BILL ANALYSIS �
AB 2700
Page 1
Date of Hearing: May 13, 2014
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Raul Bocanegra, Chair
AB 2700 (Nazarian) - As Amended: April 1, 2014
Majority vote. Fiscal committee. Tax levy.
SUBJECT : Income taxes: credits: motion pictures: qualified
post production costs
SUMMARY : Allows a credit under either the Personal Income Tax
(PIT) or the Corporation Tax (CT) law for the post production of
a qualified motion picture, as provided. Specifically, this
bill :
1)Provides a credit in an amount equal to 25% of qualified post
production costs, for taxable years beginning on or after
January 1, 2015, for the post production of a qualified motion
picture at a qualified production facility. The credit may
not be allowed for qualified post production costs that are
claimed under Revenue and Taxation Code (R&TC) Section
17053.85 or Section 23695 (the existing "film tax credit").
2)Provides that the credit shall be allowed for taxable years in
which the California Film Commission (CFC) issues credit
certificates for qualified post production costs.
3)Limits the credit available to a qualified taxpayer to amount
specified in the credit certificate issued by the CFC.
4)Defines "employee fringe benefits" to mean the allowable
deduction to the qualified taxpayer involved in the post
production of a qualified motion picture, exclusive of any
amounts contributed by employees, for any of the following:
a) Employer contributions under any pension,
profit-sharing, annuity, or similar plan;
b) Employer-provided coverage under any accident or health
plan for employees; and,
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c) The employer's cost of life or disability insurance
provided to employees.
5)Defines "post production" to mean the final activities in a
qualified motion picture's production, including editing,
foley recording, automatic dialogue replacement, sound
editing, scoring, music track recording by musicians and music
editing, beginning and end credits, negative cutting, negative
processing and duplication, the addition of sound and visual
effects, sound mixing, film-to-tape transfers, encoding, and
color correction. Provides that "post production" does not
include the manufacture or shipping of release prints.
6)Defines "post production facility" as a building, complex or
buildings, or both, and their improvements in which films are
intended to be post produced, and defines "qualified post
production facility" as a post production facility located in
the state and engaged in finishing a qualified motion picture.
7)Defines a "qualified individual" as any individual who
performs services related to the post production of qualified
motion picture. The term may not include the following:
a) An individual as described in Internal Revenue Code
(IRC) Section 51(i)(1); and,
b) A "5-percent owner" as described in IRC Section
416(i)(1)(B).
8)Defines a "qualified motion picture" as a motion picture that
is produced for distribution to the general public, regardless
of medium. A "qualified motion picture" must be 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, exclusive of commercials, produced in
California, with a minimum production budget of $1 million
per episode;
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d) An independent film;
e) A television series that relocated to California;
f) A television series; or,
g) A pilot for a new television series that is longer than
40 minutes, exclusive of commercials, produced in
California, and with a minimum production budget of $1
million.
9)Requires a "qualified motion picture" to satisfy all of the
following:
a) At least 75% of the post production work must occur
within California or 75% of the post production budget must
be incurred for payment of services performed within the
state, and the purchase or rental of property used within
the state.
b) Post production must be completed within 30 months from
date the qualified taxpayer's application is approved by
the CFC. A qualified motion picture is completed when the
post production has been finished.
10)Provides that a "qualified motion picture" may not include
commercial advertising, music videos, a motion picture
produced for private noncommercial use, such as weddings,
graduations, or as part of an educational course and made by
students, a news program, current events or public events
program, talk show, game show, reality television program,
documentaries, or any production that falls within the record
keeping requirements of U.S. Code, Title 18, Section 2257.
11)Defines "qualified production costs" as the amount paid or
incurred to perform post production work on a qualified motion
picture including, but not limited to, amounts paid or
incurred for tangible personal property purchased or leased,
and used, within this state in the post production of a
qualified motion picture and any payments, including qualified
wages, for services performed within this state in the post
production of a qualified motion picture.
