LOS ANGELES (The Hollywood Reporter) — Hours after California Assembly Speaker Fabian Nunez detailed a new incentive bill Aug. 18 designed to keep production work in the state, a study was released showing that film work in the Los Angeles area has plummeted in the past decade.
Lawmakers hope to rush the measure during the next three weeks to get it to Gov. Arnold Schwarzenegger before the session recesses Sept. 9. AB 777 has the support of the industry’s unions and studios, bipartisan members of the Senate and Assembly and Schwarzenegger.
“Look what’s happened with Louisiana’s tax incentive — film production has grown from $12 million in 2002 to what may be $500 million this year,” said Steve MacDonald, president of the Entertainment Industry Development Corp., which released the study. “That’s proof positive of what a tax incentive can do. California can stand by and continue to let that happen, or we can take some steps to address it and retain jobs and revenue here in the city and state.”
Louisiana has one of the most aggressive production incentives, but New York, New Mexico and an increasing number of other states are working to attract feature film production, much as Canada did in virtually starting the “runaway production” phenomenon in the early 1990s.
No final dollar figure has been released, but California’s incentive would allocate tens of millions of dollars to cover a 12% tax credit on wages and other costs, worth up to $3 million per production. Certain TV productions could qualify for as much as a 15% credit.
The goal is to reverse the current trend, which has seen on-location film work in Los Angeles fall 37% from its 1996 peak of 13,980 permits days, according to the EIDC, which administers the region’s permitting.
TV production, by contrast, rose 179% during the same period, to 18,257 permitted days in 2004. That boost is attributed to an increased demand for original programming on cable networks and a shift away from reruns by the broadcast networks.
The EIDC recently surveyed the networks and found that 72% of the 134 scripted and reality episodic series on the fall primetime schedule were shot and produced in the Los Angeles area. The region accounted for 43 of the 58 one-hour scripted series on the networks’ fall schedule and 48 of the 54 half-hour scripted series.
Additionally, an estimated 43% of the 72 primetime episodic programs on 10 leading, ad-supported cable networks were done in Los Angeles.
“The bottom line is that without television, production here would be looking very bad because of how feature films have fared over the past 10 years,” MacDonald said.
California’s incentive would extend a 10% tax credit to qualified commercial production, an industry that was not necessarily slated to benefit from this outlay.
The program would be administered by the California Film Commission and the Franchise Tax Board.
One key feature is that producers could cash out the credit if it exceeds their tax liability.
Qualified projects would include a feature film, movie-of-the-week or miniseries with a budget of $500,000-$75 million or an episode of a television series that is new or new to California, provided it has a budget of $500,000-$1.8 million. The latter also would apply only to the first three seasons of the series, which also can’t exceed 22 episodes per season.
At least 75% of days spent in principal photography also must be done in California.
Certain productions do not qualify, including news, current-events programs, talk shows, game shows, sports, awards shows, telethons, reality television, documentaries, daytime dramas and any feature film where 80% or more of the content is computer-generated.
Once qualified, a production must start principal photography within 180 days and complete the project within 30 months.
The credit can’t be applied to legal work, nonproduction accounting and costs associated with rights acquisition, development, financing, overhead, marketing, promotion, distribution or residuals. Separately, only the first $25,000 of wages for above-the-line talent such as directors, writers and actors could be applied to the credit.
Commercial production companies also can’t receive more than $500,000 in benefit per calendar year.
The funds are slated to come out of the state’s general fund beginning with the 2006-07 fiscal year, with new annual outlays each year through Jan. 1, 2016.
After details were released, pundits and taxpayer advocates began decrying the measure as “corporate welfare” for wealthy Hollywood producers.
Two scathing attacks emerged Aug. 18 even as the bill’s backers prepared for release of a report outlining the need for the tax credit.
The coalition of Hollywood unions, producers and trade associations that back the bill expected to face criticism, especially because much of the industry is based in Southern California and Schwarzenegger is one of its most prominent stars.
The California Tax Reform Assn., a Sacramento-based public employee advocacy group, fired the first shot Aug. 18 in claiming that AB 777 offers no accounting oversight and would allow, for the first time, a business venture to cash out a credit once it exceeds its tax liability.
“Various companies have sought refundable credits, and those have been rejected as essentially corporate welfare or handouts based not on economics but solely based on special pleadings,” CTRA legislative advocate Lenny Goldberg said in a letter to Schwarzenegger and Nunez.
“The fact that Hollywood productions use famously creative accounting is no reason to compromise a basic principle of our tax system,” Goldberg said. “And despite the claim that this benefits workers and not investors, the provisions with regard to pass-through entities means that the returns as a result of this program will pass through to investors — in effect providing grants of taxpayer money to wealthy investors in Hollywood productions, whether in state or out of state.”
The bill’s backers were further rattled Aug. 18 by an editorial in the Sacramento Bee blasting Democratic lawmakers for being hypocrites beholden to the generosity of their Hollywood benefactors.
“That, in a nutshell, explains why the Democratic speaker of the assembly, Fabian Nunez, quietly amended a bill this week to grant movie producers tens of millions of dollars in subsidies from a state treasury that already is drowning in red ink, with multibillion-dollar annual deficits,” columnist Dan Walters wrote.
Walters likewise raised the issue of “Hollywood accounting” and said the measure amounted to no more than “a handout” to the wealthy.
“The film industry is famous — or infamous — for its creative accounting techniques that can turn obvious profits into paper losses, so fooling a bunch of state bureaucrats would be child’s play,” Walters said. “It’s not a whit more justifiable than any of the corporate subsidies that Nunez and other Democratic politicians routinely denounce as robbing the state treasury of money that’s sorely needed for schools, health, welfare and other vital programs.”
After two previous failed attempts to establish such an incentive, California is only now hoping to catch up to such other states as Louisiana and New Mexico, which already are providing innovative and generous breaks for producers.
