BILL ANALYSIS �
AB 2700
Page 1
Date of Hearing: May 21, 2014
ASSEMBLY COMMITTEE ON APPROPRIATIONS
Mike Gatto, Chair
AB 2700 (Nazarian) - As Amended: April 1, 2014
Policy Committee: AESTIMVote:6-0
Revenue & Taxation 8-0
Urgency: No State Mandated Local Program:
No Reimbursable: No
SUMMARY
This bill creates a tax credit, for taxable years beginning on
or after January 1, 2015, equal to 25% of qualified post
production costs incurred in the production of a qualified
motion picture at a qualified production facility, and
authorizes the California Film Commission (CFC) to administer
the program and allocate the tax credits, subject to an
unspecified aggregate annual cap. In summary, this bill:
1)Defines "post production" as the final activities in a
qualified motion picture's production, including editing,
sound editing, scoring, music track recording and music
editing, beginning and end credits, the addition of sound and
visual effects, sound mixing, and color correction; provides
that "post production" does not include the manufacture or
shipping of release prints.
2)Defines "post production facility" as a building or complex 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.
3)Defines a "qualified motion picture" as
a) One of the following motion pictures produced for
distribution to the general public:
i) A feature with a minimum production budget of $1
million.
AB 2700
Page 2
ii) A movie of the week or miniseries with a minimum
production budget of $500,000.
iii) 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.
iv) An independent film, which is currently defined
under existing state law 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.
v) A television series or television series that
relocated to California.
vi) 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.
b) Requires a "qualified motion picture" to satisfy all of
the following:
i) 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 or
property used within the state.
ii) Post production is completed within 30 months from
the date on which the qualified taxpayer's application is
approved by the CFC.
4)Requires the CFC to establish criteria and procedures for
applications and the allocation and certification of credits,
subject to the following limitations:
a) The application shall include budget and financial
information for post production, the number of post
production days, corporate ownership information,
b) The aggregate amount of credits issued cannot exceed an
annual unspecified cap, with any unused allocation or
uncertified credit amounts carrying forward to subsequent
AB 2700
Page 3
fiscal years.
c) Credit certificates must be issued to qualified
taxpayers upon completion of post production.
d) The CFC shall annually post on its website and make
available for public release certain specified information
regarding the allocation of the tax credits.
5)Specifies the credit is not allowed for qualified post
production costs that are claimed under the existing qualified
motion picture tax credit.
6)Allows a qualified taxpayer to sell the post production
credit, and provides that the credit may not be sold to more
than one unrelated party nor resold by the unrelated party to
another taxpayer.
7)Allows a qualified taxpayer to carry forward the excess credit
to the following six taxable years.
8)Allows a qualified taxpayer, under the corporate tax 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.
FISCAL EFFECT
1)Potentially significant costs to CFC and FTB to develop
processes and regulations to administer the program.
2)Unspecified but substantial GF revenue decreases, likely in
the tens of millions of dollars annually, over the duration of
the program.
COMMENTS
1) Purpose. According to the author, this bill would create a
post production credit to create jobs and stimulate economic
activity by increasing the overall post production industry
presence in California and mitigating the negative effects of
runaway post production. The author contends that post
production work is vital to the overall entertainment business
in California, and may be under greater threat than any other
aspect of the film industry.
AB 2700
Page 4
Proponents argue that California has seen a significant exodus
of physical and post production work in recent years as a
result of post production incentives offered by other states
and countries. This has resulted in a loss of high-quality
jobs and capital investment in this segment of the film
industry.
2) Post Production Only. This bill provides a 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 economic
multiplier effect frequently cited by advocates of the broader
film production credit. The Committee may wish to consider
whether expanding the existing film production tax credit
framework to encompass post production is preferable to
creating stand-alone program.
3) Race to the Bottom? Opponents argue that film tax credits are
not proven to prevent productions from leaving California and
are a drain on scare public funds. As other states and
countries offer ever more lucrative film production
incentives, California cannot continue to give away tax
credits in order to compete in this "race to the bottom."
Opponents contend the credit hurts schools by reducing
Proposition 98 funding, and otherwise depletes the General
Fund of needed tax receipts. Opponents also contend the tax
credit rewards activity that is already taking place, and that
the credit therefore has no marginal economic benefit to the
state.
4) Reasons to Compete. While the economic benefits remain
debatable, the Legislative Analyst Office's (LAO) most recent
report on the film tax credit highlighted three factors for
the Legislature to consider: (i) the motion picture industry
is a flagship industry for the state; (ii) the industry is a
major employer in California, including post production
activity in Silicon Valley, paying high wages; and (iii) other
states are aggressively competing for industry activity. The
LAO contends this competition may be the most compelling
reason to continue or expand the tax credit in order to
correct economic distortions created by other states and
maintain California's inherent advantage.
5) Amendment. The author has proposed amendments that would cap
AB 2700
Page 5
the overall post production credit at $15 million.
6) Related Legislation. AB 1839 (Gatto) of 2014 extends and
modifies the existing film tax credit for taxable years
beginning on or after January 1, 2016. AB 1839 is currently
hearing with this Committee.
Analysis Prepared by : Joel Tashjian / APPR. / (916) 319-2081