Film and Television Production: Overview of Motion Picture Industry and State Tax Credits

Film and Television Production: Overview of Motion Picture Industry and State Tax Credits MAC TAYLOR • L E G I S L A T I V E A N A L Y S T • APRIL 30, 2014 AN LAO REPORT 2 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT EXECUTIVE SUMMARY California has annually provided $100 million in tax credits to eligible film and television productions since 2009. California lawmakers recently have been discussing legislation that would revise key provisions of the tax credit. We have prepared this report to provide background information on the motion picture industry and offer preliminary observations regarding tax credits. This report does not make recommendations regarding the tax credit or the proposed legislation. (Our office will release a more wide ranging report on the program, as required by statute, by January 2016.) The Motion Picture Industry • While we caution against drawing strong conclusions from the data, growth in the U.S. motion picture industry may have slowed over the last decade. • Nationwide, almost half of this industry’s jobs are located in Los Angeles County. • Over the last several years, fewer large-budget films have been made in California. States’ Film and Television Subsidies • Most states and many countries offer tax credits and grants to lure film and television production away from California. These efforts appear to have had some success. • Nationwide, states are providing more than $1.4 billion annually to this industry. Key Takeaways for Legislature • Ideally, states would not compete on the basis of subsidies. • Some factors might lead the Legislature reasonably to consider extending or expanding the state’s film tax credit. 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. • If the Legislature wishes to continue or expand the film tax credit, we suggest that it do so cautiously. We highlight several factors to consider. Specifically (1) responding to other jurisdictions’ subsidies could be very expensive and (2) for state government, the film tax credit does not “pay for itself.” www.lao.ca.gov Legislative Analyst’s Office 3 AN LAO REPORT 4 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT INTRODUCTION The California Film and Television Production program among the public and legislators, we Tax Credit (film tax credit) program provides prepared this initial report to provide background up to $100 million annually to qualifying film information on the motion picture industry and and television productions. Since 2009, when to offer preliminary observations regarding the the program was adopted, the state has allocated tax credits. In the preparation of this report, we film tax credits using a lottery system because the conducted over two dozen interviews with industry program has had more eligible applicants than experts and reviewed the available research on available tax credits. Under current law, the film the economic effects of state subsidies for film and tax credit program will sunset on July 1, 2017. television production. This early report does not California lawmakers recently have introduced make recommendations regarding the film tax legislation that would revise key provisions of the credit program or the proposed legislation. program. Our next report on the program will review the Chapter 841, Statutes of 2012 (AB 2026, project-level data that state officials are collecting Fuentes), requires the Legislative Analyst’s Office about film tax credit recipients. We expect to (LAO) to report on the economic effects and release the report required by Chapter 841 in late administration of the film tax credit program by 2015. January 2016. Given the level of interest in this THE MOTION PICTURE INDUSTRY Production Process ten individuals. During pre-production, the initial production staff prepare a detailed schedule and The motion picture industry creates films, budget, finalize the script, determine the filming television programs, and other motion picture location (or locations), and negotiate contracts with products (such as commercials and music videos) vendors and suppliers. During pre-production, for distribution through various channels— the initial production staff also hires the core including movie theatres, television broadcasters, production staff, crew, and cast. The core and retailers. While every motion picture production staff may exceed 200 people for large- production is a different undertaking, each usually budget films and television programs, although follows the same process: (1) pre-production, this number varies depending on the needs (2) principal photography, and (3) post-production. of the individual production. (Smaller-budget Some understanding of these phases helps to better productions typically have a smaller staff.) The understand the industry and certain provisions of core staff generally begins work—designing and the film tax credit. building sets and property (props), for example— Hiring Ramps Up During Pre-Production well in advance of principal photography. Phase. Pre-production is the process of planning Principal Photography Phase Usually and preparing all of the details of the production. Is Short, but Offers Many Jobs. The cast Industry experts advise us that the pre-production performances are filmed during the principal phase typically begins with a small staff of about www.lao.ca.gov Legislative Analyst’s Office 5 AN LAO REPORT photography phase. Employment may increase post-production all occurring on different episodes dramatically for short periods during principal at the same time. photography depending on the number of Workforce and Economic Statistics additional cast or crew required for individual scenes or episodes. Production spending is highest About the Data. Much of our description of during principal photography, although budgets the film and television production industry below and durations of principal photography can vary relies on employment, wage, and economic output greatly. While principal photography for a major data reported by state and federal agencies. These feature film might continue for several months, a statistics have certain limitations that may cause movie made for a basic cable television network them to be somewhat overstated or understated. typically will be shot over 30-35 days and a single We provide more detail in the nearby box. These episode for a one-hour television drama typically data limitations are not unique to this report. Every will be shot over 7-9 days. Many television analysis of this industry makes choices about how to commercials are filmed in a single day, but some address them. Comparisons across various studies may require a longer period. and reports are difficult because there is some Timeline and Employment During variation in how they address these data limitations. Post-Production Phase Are Highly Variable. U.S. Motion Picture Industry Appears to Be Post-production is the process of editing and Growing More Slowly Than Overall Economy. assembling all of the elements of the film, television To understand whether the U.S. motion picture program, or other production into the finished industry is making more or fewer products product. Post-production often begins while over time, we examined national data on the principal photography is still in progress. The “gross output” of the “motion picture and video specific requirements of post-production depend industries.” Gross output represents the total on the project. In addition to editing, the process market value of an industry’s production. The typically includes sound editing, adding sound gross output of the U.S. motion picture industry effects, adding a musical score, adding visual was $120 billion in 2012. (This estimate, while effects, color correction, and other technical tasks. reasonable, reflects the data limitations described Following the completion of principal photography, above. Gross output data is aggregated and, in post-production may take a week or many months addition to film and television production and depending on the length of the project and, more post-production, it includes