California's film and television production tax incentive program is likely to get bigger, and state lawmakers have included new provisions to assure taxpayers that the costly program will do what it's intended to do: Namely, create more production jobs in the state.
But other states — including New York and New Mexico — have called into question whether the jobs created are worth the money they invest in tax incentives.
Even so, AB 1839, the closely watched bill to expand the program, passed the California Senate Appropriations committee last week and is headed to a vote of the full legislature. If it passes and is signed into law by Gov. Jerry Brown, it will raise the amount of public money made available to these productions from $100 million to $400 million each year.
That's the dollar figure most supporters in Hollywood were hoping for. But legislators also want to make sure that Hollywood is held to account for the incentives productions receive. New details have emerged about how legislators want to change the way productions compete for these dollars.
Here's an FAQ about the proposed legislation and the results of similar programs in other states.
What would change?
Lawmakers are still finalizing the language that will govern how many of the changes will work. But the office of State Sen. Kevin De Leon, chairman of the Senate appropriations committee, made available a list of proposed changes. They include the following:
- No more lottery. The law will do away with the random one-day-per-fiscal-year lottery the California Film Commission now uses to select productions that receive the tax credit. In its place, starting in January 2016, the commission will use a scoring and ranking system under which projects will compete for the credit. The commission will conduct the process at least twice a year and develop the scoring system in collaboration with and with approval of the Governor's Office of Business and Economic Development, or GoBiz.
- How to score: The scoring will be based on a so-called Job Creation Ratio: Aggregate employee compensation divided by the amount of tax credit requested. Productions qualify by either committing to shoot at least 75 percent of principal photography in California OR to spend 75 percent of the budget in state. Projects get bonus points for committing to do both and for using production and post-production facilities in California.
- Size does matter. To ensure that productions are competing against similar projects, separate pots of tax incentive money will be designated for each of the following categories: independent films; new TV pilots and renewed TV series; feature films; and out-of-state productions that are returning to California.
- Hooray for (outside) Hollywood. Applicants will be able to request a tax credit range of 15-20 percent in the so-called "Thirty-Mile-Zone" around Los Angeles and 20-25 percent outside.
- "Clawback" penalties. A production selected to receive the credit that overestimates its level of jobs creation will be subject to penalties to be determined by the film commission. A discrepancy of 10 percent or more will result in credit reduction. If the discrepancy is more than 20 percent, the incentive applicant will be locked out of the following year’s funding cycle. (Currently, productions do not receive any subsidy money until a project is completed and producers have sent in a detailed audit of expenditures.)
California lawmakers want to expand the tax credit program to keep productions from running away to other states – like New York — that offer more generous subsidies, but they are mindful of the studies and reports that have shown mixed results.
How have other states measured their success?
New York: One study in December 2012 commissioned by the Motion Picture Association of America said that — since 2004, when New York started its incentive program — annual spending on productions there more than doubled, from $600 million dollars to $1.5 billion in 2011, and that the state picked up about 11,000 production jobs along the way.
Almost a year later, another report on all of the state's business tax incentives — for the New York State Tax Reform and Fairness Commission — said the production tax credit represents almost a quarter of the total cost of New York’s business tax credits, but that film and TV production jobs account for less than 1 percent of New York’s job market. The same study said it isn’t clear that the size of New York’s credit is justified.
Michigan: An Ernst and Young study in February 2011 said that the state's film and television tax incentive program created a total of 5,400 jobs in 2009 and a little more than that in 2010. Given how tough the recession hit Michigan, that’s good news. But the study also calculated the number of full-time-equivalent jobs created, and that was just over a thousand in 2010. That year, Michigan gave out $117 million in tax incentives to production. The math suggests that the state spent more than $100,000 per full-time-equivalent job.
New Mexico: Last month, a state-commissioned study of New Mexico's tax credit program said it had created about 16,000 jobs, with a little more than half those jobs directly related to production. But the same study said that for every dollar New Mexico gave out in tax incentives, it only got 43 cents back in state and local tax revenue.
How will California make sure its program is working?
AB 1839 will "require the Legislative Analyst’s Office (LAO) to prepare reports related to the effectiveness and administration of the qualified motion picture credit under the Sales and Use Tax Law, the Personal Income Tax Law, and the Corporation Tax Law," according to language highlighted in the bill last month.
The Legislative Analyst's Office already took a hard look at California’s current program and some aspects of those in some other states a few months ago (April 2014). Its report, discussed on AirTalk, found that California's only getting back 65 cents in tax revenues for every dollar it’s spending on the film and TV subsidy.
It pointed out that 37 states now have some form of tax incentive or subsidy program for the film industry and that the top 10 (California is ranked number five in the cost category) give a total of $1.4 billion each year to production companies.
In its report, the LAO stated that, "ideally, states would not compete on the basis of subsidies," but acknowledged: "Given that other states and countries offer subsidies, it might be difficult for California not to provide subsidies and still maintain its leadership position in this industry."
State lawmakers are on the verge of confirming that you-can't-win-if-you-don't-play approach to the film tax credit game. But with a scoring system on the front end and more discerning audits on the back end, they're hoping California can play the game smarter.