12)Defines a "qualified taxpayer" as a taxpayer who has paid or
incurred qualified post production costs and has been issued a
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credit certificate by the CFC.
13)Provides that with respect to a pass-thru entity, the
determination of whether a taxpayer is a qualified taxpayer
shall be made at the entity level and any credit under this
section is not allowed to the pass-thru entity, but shall be
passed through to the partners or shareholders. Provides that
pass-thru entities means any entity taxed as a partnership or
"S" corporation.
14)Provides that "qualified wages" includes all of the
following:
a) Wages that are subject to withholding and were paid or
incurred by any taxpayer involved in the post production of
a qualified motion picture with respect to a qualified
individual for services performed on post production within
the state;
b) The portion of employee fringe benefits paid or incurred
by a taxpayer involved in the post production of a
qualified motion picture;
c) Payments made to a qualified entity for services
performed in this state by qualified individuals; and,
d) Remuneration paid to an independent contractor who is a
qualified individual for services performed within the
state.
15)Provides that "qualified wages" may not include all of the
following:
a) Expenses, including wages, related to new use, reuse,
clip use, licensing, secondary markets, or residual
compensation, or the creation of any ancillary product,
including, but not limited to, a soundtrack album, toy,
game, trailer, or teaser;
b) Expenses, including wages, paid or incurred with respect
to acquisition, development, and turnaround;
c) Expenses, including wages, related to financing,
overhead, marketing, promotion, or distribution of a
qualified motion picture; and,
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d) Expenses, including wages, paid for writers, directors,
music directors, music composers, music supervisors,
producers, and performers, other than background actors
with no scripted lines.
16)Allows a qualified taxpayer, under either the Personal Income
Tax (PIT) Law or the CT law, to sell the post production
credit.
17)Requires a qualified taxpayer to report to the Franchise Tax
Board (FTB) prior to the sale of the credit all required
information regarding the purchase and sale of the credit,
including the social security or other taxpayer identification
number of the unrelated party to whom the credit has been
sold, the face amount of the credit sold, and the amount of
consideration received by the qualified taxpayer for the sale
of the credit.
18)Allows a qualified taxpayer to carry forward the excess
credit to the following six taxable years.
19)Provides that the credit may not be sold to more than one
unrelated party, nor may the credit be resold by the unrelated
party to another taxpayer party.
20)Prohibits a qualified taxpayer from assigning or selling the
tax credit that the taxpayer has claimed on a tax return, and
allows the FTB to disallow a credit if the qualified taxpayer
and a taxpayer to whom the credit has been sold both claim the
same credit.
21)Allows a qualified taxpayer, under the Corporate Tax (CT)
Law, to assign a portion of the credit to one or more
affiliated corporations for each taxable year in which the
credit is allowed if the credit exceeds the taxpayer's tax
liability. An "affiliated corporation" is defined, with
specified modification, by reference to R&TC Section 25110.
The election to assign a tax credit to an affiliated
corporation must comply the following:
a) May be based on any method selected by the qualified
taxpayer that originally receives the credit;
b) Shall be irrevocable for the taxable year the credit is
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allowed, once made;
c) May be changed for any subsequent taxable year if the
election to make the assignment is expressly shown on each
of the returns of the qualified taxpayer and the qualified
taxpayer's affiliated corporations that assign and receive
the credits; and,
d) Shall be reported to the FTB, in a form specified by the
FTB, along with all required information regarding the
assignment of the credit, including the corporation number,
the federal employer identification number, or other
taxpayer identification number of the assignee, and the
amount of the credit assigned.
22)Requires a qualified taxpayer to provide the CFC with all of
the following:
a) Identification of each qualified individual;
b) Specific start and end dates of post production;
c) Total wages;
d) Amount of qualified wages paid to each qualified
individual;
e) Verification of completion of the post production of the
qualified motion picture;
f) Total amounts paid or incurred to purchase or lease
tangible personal property used in the post production of a
qualified motion picture;
g) Information to substantiate its qualified post
production costs; and,
h) Information required by the CFC necessary to verify the
amount of credit claimed.