motion picture critically, the number and complexity of the added distribution and movie theatres.) At $120 billion, visual effects. Employment levels during this stage the U.S. motion picture industry is larger than, are highly variable and significantly depend on the for example, automotive repair and maintenance needs of the individual production. ($112 billion) and natural gas distribution Production Phases Can Overlap or Occur ($82 billion). Simultaneously. While the phases of the Figure 1 (see page 8) compares inflation-adjusted production processes overlap somewhat for a film growth in the gross output of the motion picture or one-time television program, it is more or less industry since 1997 with growth in real gross a linear process. Episodic television programs, domestic product. We see that the U.S. motion on the other hand, are more complex with picture industry generally kept pace with the nation’s writing, planning and preparation, filming, and economy between 1997 and 2004—with gross output 6 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT growing by about 3.5 percent annually. Motion Another Look at Growth in the Motion Picture picture industry gross output has since leveled Industry. Given the data limitations, we looked for off. In real terms, it has declined by an average of other measures of film and television production 0.2 percent annually between 2004 and 2012. Over output—such as the number of movies or television the 1997 to 2012 period, the motion picture industry episodes filmed each year. Unfortunately, the grew at an average annual rate of 1.5 percent, while production statistics that we are aware of are the overall economy grew at an average annual rate limited and often self-reported by producers, of 2.3 percent. distributors, or broadcasters. In the case of Workforce and Economic Data Have Some Limitations Much of our description of the film and television production industry relies on employment, wage, and economic output data reported by state and federal agencies. In some cases, the available data include businesses that do not produce films or television programs. For example, film libraries may be grouped with film and television post-production companies. Still in other cases, the available data do not include information regarding certain film and television production companies because (1) their primary business activity is in another industry, such as television broadcasting, or (2) they contract with a payroll services company, which serves as the employer of record for the production staff, cast, and crew. Additionally, the wages and output of actors, screenwriters, and directors working on a freelance basis (as opposed to being employees of a motion picture studio) typically are reported under a different industry group that also includes independent artists and writers in other fields, such as novelists and professional speakers. State agencies derive employment and wage statistics from quarterly reports filed by most employers. In reviewing this data, it is important to note that various factors may cause employment levels and wages to be overstated or understated. Specifically, most of the employment information refers to jobs, not annual full-time equivalent positions. While this likely overstates employment for all industries, the effect is greater for industries with a lot of temporary and part-time employment— such as film and television production. Conversely, as described previously, film and television production jobs are understated because the statistics may not include freelance performers and crew directly employed by payroll services companies. Wages are summarized in the available data as total annual wages (which may include bonuses, reimbursements, and some other benefits) for each establishment. To arrive at an average annual wage for an industry, total annual wages are divided by total jobs. Annual wages may vary with employee skill levels, hourly wages, and the number of hours worked. For example, film and television production workers may work a lot of overtime in some locations while, in other locations, similar workers may only work part-time. The available data does not provide sufficient information to help us understand whether changes in wages over years and across locations are due to differences in employee skill levels, hourly pay, number of hours worked, or some combination of these factors. However, the wage data clearly provides information on the total amount of wage income earned by the employees working in that industry. www.lao.ca.gov Legislative Analyst’s Office 7 Graphic Sign Off Secretary Analyst MPA Deputy AN LAO REPORT to the MPAA for rating (G, Figure 1 PG, PG-13, R, or NC-17) is a U.S. Motion Picture Industry Not Keeping Pace With Economy good, but imperfect measure Real Percentage Growth in Motion Picture Industry Gross Output and of annual film production. Gross Domestic Product (GDP) Since 1997 (It excludes unrated films 45% and double-counts some 40 films that were resubmitted GDP 35 or that have more than one 30 version.) By this metric, film production appears 25 to have peaked in 2003 20 with 949 films rated by the 15 U.S. Motion Picture Industrya MPAA. For comparison, 10 Graphic Sign Off the MPAA annually rated 5 between 700 and 800 films Secretary over each of the past five 1997 1999 2001 2003 2005 2007 2009 2011 Analyst years. While we caution a Includes motion picture and video industries. MPA against drawing strong Deputy conclusions from these data, television production, we were not able to identify the trends indicate that ARTWORK #140164 a consistently reliable source of output data. In the growth in the motion picture industry output may case of film productioTne,m hpowlaetvee_r,L wAeO fRoeupndo rttw_om id.ait have slowed over the last decade. metrics that were of sufficient quality to illustrate trends in Figure 2 film output over time: (1) the Declines in Ticket Sales and Movies Rated Over Last Decade annual number of movie 1,800 tickets sold in the U.S. and Millions of Movie Tickets Sold in the U.S. and Canada Canada, and (2) the annual 1,600 number of films rated by the 1,400 Motion Picture Association of America (MPAA)—an 1,200 industry advocacy group. We 1,000 present this information in 800 Figure 2. Annual movie ticket Movies Rated by the MPAA sales peaked in 2002 with 600 1.58 billion movie tickets sold 400 in the U.S. and Canada. In 2013, 1.34 billion tickets were 200 sold, a decrease of 16 percent 1997 1999 2001 2003 2005 2007 2009 2011 from the peak. The number of films annually submitted MPAA = Motion Picture Association of America. ARTWORK #140164 8 Legislative Analyst’s Office www.lao.ca.gov Template_LAOReport_mid.ait AN LAO REPORT Motion Picture Production Employment Pressures Confronting the Industry Growing. Employment statistics provide According to industry experts, the U.S. information on hiring trends in an industry. The motion picture industry is facing challenges federal Bureau of Labor Statistics reports that from intellectual property theft, competition in 2012, there were 205,000 film and television from other media, and competition from foreign production jobs and 16,000 film and television production locations. The industry is also evolving post-production jobs in the nation. Film and in significant ways due to globalization and television production employment has increased technological change. These pressures and changes since 2001—when the industry supported 173,000 may play some role in the industry’s slowing jobs—at an average annual rate of 1.6 percent. Film growth in output (discussed above) and the changes and television post-production employment has not in production locations that we discuss later in this significantly changed since 2001. Overall, film and report. television production industry employment since Intellectual Property Theft and Competition 2001 grew somewhat faster than U.S. employment. From Other Media. The MPAA has identified Wage Incomes for Motion Picture Industry intellectual property theft as a major problem Jobs Are High Relative to Other Industries. Wage facing the industry. This problem seems to have incomes