From The Pages Of Film Works: California Film & TV Tax Credit – An Overview

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In In 2009, California enacted a Film & Television Tax Credit program to help defend the state from runaway production.  Guess what happened next?

In 2010, the decline in on-location feature filming in L.A. increased after four straight years of decline.  Feature film (movie) production days were still down 62% from their high in 1996 (this is up slightly from its record low the year prior).  Had incentivized films not accounted for 26% of all Feature activity, 2010 would have been the worst year on record for the L.A. region.  The California Film & Television Tax Credit is not a “tax loophole”.  It is California’s only means of protecting its vital economic engine — the entertainment industry.

It’s time for California to wake up.  California is under attack. In the late 1990′s, Canada devised generous film incentives in the form of tax credits as a weapon to wage economic war on the U.S. in an attempt to capture one of the planet’s most valuable and prized industries: the U.S. motion picture and television industry–”Hollywood”.

Out-of-state tax credits had a devastating effect on California as film and television productions were sucked out of the local economy at astonishing rates.  Producers would have been fiscally irresponsible to ignore cost savings in Canada.  In a few short years, the number of Canadians employed by runaway productions from the U.S. (leaving mainly California, but also New York) doubled from 25,500 to over 53,000 as spending soared.  The spectacular effect film tax credits had in causing runaway production was quickly copied around the world and in over 40 U.S. states all eager to get a piece of the pie.

Billions of dollars each year in production spending that used to pour into the California economy is now enjoyed as spoils of war in rival states and nations.  In short, just six locations (Vancouver, Toronto, Louisiana, Georgia, New Mexico, Massachusetts) offering film incentives captured $3.2 billion in direct production spending in 2010 alone.  Historically, much of that spending occurred in California.

In the past, many factors contributed to runaway production and, regrettably, this has blinded many in the state from accepting the current reality.  Since the late 1990′s, film incentives have been the predominant factor causing runaway production.  After all, they are weapons designed for no other purpose than to cause runaway production and they are spectacularly effective in doing so.  For example, the year before Louisiana enacted its inventive (2002), production spending was just $3.5 million; in 2010, it was over $674 million, which represents a mind blowing 19,000% increase.

Indeed, in 2005 one Canadian official told Canada’s National Parliament that the tax credit system they devised was a “simple and efficient system” of attracting foreign productions, and if Canada wanted to attract more, they “would just have to give a 50 per cent tax credit on labor, and nothing would be filmed in Hollywood, everything would happen here.”

·         In 2003, over 66% of studio feature films shot in California.  In 2011, that number had dropped to less than 40%.

·         In 2009, the lowest year on record, on-location shooting days for feature films in Los Angeles dropped nearly 65%.

·         In 2005, 79% of new network one-hour dramas filmed in California.  In 2012, only 8% (just two of the 23 new shows) will be filming here.

·         From 2004-2011, California lost $3 billion in film crew wages to other states and nations offering film incentives, according to Entertainment Partners.

·         At many IATSE Locals in greater Los Angeles, the unemployment rate is 30% or higher, which is higher than unemployment during the Great Depression.

·         According to the Milken Institute, since Canada enacted the first tax credit program in 1997, now copied in roughly 40 states and dozens of nations, California has lost 36,000 jobs as a result.

The particular means of attack causing runaway production require a specific means of defense.  Bringing a knife to a gun fight will not work.    Against film incentives, California’s only means of defense is the California Film & Television Tax Credit.  And since it took  effect in 2009, California’s film incentive has been a very effective defense.

Some critics of the program claim it is a wasteful handout to productions that would “shoot in California anyways”.  That such critics would actually believe most productions would shoot in California anyway shows a frightening disconnect from reality.  In fact, as a UCLA study recently confirmed, of the projects that never got California credits but were ultimately produced, 91.6% of their combined budgets were spent in other states — all of which offered their own film incentive programs.  Empirically, the critics have been proven wrong.  As we have said on countless occasions, the most important kind of productions (movies in particular) are not shooting in California at levels anywhere close to the past.  The bountiful flood California enjoyed for decades is now barely a trickle.

Further, many of the people who oppose the film incentive base their criticism on a Center on Budget and Policy Priorities report of incentive programs in other states, NOT California.  The report is valid for states trying to “create” a film industry with film incentives, but not in California, which is using film incentives to protect the industry already in place.  In fact,  in response to an email from Film Works, Robert Tannenwald, the author of the Center on Budget and Policy Priorities report, said California’s program “has a larger payoff” than other film incentive programs.I have to acknowledge, overall, that film retention in California has a larger payoff than film acquisition by another state.

Asking for an extension of the film incentive is not a matter of want, it is a matter of need.  California is in dire straits, in part,  because it has allowed the competition to dismantle one of the most valuable industries on the planet, which had been housed almost wholly in Southern California.  The film and television industry’s massive concentration in Hollywood made it the global economic powerhouse it is.  U.S.-produced Hollywood films control the global box office the way Chinese produced goods dominate shelves in Wal-Mart.  And yet, astonishingly, it’s somehow acceptable for some to let a signature state (and national) industry get dismantled?  Is it any wonder why California’s economy is in ruins?

In an attempt to relocate the film industry, states like Louisiana are spending obscene amounts of money on film incentives.  For example, to lure major films to Louisiana, the state subsidizes 30-35% of ALL production costs, which includes “below-the-line costs” for off-screen labor and “above-the-line costs” for things like star salaries.  Their incentive needs that kind of firepower because without it, productions rarely went there unless the plot called for it.    In other words: on a level playing field,  Louisiana can’t compete with California.  Indeed, no one can.

Unlike California, Louisiana’s program is not an actual tax reduction for the studios.  Instead, since production companies do not have Louisiana tax liabilities, they can sell the credits to wealthy Louisiana residents or get a cash refund directly from the State of Louisiana.  Film incentives operate as “corporate welfare” in places like Louisiana, not California.

In Louisiana, the cash refund option operates under a buy-back provision.  For many years, the price Louisiana paid to producers for tax credits was 74-cents on the dollar and virtually no one elected to sell their credits back to the state when they could get 85-95 cents on the dollar by selling them to a broker.  But in 2009, Louisiana began paying 85-cents on the dollar and the buy-back part of the program has taken off.  By 2012, almost half of Louisiana’s film credits were paid out in cash directly from the state coffers.

With its incentive, California can level the playing field for a fraction of what others offer.  The California incentive is just 20-25% of “below-the-line” costs only, which are typically 60% of the total budget.  And, perhaps most importantly, California’s film incentive does not function like a cash subsidy as it does in places like Louisiana, New Mexico or Canada.  California’s incentive functions uniquely when awarded to a non-independent project.  California state credits cannot be sold or refunded and the major studios can only use them to satisfy a portion of their state taxes.  Only independent productions can sell their credits, which account for roughly 15% of total credits issued each year.  For the 85% of credits awarded to non-independents, the credits are a reduction on taxes owed that can only be earned after spending millions to hire Californians and make the project in the Golden State.  It is not a tax cut based on the hope business will spend the money to hire workers and expand, rather it works as a tax cut the REQUIRES business to hire and spend locally.

Californians need to stop listening to empty rhetoric that portrays the California Film & Television Tax Credit as a form of wasteful “corporate welfare” and reject baseless claims it was influenced by campaign donations from Democrats in Hollywood.   The incentive is supported by both parties and the attempt to paint this as a partisan issue is shameful.  Instead, the overwhelming bipartisan support its getting should be applauded.  Finally, lawmakers on both sides of the aisle agree on at least one thing: Film Works for California.

 

To learn more about Film Works, please visit their website:

www.filmworksla.com