23)Provides that the CFC may prescribe rules and regulations to
carry out the purpose of this section, including rules and
regulations necessary to establish procedures, processes,
requirements, application fee structure, and rules identified
in or required to implement this section, including credit and
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logo requirements.
24)Requires the CFC to do all of the following:
a) Allocate credits to applicants in an unspecified amount
for the 2015-16 fiscal year (FY) and each fiscal year
thereafter, through and including the 2019-20 FY.
b) Establish a procedure for applicants to file a written
application, on a form jointly prescribed by the CFC and
FTB for the allocation of the tax credit. The application
shall include, but not be limited to, the following
information:
i) The budget for the post production of the qualified
motion picture;
ii) The number of post production days;
iii) All members of a combined reporting group, if known
at the time of the application;
iv) Financial information, if available, including, but
not limited to, the most recently produced balance
sheets, annual statements of profits and losses, audited
or unaudited financial statements, summary budget
projections or results. The information provided shall
be confidential and shall not be subject to public
disclosure;
v) The names of all partners in a partnership not
publicly traded or the names of all members of a limited
liability company classified as a partnership not
publicly traded for California income tax purposes that
have a financial interest in the applicant's qualified
motion picture. The information provided shall be
confidential and shall not be subject to public
disclosure;
vi) Any other information deemed relevant by the CFC or
FT.
c) Establish criteria for allocating tax credits;
d) Determine and designate applicants who meet specified
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requirements;
e) Process and approve, or reject, all applications on a
first-come-first-served basis;
f) Subject to the annual cap, allocate an aggregate amount
of credits and allocate any carryover of unallocated
credits from prior years;
g) Certify tax credits allocated to qualified taxpayers;
h) Establish a verification procedure for the amount of
qualified post production costs paid by the applicant;
i) Establish audit requirements that must be satisfied
before the credit certificate may be issued;
j) Issue a credit certificate to a qualified taxpayer upon
completion of post production of the qualified motion
picture reflecting the credit amount allocated after
qualified post production costs have been verified under
this section. The amount of credit shown on the credit
certificate shall not exceed the amount of credit allocated
to that qualified taxpayer; and,
aa) Post on its Internet Web site information relating to
the qualified taxpayer and qualified motion picture that
received a tax credit allocation. Information submitted to
the CFC in application for a tax credit is not considered
to be part of the public record
25)Provides that information provided to the CFC is confidential
tax information.
26)Fails to specify a cap for the amount of credits available in
a fiscal year.
27)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
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if the production expenses are incurred in certain distressed
areas) of the cost of any qualifying film and television
production, commencing prior to January 1, 2012, in the year
in which the expenditure is incurred.
2)Provides that "qualified film" productions are eligible for
the domestic production activities deduction. The amount of
the deduction is equal to a 9% deduction of so-called
"qualifying production activities income" (QPAI). The
deduction was phased in at 3% in 2005 and 2006, 6% in 2007
through 2009, and 9% in 2010 and thereafter. QPAI refers to
the net income from the license, sale, exchange, or other
disposition of any qualified film produced by the taxpayer.
The deduction is limited to 50% of the W-2 wages paid by the
taxpayer with respect to domestic production activities during
the taxable year, and is generally allowed for purposes of the
Alternative Minimum Tax (AMT). A "qualified film" is defined
as any motion picture film or video tape, excluding sexually
explicit films as defined in 18 United States (U.S.) Code
Section 2257, if at least 50% of the total production
compensation constitutes compensation for services performed
in the U.S. by actors, production personnel, directors, and
producers.
3)Does not allow any income tax credit for motion picture
production activities.
EXISTING STATE LAW :
1)Conforms to the use of the federal income forecast method of
depreciation for the recovery of costs of motion picture
films, sound recordings, copyrights, books, and patents, with
modifications.
2)Does not conform to the federal expensing provision for film
and television production.
3)Does not conform to the federal domestic production activities
deduction.
4)Allows a qualified taxpayer, for taxable years beginning on or
after January 1, 2011, a motion picture production tax credit,
under either the PIT or CT Law.