vary considerably across industries. become more pervasive with widespread access The relatively high incomes earned by film to unauthorized copies of films and television and television production and post-production programs on the Internet. In addition, there seems employees frequently are cited as a reason for to be an increase in competition for consumers’ supporting efforts to attract and develop this attention and disposable income as new types of industry. In 2012, the national average annual consumer electronic entertainment devices become wage income in the film and television production available. As the data in Figure 2 show, annual per industry was $89,000 and was $106,000 in the capita movie ticket sales declined from 5 tickets post-production industry. This compares to average in 2002 to 3.8 tickets in 2013. It is unclear whether annual wage income of about $49,000 for all private- this decline is being offset by an increase in the sector jobs in the U.S. in 2012. The average annual viewing of films in other ways, such as DVDs, wage income in the film and television production on-demand cable television, and Internet streaming industry has increased from $70,000 in 2001—an or downloading (legal or illegal). However, one increase of about 2.2 percent per year on average. survey reports that Americans are watching more This is slower than the 2.8 percent annual average television; in 2012 Americans spent an average of increase in wage incomes for all private industries. 2.8 hours per day watching television—a 10 percent Average annual wage income in the post-production increase from 2003. industry increased faster than average, with a Government Subsidies to Attract Productions. rate of about 4 percent per year. There appears Throughout the history of cinema, films have been to be significant variation in the average annual made in foreign locations for creative reasons wage incomes for film and television production (for example, a film is shot in Paris because the employees (and post-production employees) across story takes place in that city). Beginning around states. This may reflect differences in employee skill 1997, however, some productions began to film levels, hourly pay, number of hours worked, or some in Canada because favorable currency exchange combination of these factors. rates and labor costs reduced production costs. www.lao.ca.gov Legislative Analyst’s Office 9 AN LAO REPORT As economic conditions began to normalize, a particularly rich history with the motion picture provincial governments began to offer filmmakers industry. Former Governor Leland Stanford subsidies to enhance the financial incentive to funded the photographic experiments of Eadweard film in Canada instead of the U.S. Now, other Muybridge that led in 1878 to what some historians governments around the world are offering similar consider to be the very first motion picture. subsidies to attract film and television production. Thomas Edison and his employees advanced the The relocation of production due to subsidies, early commercial development of the U.S. motion instead of for creative reasons, is what the industry picture industry in New York and New Jersey. Soon calls “runaway production.” afterwards, however, many pioneering filmmakers Technological Change and Globalization. began to relocate to Southern California in order to Industry experts advise us that technological take advantage of the better filming conditions and, changes have transformed the way films and perhaps, to avoid paying the fees to license Edison’s television programs are made. Digital film editing, patents. The community of Hollywood—which digital cameras, three-dimensional projection, merged with the City of Los Angeles in 1910—was a extensive digital animation in live action films, and key location for filmmakers. The entire Los Angeles high-definition television have led to significant area—often broadly called “Hollywood”—became, changes in the industry. Some of these changes have and remains to this day, the center of film and reduced production costs, while other technological television production in the U.S. changes have increased the complexity and costs California Has a Large, but Declining Share of of production. In addition, other technological U.S. Motion Picture Employment. California had advancements—such as e-mail, smartphones, and 107,400 film and television production jobs in 2012. video teleconferencing—reduce production costs This is more than half—52 percent—of the 205,000 and allow management to better oversee film and industry jobs in the nation. As shown in Figure 3, television development over great distances. Industry Figure 3 experts have noted, for More Than Half of U.S. Motion Picture Production Employment Is in California example, that the combined forces of technological 2012 change and globalization New York now allow digital animators and post-production staff Los Angeles County in multiple locations to collaborate in real time on production and visual Other States effects. Concentration in Florida Southern California Pennsylvania Louisiana Historical Home New Jersey Georgia of the Motion Picture Texas Rest of California Industry. California has 10 Legislative Analyst’s Office www.lao.ca.gov Workload #14-0164 AN LAO REPORT New York is the only other state with a significant clear to us whether this difference in annual wage number of film and television production jobs. incomes across the states reflects differences in Florida, Pennsylvania, Louisiana, New Jersey, employee skill levels, hourly pay, number of hours Georgia, and Texas each account for about worked, or some combination of these factors. 2 percent of U.S. jobs in the industry. California The average annual wage income for a film and also had 9,600 film and television post-production television production job in Los Angeles County jobs in 2012, 61 percent of the U.S. total. While was $101,000 in 2012—5 percent higher than in California has more than half of the nation’s New York and 82 percent higher than the rest of film and television production jobs, its share of the nation. The discrepancy is more pronounced for national employment has steadily declined since post-production incomes. The average annual wage 2004—when California had about 65 percent of the income for a post-production job in Los Angeles national film and television production jobs. County was $127,000 in 2012—29 percent higher Most California Motion Picture Industry than in New York and more than twice as much as Jobs Are in Los Angeles. Film and television the average in the rest of the nation. production employment is heavily concentrated Additional Jobs in Related Industries. The in Los Angeles County. Of the 107,400 film many businesses that provide the motion picture and television production jobs in California, industry with specialized equipment and services 100,500—94 percent—are located in Los Angeles employ many thousands of California residents— County. In addition, about 8,100 film and television mostly in the Los Angeles area. Within Hollywood post-production jobs are located in Los Angeles is an aggregation of thousands of specialized County—about 84 percent of the post-production businesses that support the motion picture industry jobs in California. This means that half of all film in various ways. and television production and post-production jobs • Vendors and suppliers of specialty motion in the U.S. are located in a single county. picture, video, sound, and lighting The motion picture industry is a significant equipment. employer in Los Angeles County. The 108,600 combined film and television production and • Vendors and suppliers of specialty post-production jobs account for nearly 3 percent of production items, such as animal handlers, all jobs in the county. By employment, the industry property (prop) craftsmen, and companies is about the same size as the construction sector renting trailers. or about a third as large as the manufacturing • Specialty insurance, legal, information sector, which, in Los Angeles County, includes a technology, and other business services significant number of jobs related to manufacturing providers. transportation