (Art Directors Guild)
IATSE Local 892 (Costume Designers Guild)
Independent Film & Television Alliance
Indio Chamber of Commerce
Inland Empire Film Commissioner
International Alliance of Theatrical Stage Employees, Moving
Pictures
Technicians, Artists, and Allied Crafts of the United States,
Its Territories and Canada
JCX Expendables
League of California Cities
Los Angeles Latino International Film Festival
Los Angeles Unified School District
Marin County Film Liaison
Mayor, City of Beverly Hills
Mayor, City of Burbank
Mayor, City of Calabasas
Mayor, City of Carson
Mayor, City of Cerritos
Mayor, City of Compton
Mayor, City of Culver City
Mayor, City of Downey
Mayor, City of Duarte
Mayor, City of El Segundo
Mayor, City of Fresno
Mayor, City of Glendale
Mayor, City of Hawthorne
Mayor, City of Hermosa Beach
Mayor, City of Inglewood
Mayor, City of La Canada Flintridge
Mayor, City of La Puente
Mayor, City of Long Beach
Mayor, City of Los Angeles
Mayor, City of Malibu
Mayor, City of Monrovia
Mayor, City of Norwalk
Mayor, City of Oakland
Mayor, City of Pasadena
Mayor, City of Pico Rivera
Mayor, City of Rancho Pales Verdes
Mayor, City of Torrance
Mayor, City of Sacramento
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Mayor, City of San Diego
Mayor, City of San Fernando
Mayor, City of San Francisco
Mayor, City of San Jose
Mayor, City of Santa Ana
Mayor, City of Santa Fe Springs
Mayor Pro Tem, City of Sierra Madre
Mayor, City of South Pasadena
Monterey County Film Commissioner
Motion Picture Association of America, Inc.
Motion Picture & Television Mobile Catering Association
Orange County Film Commissioner
Pan African Film Festival
Paramount Pictures
Placer Lake Tahoe Film Commissioner
Producers Guild of America
Regional Economic Association Leaders of California
Sacramento Hotel Association
San Francisco County Chamber of Commerce
San Francisco Film Commissioner
San Gabriel Valley Economic Partnership
San Mateo County/Silicon Valley Film Commissioner
Sacramento Film Commissioner
Santa Barbara County Film Commissioner
Screen Actors Guild - American Federation of Television and
Radio Artists
Script Supervisors/Continuity, Coordinators, Accounts, & Allied
Production Specialists Guild, Local 971
South Bay Chamber of Commerce
Southern California Association of Governments
Southwest California Legislative Council
Sundance Institute
Superintendent, Los Angeles Unified School District
Teamsters
Teamsters Local 399
Valley Industry and Commerce Association
Vice Mayor, City of Bakersfield
Walt Disney Company
Warner Brothers
16,873 private individuals
Opposition
American Heart Association
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American Lung Association in California
California School Employees Association
California Tax Reform Association
California Teachers Association
Cancer Action Network, American Cancer Society
Analysis Prepared by : Oksana Jaffe / REV. & TAX. / (916)
319-2098