5)Specifies that the amount of the tax credit is equal to
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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.
6)Defines "independent film" as a film with a budget between $1
million and $10 million produced by a non-publicly traded
company that is not more than 25% owned by publicly traded
companies.
7)Requires the CFC to administer a motion picture production tax
credit allocation and certification program, as follows:
a) Taxpayers will first apply to the CFC for a credit
allocation, based on a projected project budget.
b) Upon receiving an allocation, the project must be
completed within 30 months.
c) The taxpayer must then provide the CFC with verification
of completion and documentation of actual qualifying
expenditures.
d) Based on that information, the CFC will issue the
taxpayer a credit certificate up to the amount of the
original allocation.
8)Defines a "qualified motion picture" as one produced for
general distribution to the public, regardless of the medium
that, that is one of the following:
a) A feature film with budgets between $1 million and $75
million;
b) A movie of the week or miniseries with a minimum budget
of $500,000;
c) A new television series produced in California with a
minimum production budget of $1 million licensed for
original distribution on basic cable;
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d) An independent film; or,
e) A television series that relocated to California.
9)Requires that 75% of the production days take place within
California or 75% of the production budget be incurred for
payment for services performed within the state and the
purchase or rental of property used within the state. In
addition, requires that the production of the qualified motion
picture be completed within 30 months from the date on which
the qualified taxpayer's application is approved by the CFC.
10)Declares that the credit is not available for commercial
advertising, music videos, motion pictures for non-commercial
use, news and public events programs, talk shows, game shows,
reality programming, documentaries, and pornographic films.
11)Requires the CFC to allocate $100 million of credit
authorizations for the 2009-10 FY and each FY thereafter,
through and including the 2016-17 FY on a first-come,
first-served basis, with up to 10% of the allocation reserved
for independent films.
12)Declares that any unallocated amounts and any allocation
amounts in excess of certified credits may be carried over and
reallocated by the CFC.
13)Provides that qualifying taxpayers could claim the credit on
their tax return filed with the Franchise Tax Board (FTB)
under either PIT or CT law.
14)Provides that taxpayers may use certified credits as follows:
a) Claim it directly;
b) Assign it to another member of their unitary group; or,
c) Elect to apply the credit against their sales and use
tax liability.
15)In the case of credits attributable to an independent film,
the qualified taxpayer is allowed to sell a credit to an
unrelated party but is required to report to the FTB prior to
the sale of the credit all required information in the form
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and manner specified by the FTB.
16)Specifies that any unused credit may be carried forward to
each of the following six taxable years or until the credit is
exhausted, whichever occurs first. In the case where the
credit exceeds a qualified corporate taxpayer's liability, it
may elect to assign any portion of the credit to one or more
affiliated corporations for each tax year in which the credit
is allowed.
17)Requires the CFC to provide the FTB with a list of qualified
taxpayers and the tax credit amounts allocated to each
qualified taxpayer by the CFC.
18)Requires the Legislative Analyst's Office (LAO) to provide to
the Legislature and the public, on or before January 1, 2016,
a report evaluating the economic effects and administration of
the motion picture tax credit.
FISCAL EFFECT : FTB's staff analysis notes that "[t]he bill, as
amended April 1, 2014, would establish a motion picture post
production credit under the PITL and CTL; however, the aggregate
amount of the credits that may be allocated was left blank.
Absent this information, the FTB is unable to calculate the
revenue impact of this bill at this time."
COMMENTS :
1)Author's Statement . The Author has provided the following
statement in support of this bill:
AB 2700 will create the California Post Production Credit
in order to create jobs and spur the economy by increasing
the post-production industry presence in California and
help mediate the negative effects of "run-away" post
production.
Specifically, AB 2700 will establish a 5 year 25% tax
credit for qualified post production costs paid in the
production of a qualified film at a qualified
post-production facility in California. To be eligible for
the credit, a post production project must meet the 75%
test (post-production days or total post-production budget
in California) and must cover costs associated with the
production of a qualifying motion picture.