equipment, apparel, fabricated metal products, and computer and electronic products. As this is a somewhat unusual industry, these Industry Wages in Los Angeles Are Higher types of individual suppliers have specialized to Than Elsewhere. As mentioned above, jobs in the meet the industry’s needs. Growth or decline in motion picture and video industries have relatively motion picture production in California will also high wages. Average annual wage incomes for have an economic effect on these other businesses. these industries are higher in Los Angeles County Industry experts estimate that one motion picture than in New York or the rest of the U.S. It is not industry job supports about 2.7 other jobs in the www.lao.ca.gov Legislative Analyst’s Office 11 AN LAO REPORT area—suggesting that the industry Figure 4 supports between 250,000 and Motion Picture Industry Is 300,000 additional jobs in California. Concentrated in the Thirty-Mile Zone The Thirty-Mile Zone (TMZ). Many film and television production workers are unionized. Ventura County Los Angeles County Santa Clarita Historically, collective bargaining 5 agreements have stipulated more Simi Valley Burbank favorable work rules and other labor Pasadena provisions for production work that Thousand 101 Oaks is located within a 30-mile radius Santa Malibu Monica Los Angeles 10 of the intersection of West Beverly Boulevard and North La Cienega 405 5 Boulevard in Los Angeles. This is one Anaheim reason that the industry became so Long Beach Orange County heavily concentrated in Los Angeles. Figure 4 shows that most of the TMZ is located in Los Angeles County with some parts of Orange and Ventura counties included. LOS ANGELES AND RUNAWAY PRODUCTION Some film and television productions located in Some Types of Production Appear to Have other countries and other states might have located Increased, While Others Decreased. Los Angeles in California were it not for the subsidies offered County and several cities in the Los Angeles by those jurisdictions. (We discuss these subsidy metropolitan area contract with a nonprofit programs in more detail later in the report.) The company—Film L.A.—to coordinate and process relocation of motion picture production due to permits for on-location motion picture filming. these subsidies—runaway production—has been Film L.A. tracks permitted production days for a major topic in legislative discussions of film tax different types of motion picture production credits. However, there has been considerable including feature films, television programs, and debate about the extent to which this is a problem. commercials. Their data, replicated in Figure 5, As we discuss further below, official wage and shows that overall permitted production days employment statistics suggest that California—and have increased by about 90 percent since 1993, but Los Angeles County in particular—has a large total permitted production days in 2013 remain share of employment and wages in the motion somewhat below 2005-2007 levels. While not picture and video industries, but that California’s shown in Figure 5, Film L.A.’s data also show that share has declined somewhat. the share of permitted production days for films has declined relative to the share for television 12 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT and commercials (productions that typically Figure 6 (see next page), they found that the have lower levels of spending and employment number of the top 25 films for which California than films). In reviewing the Film L.A. data, it is was the location of principal photography has important to note certain limitations. First, some declined from 16 in 1997 to 2 in 2013. While 1997 of the changes could be affected due to growth in may have been an anomalous year—the average the number of jurisdictions that contract with Film number of top 25 films made in California from L.A. to coordinate permitting. In addition, some 1998 to 2004 was 10—the recent negative trend for film and television production in the Los Angeles large-budget films is clear. The LAEDC researched area is excluded because Film L.A. data do not the locations of principal photography for the include unpermitted filming and most filming on 41 live action feature-length films released between soundstages (large, sound-proofed buildings for July 2012 and June 2013 that had an estimated motion picture production). production budget of more than $75 million. Of Studies Report Fewer Major Films and these, only 2 were made entirely in California and Television Drama Programs Made in California. 9 used California as a secondary location. For 30 of Graphic Sign Off Film L.A. staff and other industry experts assert these films—or 73 percent—principal photography Secretary that there has been a shift in the composition of occurred entirely outside of California. Analyst production from larger budget films and television Since 2008, Film L.A. has captured more MPA programs—with more spending and hiring per detailed data on the types of television programs Deputy production day—to smaller budget productions filming on-location in the Los Angeles region that employ fewer people. Film L.A. observes than it did previously. Figure 7 (see next page) that, in terms of budget size, the films made in shows that television dramas—which typically Los Angeles in 1993 were larger than those being have larger budgets than other types of television made in 2013. While Film L.A. does not track data on Figure 5 production budget or crew On-Location Motion Picture Production in Los Angeles Area size, there have been some Total Annual Permitted Production Daysa attempts to measure these 45,000 changes. In 2014, Film L.A. and the Los Angeles County 40,000 Economic Development 35,000 Corporation (LAEDC) each 30,000 issued reports measuring the 25,000 decline in the production of 20,000 large-budget, feature-length 15,000 films in California. Film 10,000 L.A. researched the primary 5,000 production location of the top 25 live-action feature- 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 length films determined a Includes feature-length films, television, and commercials. by the highest worldwide Source: Film L.A. box-office. As shown in www.laAoR.cTaW.goOvR KLe #gi1sl4a0ti1ve6 4Analyst’s Office 13 Template_LAOReport_mid.ait Graphic Sign Off Secretary Analyst MPA Deputy AN LAO REPORT programs—have sharply reduced the number of Figure 6 production days on-location Fewer Large-Budget Films Produced in California in Los Angeles. Other data Number of Top 25 Films Produced in Californiaa collected by the California 18 Film Commission (CFC) show that, in 2012, California 16 had a 34 percent share of all 14 one-hour long television series, 12 down from a 65 percent share 10 in 2005. This decline in certain 8 types of television series was 6 at least partially offset by the Graphic Sign Off 4 production of other types of Secretary 2 television programs including Analyst basic cable drama series, 1997 1999 2001 2003 2005 2007 2009 2011 2013 MPA sitcom series, and reality television series. a Top 25 films determined by estimated worldwide box office revenue, excludes animated films. Deputy Source: Film L.A. In reviewing these data, it is important to note that most of the types of productions ARTWORK #140164 that declined—large-budget Figure 7 films and one-hour television Template_LAOReport_mid.ait Television Drama Production in Los Angeles Area Fell series—are not eligible to While Other Television Production Increased apply for the state’s tax credit. Total Annual Permitted Production Days However, these types of productions typically are the 14,000 focus of other jurisdictions’ 12,000 Other Television Production subsidy programs. 10,000 There Are Reasons for Concern About Runaway 8,000 Production. After reviewing 6,000 all of the available data, we 4,000 find it difficult to arrive at a Television Drama Production strong conclusion regarding 2,000 the extent to which runaway production has harmed the 2008 2009 2010 2011 2012 2013 California motion picture Note: Other television production includes sitcoms, reality shows, series pilots, and web-based television programs. industry. This uncertainty Source: Film L.A. is due to (1) the poor quality of the available data and ARTWORK #140164 14 Legislative Analyst’s Office www.lao.ca.gov Template_LAOReport_mid.ait AN LAO REPORT (2) various other factors affecting the industry. production jobs declined from about 65 percent in Nonetheless, there are reasons for concern. 