Bill Would Refund Film Companies

Hollywood production companies that use complex accounting to escape corporate taxes could get millions of dollars in state refunds under a bill aimed at enticing filmmakers to shoot in California.

The proposal, sponsored by Assembly Speaker Fabian Nunez (D-Los Angeles) and backed by Gov. Arnold Schwarzenegger, was unveiled in the last few weeks of the 2005 legislative session. It enjoys strong backing from labor unions, Hollywood studios and influential Los Angeles-area lawmakers.

The measure would provide eligible motion pictures with a tax credit -- sometimes paid in cash -- of as much as 15% of the cost of wages and equipment on movies made in California, to a maximum of $3 million per production. Although the total cost of the bill is unclear, the movie industry is seeking $100 million a year in tax credits for 10 years to stem so-called runaway film production.

An analysis by Republican Senate staffers questioned whether Nunez’s tax proposal was a giveaway for a favored industry. The bill would provide film producers what are known as refundable tax credits, which offer cash refunds even when no taxes are paid. That’s in contrast to standard tax credits, which simply reduce the amount of taxes owed.

The bill, critics say, is a tacit acknowledgment that many production companies post no profit by the time they wrap up shooting and close their books.

“As a refundable tax credit, this bill is the equivalent of a direct payment from the state treasury to one of the wealthiest industries in California,” said the analysis of Nunez’s bill, AB 777, by the Senate Republican Office of Policy, which generally favors tax breaks.

Critics contend that under current law, the only group eligible to get cash refunds from the state is middle- and lower-income families who claim tax credits for caring for children and elderly dependents.

“The fact that Hollywood productions use famously creative accounting is no reason to compromise a basic principle of our tax system,” said an opposition letter sent to Nunez last week by Lenny Goldberg, a lobbyist for the California Tax Reform Assn.

There’s little hard data on the profitability of film production companies. However, a federal antitrust lawsuit in the mid-1990s shed light on the accounting practices used by Hollywood studios to report losses on such box-office successes as “Batman” and “JFK.”

Industry accountants say most film earnings come from downstream enterprises such as DVD sales, foreign distribution and spinoff product marketing, which can be done by out-of-state corporations that pay no taxes here.

“Most of the productions break even,” said Vicken Haleblian, an entertainment accounting specialist with Holthouse Carlin & Van Tright in Pasadena. The companies usually are created “specifically to make one film,” he said.

Because so few production companies end up with taxable profits, most would be willing to bring jobs back to California only if they get a check from the state, not a credit against taxes paid, said Sen. Kevin Murray (D-Culver City), a former entertainment agent and lawyer who is carrying a bill similar to Nunez’s measure.

Nunez said his bill wouldn’t allow “any company to avoid paying its fair share and then get a break on taxes.”

Proponents of the tax credit say substantial incentives are a must to keep jobs on feature films, made-for-TV movies and, to a lesser degree, commercials from being lured away to other states and countries offering tax credits and other sweeteners. Canada has been particularly successful in attracting low-budget “movies of the week,” which generate an average of $12.6 million in economic activity per production, according to a report released this week by the California Film Commission.

Filmmaking in California fostered $34.3 billion in economic activity in 2002 and provided jobs for nearly 246,000 people, according to the Motion Picture Assn. of America.

Getting financial help from the state, similar to benefits offered by Canada, could mean the difference between productions staying home or staying away from California, said Stan Brooks, whose Santa Monica-based Once Upon a Time Films Inc. expects to shoot 10 made-for-TV movies in Canada in 2005.

“It’s absolutely [uneconomical] to do this without tax incentives,” Brooks said. “This is a jobs bill pure and simple.”

Vince Sollitto, a Schwarzenegger spokesman, said, “These incentives are designed to keep production and jobs in California while generating tax revenues that more than offset their costs.”

Critics of the Nunez bill question Brook’s assertion. In a new report, the Sacramento-based California Budget Project concluded that the motion picture industry was prospering without any tax incentives.

The report cites figures from the state Employment Development Department showing that the film and TV industries added 20,400 jobs in the 12-month period ended in June, much of it driven by the biggest boom in local TV production in L.A. history. The report notes that so-called production days in Los Angeles peaked to an all-time high of 52,570 in 2004 -- up nearly 19% over the year before. Such figures, the report said, “suggest that the industry is not in crisis.”

Opponents also note that the bill would provide the tax breaks or refunds on a first-come, first-served basis, regardless of whether the applicant actually intended to move a film production out of state.

Some suggest that if the state is going to make cash payments to film companies, they should do it in the form of grants, handed out by a committee focused on luring projects away from other states and abroad.

“A great advantage of a grant program is that it may be administered intelligently by experts in the field, so as to focus the available funds only on those taxpayers whose behavior is most likely to be affected by the grant,” said a Senate committee analysis of Murray’s bill. The analysis says grants are “likely to be much more efficient” than indiscriminant tax credits.

The concerns are shared by lawmakers, particularly in the Senate, where many are ambivalent about the bill even in the face of pressure from leaders of the Southern California delegation, film companies and unions. The Senate Revenue and Tax Committee is expected to hold a first hearing on the bill this week or early next week.

“We are not necessarily comfortable with the figures being presented to us by movie industry types,” said Senate Appropriations Committee Chairwoman Carole Migden (D-San Francisco). “We want to be satisfied we are not getting snookered.”