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Especially in California, where there is a long and rich
history of entertainment business and growth, it is
imperative that other states create competitive policies
that offer meaningful financial incentives to retain and
lure both film and post production job and spending.
Overall, AB 2700 provides the necessary economic incentive
to retain and attract post production work back to
California. An industry that according to the Milken
Institute "is under greater pressure than perhaps any other
in filmed entertainment."
2)Arguments in Support . Supporters of this bill state that
"California has seen a mass exodus of physical and post
production work in recent years to other states and foreign
countries that have developed production and postproduction
incentive regimes designed to grow and diversify their
respective economies. The impact is felt in California
through the corresponding loss of high-quality and
high-skilled jobs and capital investment. AB 2700 takes a
step in the right direction at addressing runaway production
and helps to revive the visual effects and post-production
industry in California."
3)Arguments in Opposition . Opponents of this bill oppose "any
reduction in revenue to the General Fund which would reduce
Proposition 98 funding. In the last several years, K-12
education alone has taken over $20 billion in cuts. This does
not include cuts that have hit the California Community
Colleges, [California State University] and the [University of
California] systems. Likewise, we must not forget the cuts
that have also hit our social and health services, safety
programs, and many other essential services." Additionally,
opponents argue that, while the film industry plays an
important role in California's economy, "it contains some of
the same problems as many credits: it would reward activity
which is otherwise taking place, using state dollars that have
no positive impact." They assert that the "increases and
decreases in trade activity are generally a function of the
economy, not tax credits." The opponents conclude that every
dollar "we lose in state revenues means less funding for
schools and other vital programs for seniors and children."
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4)Background . The Film Tax Credit Program was established in
2009 [ABx3 15 (Krekorian) and SBx3 15 (Calderon).] The 2009
legislation authorized the California Film Commission (CFC) to
allocate $100 million in credits annually beginning in FY
2009-10 and ending in FY 2013-14. Despite the $100 million
annual cap, the legislation effectively allowed the CFC to
allocate the first two fiscal years of tax credits (i.e., $200
million) in FY 2009-10, the third fiscal year of credits in FY
2010-11, and so on. At this rate, the $500 million aggregate
cap was set to be reached during FY 2012-13. In 2011,
however, the Legislature authorized an additional $100 million
annually through FY 2014-15 [AB 1069 (Fuentes).] In 2012, the
Legislature again extended the program for two additional
years, authorizing $100 million annually through FY 2016-17
[AB 2026 (Fuentes).]
The Film Tax Credit Program allows a motion picture production
tax credit, under either the PIT or the CT Law, for qualified
expenditures attributable to specified productions made in
California. The Program requires the CFC to allocate the $100
million in credits each year on a first-come, first-served
basis, with 10 percent of the allocation reserved for
independent films. Independent films are those with a
production budget of between $1 million and $10 million and
produced by a company that is not publicly traded. The
taxpayer may claim the credit directly, assign it to another
member of their unitary group, or elect to apply the credit
against their sales and use tax liability. Qualified
expenditures include crew and staff salaries, rental costs for
facilities and equipment, and production costs like
construction, wardrobe, food, lodging, and lab processing.
The Program requires that at least 75% of production days take
place in California, or alternatively, that 75 percent of the
production budget be incurred for payment of services
performed within the state and for the purchase or rental of
property used within the state. In addition, the Program
requires that the production of the qualified motion picture
be completed within 30 months of the date of the approved
application.
The Film Tax Credit Program provides either a 20% tax credit
for qualified expenditures attributable to the production of a
qualified motion picture in California or a 25 percent tax
credit for qualified expenditures attributable to an
independent film or a television series relocating to
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California. The tax credits are nonrefundable and
nontransferable, except in the case of certain independent
productions, which are allowed to sell their tax credits. The
tax credit is also limited to productions with budgets between
$1 million and $75 million. The Program allows unused tax
credits to be carried forward for six taxable years, or until
the credit is exhausted, whichever occurs first.