2004 to just over 50 percent in 2012. While total The number of film and television production permitted production days have increased over the jobs in California declined from a peak of 122,800 long-run, there was a significant decline—between in 2004 to the present level of 107,400. (Overall the peak in 2007 of 38,300 jobs to 26,200 jobs employment in California, in contrast, increased in 2009—during a period when many states, as between 2004 and present.) Concurrently, we discuss below, were adopting new film and California’s share of national film and television television production subsidies. ROLLING OUT THE RED CARPET States Are Actively Competing for Productions on a percentage of production expenses. These expenses typically are qualified in some way. For Over the last 15 years, many states have example, nearly all states allow only so-called established subsidies intended to encourage the “below-the-line” wages to count towards the development of local motion picture production credit; however, several states allow some or all industries and to stimulate tourism. We note that “above-the-line” expenses to also qualify. (Above- some of these subsidy programs were established the-line expenses are the wages and fees paid to at the urging of the motion picture industry. As the leading actors, the writer, and the director more states have begun to offer these incentives— and below-the-line wages are for crew, some cast, typically tax credits or cash grants—competition and most production staff.) Figure 9 (see page 18) across the states has escalated. Some states, such compares California’s tax incentive program with as Maryland, have expanded their programs. the other programs in the top ten states providing (We describe Maryland’s recent expansion of the most funding for film and television production its tax credit program in the box on page 17.) A subsidies. New York and Louisiana offer a subsidy few other states, such as Arizona and Iowa, have worth up to 35 percent of qualified expenditures. discontinued theirs, choosing not to compete. New York has capped its program at $420 million As shown in Figure 8 (see next page), 37 states per year, and we do not know if that amount will currently offer and fund some sort of film and be exhausted this year. Louisiana’s program has television production incentive. no annual cap and it allocated $236 million of tax Subsidies in Some States Very Generous. State credits in 2012. film and television production incentives typically Other Countries Offer Subsidies Too. have key elements in common. Most programs California’s most significant competitors may provide corporate and sales tax benefits. Some be certain Canadian provinces and the United states, such as Texas and Michigan, provide a cash Kingdom. In addition to offering generous grant or rebate to qualified film and television film and television production subsidies, productions instead of a tax credit. In most Canada and the United Kingdom also possess states, the tax credit is transferable or refundable high-quality soundstages, experienced crews, and because most production companies and their post-production facilities with many specialized parent corporations would not have a sufficiently suppliers and vendors located near their major large tax liability in the state to offset the full tax production centers. credit. The value of the incentive usually is based www.lao.ca.gov Legislative Analyst’s Office 15 AN LAO REPORT California’s Response and “independent” films are eligible for a tax credit of 25 percent of qualified expenditures. While this California Offers a Film and Television is less than the 30 percent or more that some other Production Subsidy. California’s film tax credit states offer, many industry experts we spoke with program is the fifth largest in the U.S. in terms of indicate that other cost advantages of filming in available funding. The film tax credit program has Graphic Sign Off California offset this difference. Under current law, a $100 million annual funding cap and the CFC only certain types of productions are Seleigcibrelet ator y allocates the credits by lottery. On the first day apply for and receive a tax credit. Analyst of the 2013 application period, the CFC received MPA 380 applications and allocated a tax credit to • A film with a production budget less than Deputy 34 projects. $75 million (and more than $1 million). California’s program provides a tax credit for • A television film (“movie-of-the-week”) or 20 percent of qualified expenditures for eligible a television mini-series with a production film and television projects. Television series budget more than $500,000. relocating to California from other jurisdictions Figure 8 Thirty-Seven States Offer Motion Picture Incentives As of March 31, 2014 Without Incentive Incentive Note: Idaho’s incentive program not currently funded. 16 Legislative Analyst’s Office www.lao.ca.gov ARTWORK #140164 Template_LAOReport_large.ait AN LAO REPORT • A new television series with a production • A television series that relocated to budget of more than $1 million that is California. licensed for original distribution on Independent film productions, which account “basic cable.” (This term does not include for at least 10 percent of the tax credits, are television series distributed through a allowed to sell their credit to another taxpayer. broadcast television network, such as (Independent films are defined by statute as having ABC, or a premium cable network, such as a budget between $1 million and $10 million Showtime.) and are not produced by a company that is publicly traded or a company in which a publicly • An independent film. Maryland Recently Extended Film and Television Production Subsidy Maryland, like many states, competes to attract film and television productions. The state offers a refundable income tax credit on qualified production spending and an exemption from the sales tax for production-related purchases made in the state. During the first two seasons of its production, Maryland provided the one-hour drama series House of Cards a total of $26 million in income tax credits. For the upcoming season, however, Maryland had only $4 million in tax credits available under current law to allocate to the series. Seeking to receive $15 million in tax credits, the show’s producers sent a letter to state officials informing them that filming of the program’s third season would be delayed pending legislative action on the tax credit. In a letter to Maryland’s Governor, the show’s producer wrote: We know that the General Assembly is in session, and understand legislation must be introduced to increase the program’s funding. . . In the meantime, I wanted you to be aware that we are required to look at other states in which to film on the off chance that the legislation does not pass, or does not cover the amount of tax credits for which we would qualify. I am sure you can understand that we would not be responsible financiers and a successful production company if we did not have viable options available. We wanted you to be aware that while we had planned to begin filming in early spring, we have decided to push back the start date for filming until June to ensure there has been a positive outcome of the legislation. In the event sufficient incentives do not become available, we will have to break down our stage, sets, and offices and set up in another state. In April 2014, the Maryland Legislature approved (and the Governor agreed to sign) legislation providing the House of Cards $11.5 million in tax credits for the upcoming season. The producers indicated they will start filming the third season of the show in Maryland within a few months. The series airs on Netflix, an online video streaming service whose parent company is based in Los Gatos, California. www.lao.ca.gov