By GREGORY N. LIPPE Several days ago I was in Sacramento to advocate for the passage of AB 777 (Nunez), a bill that I have discussed before, that would provide refundable tax credits of 12 percent to 15 percent for “Qualified Motion Pictures” with at least 75 percent of their total days of “principal photography” occurring wholly in California. While in Sacramento I found that a number of the legislators still believe that the bill would mainly put money into the pockets of very wealthy individuals and provide unnecessary benefits to a very rich industry. Although I explained that for every dollar of lost production the “ripple effect’ would cost the economy of California seven dollars (a multiplier of 7 times) and that the true victims (as identified in numerous published reports) of “runaway film production” are not the highly paid actors, directors and producers but instead are the “below the line” workers (electricians, grips, camera operators, drivers, make-up artists, hairdressers, costumers, set designers, set construction etc.), and the ancillary businesses (camera rentals, caterers, dry cleaners, travel agents, hotels, restaurants, car rentals, costume rentals etc.) I still encountered resistance and disbelief. When I returned home, I began thinking of just how many businesses are affected by the loss of film production. The list seems endless. In addition to those mentioned above as the “ancillary businesses” there are telephone companies, clothiers, florists, pharmacies, supermarkets, physicians, opticians, accountants, attorneys, limousine services, theme parks, travel agencies, airlines, tour directors, cruise lines, package delivery services, messengers, hardware stores, etc., etc.) I thought to myself: Why is it that a multitude of other countries and states understand the importance of film production to their economies and California, once responsible for 82 percent of all filming in the United States, can’t seem to convince it’s legislature to take action to hold on to the Golden Goose. After five years of advocating for incentives to stop “runaway film production,” it feels as though more ground is being lost than gained. When I began my efforts, California’s primary film production adversary was Canada. Now, many foreign countries along with 23 other states are offering sizeable incentives to draw filming away from California. Our climate, superior film crews, soundstages etc. and conveniences are terrific but simply not enough to compete with the significantly (sometimes more than 25 percent) lower costs of filming elsewhere. ‘Refundable’ tax credits In talking with the legislators, even those that do understand seem to have problems with the idea of providing “refundable” tax credits to production companies. Refundable tax credits do not require a tax liability to offset against. Therefore if a production company is entitled to a credit of say $1,000,000 and its taxable income is only enough to generate a tax liability of $500,000, a “refundable” credit would require the state to issue a check to the company for the additional $500,000. Five states and a number of foreign countries, including Canada, are offering these “refundable” credits. Some states are offering “transferable” credits, which do not provide for refunds but allow a company to pass unused credits to affiliated companies for offset against their tax liabilities. Since it is commonplace for a new entity to be established to produce each new film and few profit dollars are actually earned in the production entity (most profits are earned in the distribution entity, which is affiliated to but separate from the production entity) it is unlikely that there will be a large enough tax liability in any production company to utilize the proposed tax credits. By allowing the credits to be passed on to the distribution affiliate, the credits can be utilized and the state would not need to dig into its coffers to distribute refunds. This “transferability” is often more palatable to states that are experiencing cash flow problems. After much consideration, I have developed my own solution to reducing the costs of producing a film in California. To my knowledge this idea has not been previously discussed or considered. I decided to target the highest (60 percent or more) “below the line” cost component, labor. Here’s how my plan would work: Instead of providing a refundable tax credit to the production companies and having to defend against claims of providing the “S” word, (the “S” stands for “subsidy”, a much disliked word in politics) a combination of tax-exempt wages and tax credits provided directly to the “below the line workers” would enable the workers to provide services at lower rates thereby reducing the cost of production to an amount that when combined with the other benefits of filming in California (mentioned above) would make it beneficial for the production companies to film in California. The workers would be required to accept reduced rates (say a reduction of 20 percent) for work on “qualified films” (those films where 75 percent or more of their principal photography occurs in California). The mechanics of the plan would be as follows: Earnings from working on “qualified films” would be segregated and reported in a designated box on the workers’ California W-2 forms. These earnings would be tax-exempt. To re-instate the workers to their normal net (after-tax) earnings, refundable tax credits would be needed. However, because the workers are already benefiting from the tax exemption on their reduced earnings, the additional credits would be limited to approximately 13.75 percent of those earnings. To illustrate, let’s assume that an employee’s normal wages were $40,000. After normal taxes, the net would be approximately $36,400. The reduced wages would be $32,000 ($40,000 less 20 percent). Since these earnings would be tax-exempt the net would be $32,000. A credit of $4,400 ($32,000 x 13.75 percent) would reinstate the earnings to $36,400 net. Union dues and benefits would not change. By utilizing the above method, we could compete on a much more level playing field with other states and countries, the tax benefits would be directed (where they belong) to the “below the line workers,” the economy would continue to benefit by the 7 times multiplier, the ancillary businesses would prosper and California’s overall tax revenues would increase by much more than the tax benefits given to the “below the line” workers.