5)What Does this Bill Do ? In general, this bill would establish
a new Post Production Film Tax Credit that would complement
the existing Film Tax Credit. The credit would apply to post
production work, which includes editing, visual effects, color
correction, sound editing, scoring, and mixing. The
application, allocation, and sale of Post Production Tax
Credit is very similar to the workings of the current program.
According to the author, post production tax credits are
needed because post production is currently not covered by the
Film Tax Credit; it only applies to actual shooting days.
Consequently, there is no incentive for visual effects and
post production studios to stay in California and finish the
film production. By enacting a new Post Production Tax
Credit, the author hopes to retain and attract post production
companies to California even if filming is conducted in other
states.
6)Purpose of the Film Tax Credit . The Post Production Tax
Credit, like the current Film Tax Credit, is designed to
prevent runaway production by retaining production already
taking place in California. According to the CFC, in 2003, 66
percent of studio feature films in the United States were
filmed in California. In 2009, however, only 38 percent of
studio films were filmed in state. (California Film &
Television Tax Credit Program Progress Report, California Film
Commission, Jan. 2011.) In San Francisco, for example, film
and television production employment dropped 43 percent
between 2001 and 2006. Id. This trend has continued, in
part, due to other states offering lower costs, more
readily-obtained incentives, and fewer regulatory obstacles to
production.
States and foreign countries have been fiercely competing with
California to lure motion picture and television series
production away from California. Specifically, Canada
introduced subsidies in 1998, which are credited with
increasing film production in that country. (Economic and
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Production Impacts of the 2009 California Film and Television
Tax Credit, UCLA Institute for Research on Labor and
Employment, Nov 2011.) Canada's film and television industry
has been further enhanced through additional local incentives,
labor savings, and a weaker Canadian dollar. Because of these
incentives, Canada is now generally regarded as providing
production services at a level comparable to Los Angeles and
New York. (Id.)
Pressure to move production away from California has also come
from other states. For example, Louisiana increased its film
production from one film in 2002 to 54 films in 2007. (Id.)
Louisiana enacted its film tax credit in 2002 at a time when
the state's annual film production activity was between
roughly $10 and $30 million. In 2004, after the credit's
enactment, Louisiana's film production increased to $354
million. (Id.) Similar examples can be found in
Massachusetts and New Mexico, with large increases in
production occurring after the enactment of a film tax credit.
(Id.) The success of some countries and states in luring
production from California has prompted others to act. The
number of states offering some sort of film production
incentive program grew from 5 in 2002 to 44 in 2010. (Id.)
The "project-based" nature of film and television production
is a major factor in allowing companies to easily pick up and
move to other locations to take advantage of subsidies. (Id.)
As an example of how sensitive film productions are to
subsidies, the New York State Department of Taxation and
Finance reported a dramatic decline in filming television
pilots in 2009 when the state's film tax credit program ran
out of money. Specifically, in 2009, the year the tax credits
ran out, only four pilots were filmed in New York, 16 fewer
pilots than the year before. In 2010, when funds were once
again available for the film tax credit program, 22 pilots
were filmed. (Id.)
7)California's Business Climate . Despite the apparent success
of increased film production and job growth in certain areas,
not everyone agrees with this use of tax credits to stimulate
the economy. Specifically, 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,
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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.)
8)Mis-Measuring Success . Several studies have found a wide
range of returns for film tax credits. For most states, the
amount of tax revenue generated for every tax dollar spent is
less than 30 cents. (Id.) As an example, Arizona's
Department of Commerce estimated a return of 28 cents on the
dollar, the Connecticut Department of Revenue estimated 7
cents on the dollar, the Massachusetts Department of Revenue
estimated 16 cents on the dollar, and the Michigan Senate
Fiscal Agency estimated 11 cents on the dollar. (Id.) In
California, one of the only major studies on the Program's
effectiveness estimated $1.13 in initial tax revenue returned
for every tax dollar spent. However, other studies have
criticized this figure as optimistic and overstated. In fact,
a study conducted by UCLA adjusted the figure downward to
$1.04 and the Legislative Analyst's Office (LAO) further
reduced the tax revenue return to under $1. (Economic and
Production Impacts of the 2009 California Film and Television
Tax Credit and Evaluation of February 2012 report, Film and
television Production: Overview of Motion Picture Industry and
State Tax Credits, LAO Report, April 30, 2014, p.23.)