Legislative Analyst’s Office 17 AN LAO REPORT have noted several Figure 9 key limitations of the California’s Film Tax Credit Program California film tax credit Ranks Fifth in Nation in Annual Cost program. Perhaps the (Dollars in Millions) most frequently cited Incentive Incentive Incentive Annual State Percenta Refundable? Transferable? Costb limitation is that the program turns away New York 30 - 35 Yes No $420 Louisiana 30 - 35 Yes Yes 236 nine out of ten qualified Georgia 20 - 30 No Yes 140 applicants due to the Florida 20 - 30 No Yes 131 $100 million funding cap. California 20 - 25 No Noc 100 The amount available for Texasd 5 - 20 — — 95 North Carolina 25 Yes No 77 new film and television Connecticut 10 - 30 No Yes 64 series effectively is Pennsylvania 25 - 30 No Yes 60 somewhat less than Michigand 20 - 35 — — 50 $100 million because Total $1,373 a Incentives are based on a percent of qualified production expenses. States differ in how they define any television series that qualified expenses. b received a tax credit The annual cost to each state is based on the program cap or, if there is no cap, the amount allocated in the most recent year for which data is available. allocation in the prior year c In California, independent production companies may sell their credits to another taypayer. d Texas and Michigan provide a cash grant or rebate instead of a tax credit. is first in line to receive a credit in the following traded company owns more than 25 percent of year. the independent production company.) As we Another frequently cited limitation of the tax discuss in the box below, California provides credit program is that, under current law, the most some additional tax benefits to the motion picture economically desirable types of productions— industry. (Some other states provide similar tax typically considered to be large-budget films and benefits.) network and premium cable television series—are Frequently Cited Limitations of California’s not eligible to apply for a tax credit. This is Tax Credit Program. Several recent studies Additional Tax Benefits Provided to the California Motion Picture Industry Sales Tax Exemptions. California provides the motion picture industry with tax benefits in addition to the $100 million film tax credit. California imposes a sales tax on retailers selling tangible personal property and levies a property tax on personal property. Leases of motion picture films and video tapes for exhibition or broadcast are exempt from the sales tax. In addition, there are several other sales tax exemptions affecting the motion picture industry. Personal Property Tax Assessed Only on Media, Not Content. Personal property, which includes films and videos owned by businesses, is assessed each year at market value, which accounts for depreciation. In California, personal property taxes are levied only on the tangible materials upon which such motion pictures are recorded, and not on the full market value of the film or television program. 18 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT because the tax credit program was designed to operating costs of the CFC, including costs related attract or retain certain types of productions that to permit processing. The commission, however, had been considered most vulnerable to being has statutory authority to charge fees to cover produced outside of California when the credit was the costs of filming on state property and state established. employee services. CFC Provides Additional Assistance to Local Government Fees and Incentives. Most Filmmakers. The CFC promotes the state to local governments in California charge fees for the motion picture industry and administers permits and specific costs related to motion picture the film tax credit program. The commission production, such as for street closures. Some local also provides filmmakers with other services, governments in California offer local film and including assistance in finding a suitable location, television production incentives. San Francisco, information about state regulations, and assistance for example, refunds all fees and payroll taxes paid on other topics such as “green” filmmaking. The to the city, up to $600,000 per film or television CFC serves as a one-stop shop for issuing permits episode. Santa Clarita refunds film permit fees to crews filming on state property. Unlike in many and 50 percent of the transient occupancy taxes other states, film and television productions in collected in the city. Other cities in other states also California do not pay fees to get state permits. offer some incentives. Rather, the state General Fund pays all of the LAO OBSERVATIONS I deally , S tateS W ould N ot C ompete businesses and taxpayers effectively pay a higher o N the B aSIS of S uBSIdIeS tax rate than they would otherwise because the costs of running the state, including paying these In our view, states ideally would not use subsidies, are raised from fewer taxpayers. We subsidies to compete for film and television would generally only recommend the Legislature productions—or for any other specific industry. We provide a subsidy when an industry’s activities yield generally view industry-specific tax expenditures— distinct societal benefits that would otherwise be such as these film tax credits—to be inappropriate produced at a lower than economically optimal public policy because they (1) give an unequal level. For example, subsidies for basic research and advantage to some businesses at the expense of development may be justified at the federal level others and (2) promote unhealthy competition because of the broad social benefits of that research. among states. Promote Unhealthy Competition Among Advantage Some Businesses Unequally. States. When government does not offer industry The ten states shown in Figure 9 collectively subsidies, businesses in those industries generally give film and television production companies locate their economic activities based on where about $1.4 billion per year. Twenty-seven other they would be best suited. For example, agriculture states give the industry additional sums. These generally plants crops where they are most subsidies give businesses in the motion picture productive and manufacturing generally locates industry an economic advantage that other where it has most advantageous access to inputs, businesses do not receive. Instead, all other labor, and markets. State film and television www.lao.ca.gov Legislative Analyst’s Office 19 AN LAO REPORT subsidies shift an activity from where it would High-Paying Los Angeles-Focused Industry. otherwise locate to somewhere else without We also note that the motion picture industry is necessarily improving the output or yielding any a large employer in Los Angeles County and pays greater social benefit. At the same time, these significantly higher than average wages. Later subsidies reduce funds available for other state in the report, we express serious concerns with priorities, including spending on programs or the economic impact studies that overstate the reductions in tax rates that would benefit all economic benefits of the film tax credit. However, taxpayers equally. the hundreds of thousands of Californians directly or indirectly employed as a result of the industry B t a r ut here re eaSoNS for deserve serious consideration. C C S alIforNIa to oNSIder uBSIdIeS Interstate and International Competition. Reasonable Considerations to Extend or In some cases, industry representatives have Expand Credit. Many observers—including aggressively promoted film and television our office—have raised concerns about whether production subsidies in other states, and these industry-specific subsidies are good public policy. states (and other countries) are offering subsidies Nonetheless, we recognize that some factors might to lure productions away from California. These reasonably lead the Legislature to extend or expand subsidies appear to have negatively affected the California’s film tax credit. Specifically, (1) the volume of film and television production in motion picture industry, including production and California. In some cases, industry representatives