Critics have argued that subsidies to the film and television
industry benefit production 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
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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.) 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.)
9)Bang for the Buck . In quantifying the number of jobs and
economic activity created, the Film Tax Credit Program should
also be measured against alternative options for economic
development such as spending on education and infrastructure.
As an example, according to research conducted by the
Institute for Study of Societal Issues at the University of
California, Berkeley, for every $1 California invests to get
more students in and through college, it will receive a net
return of $4.50. (California Economic Payoff: Investing in
College Access & Completion, Campaign for College Opportunity,
April 2012.) In fact, current graduates average $12 billion
in ongoing tax returns, far more than what California
currently spends on UC, CSU, and the Community College system
combined. (Id.)
Finally, Wells Fargo senior economist Mark Vitner notes that
there is "no argument that big productions dump loads of cash
into communities where they film." (States Ponder Costs,
Benefit of Film Incentives.) However, Vitner adds that the
subsidies do not improve the labor force, do not provide
states with fixed assets that are going to improve their
competitiveness, and that film productions only come back
because states continue to give them money. (Id.) Because of
this, Arizona has ended its film incentives, Iowa, Connecticut
and Idaho have suspended funding for theirs, and North
Carolina's package expires at the end of 2014. (Id.)
10)Filming Outside of California . This bill would provide a
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Post Production Tax Credit for post production costs incurred
in California for qualified motion pictures that are filmed in
other states. It is unclear if post production activities
have the same multiplier effect pointed to by advocates of the
existing Film Production Tax Credit. The Committee may wish
to consider whether it is more appropriate working within the
existing film production tax credit framework instead of
creating a stand-alone program. This is especially true when
one considers the fact that the existing credit has been over
scribed since year two.
11)Diverting Funds from Schools . Providing tax credits or other
tax incentives, which reduce General Fund revenues, may also
reduce Proposition 98 funding guarantees. Proposition 98 was
passed by voters in 1988. It provided constitutionally
guaranteed minimum funding levels for K-12 education,
community colleges, child development, mental health, and
developmental services. The minimum funding level is
calculated every year and depends on three "tests," which is
dependent on a number of factors, including the level of
funding in 1986-87, General Fund revenues, per capita personal
income, and school attendance growth or decline. Proposition
98 originally mandated that funding level be guaranteed based
on the greater of the two calculations. Proposition 111,
which passed in 1990, allowed for a third test for low General
Fund revenue years. Today, California has three "tests" for
determining Proposition 98 funding.
According to the Department of Finance, FY 2012-13 was a Test
1 year, FY 2013-14 is a Test 3 year, and FY 2014-15 is a Test
1 year. As this bill is currently drafted, it will go into
effect during a Test 1 year. In other words, Proposition 98
will require that 40% of all General Fund revenue be used to
fund K-12 education. As such, any decrease in General Fund
revenues, through tax credits or deductions, will have a
direct impact on Proposition 98 funding guarantees. As an
example, if this bill were to provide $100 million annually in
Post Production Tax Credits, it would reduce Proposition 98
Funding by $40 million.
12)Related Legislation . AB 1839 (Gatto) would create a Motion
Picture tax credit, for taxable year beginning on or after
January 1, 2016, to be allocated by the California Film
Commission, as provided, on July 1, 2016, and each fiscal year
thereafter, through and including the FY 2019-2020. AB 1839
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will be heard by this Committee today.
REGISTERED SUPPORT / OPPOSITION :
Support
NBCUniversal
Opposition
California School Employees Association
California Teachers Association
Analysis Prepared by : Carlos Anguiano / REV. & TAX. / (916)
319-2098