post-production, are a flagship California industry, are threatening to move production to other (2) the motion picture industry is a major employer jurisdictions if public subsidies are not provided, in Los Angeles, paying high wages, and (3) other and these threats are sometimes credible. Given states are aggressively competing for this industry that other states and countries are offering and, in some cases, industry representatives subsidies, it may be difficult for California not to are threatening to move production to other provide subsidies and still retain its leadership jurisdictions if public subsidies are not provided. position in this industry. That is, it may be Flagship California Industry. The motion reasonable for California to provide subsidies picture industry is a key part of the state’s to “level the playing field” and eliminate the “brand” and identity. For example, the industry is economic incentives to locate productions outside frequently highlighted in state and private-sector of California. Of the three factors discussed in this marketing strategies for tourism and economic section, the aggressive interstate and international development purposes. Many tourists visit the Los competition may be the most compelling because Angeles area either primarily or in part because its focus is on correcting an economic distortion. of attractions related to current or historical film I C C SSueS to oNSIder If alIforNIa and television production. California’s motion o f t C fferS a Ilm ax redIt picture industry is not going to disappear overnight because of other jurisdictions’ subsidies, but there If the Legislature wishes to continue or may be a long-term risk that California could lose expand the film tax credit, we suggest that it do so a significant share of this flagship industry. It is cautiously. In Figure 10, we highlight six key factors reasonable for the Legislature to want to take action for consideration by the Legislature as it reviews to prevent this. film tax credit proposals. 20 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT some production may Figure 10 relocate to other countries Factors to Consider When Reviewing the Film Tax Credit for reasons unrelated to subsidies. • Film and television production in California could decline anyway. • Responding to other jurisdictions’ subsidies could be very expensive. Responding to • Interstate and international competition could stoke a “race to the bottom.” Other Jurisdictions’ • For state government, the film tax credit does not “pay for itself.” Subsidies Could Be • Subsidizing one industry sets an awkward precedent. Very Expensive • It will be difficult to evaluate the effectiveness of the film tax credit. California’s current California Film and Television film tax credit program Production May Decline Anyway costs the state about $100 million per year. The motion picture industry is confronting Critics suggest that the film tax credit has not many pressures and undergoing many changes effectively countered the efforts of other states to that are affecting the level and locations of film and lure production away from California because the television production. program: Film and Television Production in the U.S. • Funds only one out of ten eligible Facing Many Pressures. The available economic applicants. and employment data on film and television • Disqualifies a large portion of the production and post-production, while limited, industry’s products, including large-budget suggests that the U.S. industry may be growing films and most television series. somewhat more slowly over the past decade than it did during the preceding decades. The industry Broadly Expanding the Film Tax Credit Could may also be growing more slowly than the overall Increase Annual Cost by Several Billion Dollars. U.S. economy. There are likely various reasons Revising the current film tax credit to fully respond this is so, as the industry is facing many pressures. to these criticisms would be very expensive. Thus, even in the absence of other states’ and Providing the tax credit to all projects that are countries’ subsidies, the level of film and television currently eligible could increase the annual cost by production activity in California might decline or about $1 billion. Expanding the eligibility criteria grow slowly. to include a very broad array of productions would Various Factors Encourage Filming Outside further increase the cost of the program—perhaps of California. While there are practical and by several billion dollars. California’s share of economic reasons for the motion picture industry the film and television industry is so large, that to cluster in the Los Angeles area, there are also it would be infeasible to provide subsidies to all various practical and economic reasons that may productions. encourage filming outside of California. Some of Rationing Tax Credits Reduces the Fiscal the technological changes discussed earlier in this Impact, Leads to Counterproductive Distortions. report have made it easier and less costly to film Given budget limitations, a reasonable response outside of the Los Angeles area. The motion picture is to restrict eligibility to certain types of industry is also a global industry and is becoming productions—as the current program does. increasingly global. Like many other industries, However, choosing which types of productions www.lao.ca.gov Legislative Analyst’s Office 21 AN LAO REPORT to subsidize is difficult and has consequences. Could Stoke the “Race to the Bottom” Legislators should be mindful of these potential The unhealthy competition between states consequences. Before the film tax credit program mentioned above also seems to have become was adopted, for example, large-budget films increasingly aggressive over time. As states compete and network and premium cable television series amongst each other to attract film and television commonly were filmed in California. It is our productions, the amount of the subsidy offered understanding that when the current program by each state may increase. This is demonstrated was designed, smaller productions—believed to by the actions states have taken in recent years to be more budget-conscious—were thought to be increase their initial subsidies—from 20 percent most likely to relocate to other states because of to 25 percent and from 25 percent to 30 percent subsidies. Thus, the California film tax credit of qualified expenditures—in an effort to attract, specifically targeted these smaller productions. and then retain, film and television productions Since then, it appears that the state has attracted in the face of increasingly aggressive interstate television movies and one-hour basic cable series, competition. but far fewer large-budget films and one-hour Were California to increase its subsidy, it network and premium cable television series are is possible that competitors in other states and filmed in California. While various factors may abroad would further increase theirs as well. This have contributed to this trend, it is likely in part sort of competition can be characterized as a race a consequence of the state’s decision to target tax to the bottom. It is unclear how these sorts of credits to certain types of productions. competitions end. In responding to other states Expansion May Lead to Other Changes in increased subsidy rates, California may only stoke Film Tax Credit. The current tax credit is not this race to the bottom without making any real refundable and is transferable only for independent headway in terms of increasing its share of film and productions. If the tax credit were expanded television productions. Meanwhile, the expense of significantly, production companies might not have the film tax credit program would increase. a sufficiently large tax burden against which to offset these tax credits. This, in turn, might increase For State Government, the Film Tax calls for the Legislature to expand transferability or Credit Does Not Pay For Itself allow for refundable tax credits. Some advocates of the film tax credit argue that Local Governments Could Share the Cost it pays for itself, in terms of increased tax revenues of an Expanded Tax Credit. Continuing or to government, and that the film and television expanding the tax credit program would reduce production spending it attracts trickles through the state tax revenues—affecting all residents of the economy generating significant economic gains. state—while largely benefiting a single region of the While these considerations are important, there state. A reasonable response might be to request are other economic and fiscal effects to take into the affected local governments to share the burden. account. Moreover, we have found that the analyses We fully expect that motion picture production in used to support the film tax credit vastly overstate California will remain heavily concentrated in the their findings. Los Angeles area, such that the state’s leaders may 2012 Analysis Aggregated State and Local wish to discuss cost sharing with city and county Tax Revenue. In 2012, our office reviewed a study governments there. produced by the LAEDC that calculated that every 22 Legislative Analyst’s Office www.lao.ca.gov AN LAO REPORT $1 of tax credit returned $1.06 in state and local tax • $0.08 in state and local fees for services. revenue. We concluded at the time that, since this • $0.03 in federal and state social insurance amount included local tax revenue and the costs of taxes such as unemployment insurance and paying for the tax credit program fall entirely on Social Security. state government, the program probably did not produce enough state government revenues to pay A return of $0.65 in state tax (excluding for itself. Nothing that we have learned since that unemployment insurance) revenue for each $1 date alters our assessment. in tax credits may or may not be a good return Analysis Suggests Film Tax Credit Returns to compared with other state programs. However, it is State 65 Cents per $1 of Tax Credit. In March 2014, incomplete—and, arguably, not accurate—to claim the LAEDC revised its calculations based on that the tax credit program pays for itself based on additional data. This new study calculated that the LAEDC data. The state government receives far every $1 of tax credit returned $1.11 in state less revenue back than it spends on the tax credit, and local revenue. We requested more detailed according to the study. information from the LAEDC and, from that Economic Benefits Overstated. Film and information, we learned that the $1.11 includes all television productions attracted by the subsidy payments to state and local government—including generate economic activity in the state by hiring fees, permits, and unemployment insurance crew and purchasing goods. The LAEDC studies payments. In our view, the analysis overstates the estimate the economic benefits resulting from tax credits’ fiscal effect because it assumes that California’s tax credit program. As we have stated all credit recipients otherwise would have located in the past in reviewing these types of studies, there in another state. The analysis also overstates the is nothing inherently wrong with the economic fiscal benefit to the state government—the entity modeling tools used to attempt to estimate these providing these credits—by including local tax economic effects. However, the methodology used revenue, fees for services, and payments for usually overstates the net economic benefits. If unemployment benefits. Were it to have reported a film project was attracted to the state because the data in a disaggregated fashion, the LAEDC’s of the tax credit, and would not have otherwise data would have shown that for each $1 received filmed in the state, the economic benefit of the film in state tax credits, California productions return is calculated based on how its spending trickles about: through the economy—a phenomenon called • $0.65 to the state in sales and use tax, the multiplier effect. However, the existence of a multiplier effect does not imply that the subsidy personal income tax, corporation tax, and generates economic gains that are greater than its other tax revenue that the state receives or costs. that directly reduces state costs. In its economic impact studies, the LAEDC • $0.35 to local governments in property offsets the total estimated economic benefits only taxes, motor vehicle license fees, and the by the $100 million per year fiscal cost of the local share of sales taxes. (Most property credits to the state. This is different and smaller taxes allocated to schools and community than the economic cost, which includes (1) the colleges are included above in the state economic impact of the best alternative use of total.) the $100 million (called the “opportunity cost”) www.lao.ca.gov Legislative Analyst’s Office 23 AN LAO REPORT and (2) other economic costs related to film and We note, however, that other industries—such as television production. For example, the state could manufacturing or software development—also have used the $100 million instead to provide could become the target of aggressive state additional funding for other state programs, subsidies. If this were to occur, would California such as early childhood education or inmate also provide subsidies to retain these businesses? rehabilitation. And just like the subsidy, any Doing so could be prohibitively expensive. Instead alternative funding decision would have created of approaching economic policy on an industry- economic benefits through an economic multiplier by-industry basis, the Legislature may take actions effect. This is important because it is possible that that encourage all businesses to stay or relocate to an alternative funding decision could have a greater California, such as broad-based tax reductions or economic benefit than the film tax credit. Also, in regulatory changes. order to be comprehensive, these studies should Film Tax Credit Effectiveness Will consider other economic costs of increased film Be Difficult to Evaluate production. When the film and television industry uses labor and other productive inputs, those Due to (1) the many ongoing pressures and inputs are not available for other uses, which may changes confronting the motion picture industry, negatively affect other industries. (2) incentive programs offered by other states We note that many other economic studies of and countries, and (3) the limitations inherent in state policies (not just film tax credits) have similar economic statistics available to measure industry defects. Economic analyses of the multiplier effects productivity and employment, it will be difficult of proposed policies can provide useful information for the Legislature to evaluate the effectiveness of regarding the potential economic benefits, but it the film tax credit (or any other policies adopted is unusual for these studies to estimate the “net” to encourage production in California). This will economic effect of a policy—which fully accounts especially be the case if the effect is small or if the for economic costs. Therefore, these studies rarely industry changes in other significant ways. Such can establish in and of themselves whether a policy data limitations often will be present in evaluating is the “best” choice for the public. industry-specific subsides. The Legislature should anticipate the likelihood of having to make ongoing Sets an Awkward Precedent decisions regarding the film tax credit without As we note above, the Legislature may wish the benefit of conclusive evidence. We expect, for to provide a tax credit to this industry because example, that our office’s statutorily required report of the generous subsidies offered by other states. on the program will lack such conclusive evidence. LAO Publications This report was prepared by Brian Weatherford and reviewed by Marianne O’Malley. The Legislative Analyst’s Office (LAO) is a nonpartisan office that provides fiscal and policy information and advice to the Legislature. To request publications call (916) 445-4656. This report and others, as well as an e-mail subscription service, are available on the LAO’s website at www.lao.ca.gov. The LAO is located at 925 L Street, Suite 1000, Sacramento, CA 95814. 24 Legislative Analyst’s Office www.lao.ca.gov