Tax board estimates significant revenue losses

HOLLYWOOD — The most recent state analysis of the key California bill to fight runaway production has boosted the cost estimate of the legislation by 57% to $650 million.

The analysis, disclosed in a recent report to the state Senate revenue and taxation committee, is based on Franchise Tax Board and staff calculations on General Fund revenue losses created by wage-based tax credits during the six-year life of Assembly Bill 2747.

The board estimates $25 million in revenue losses in the 2004-05 tax year, followed by $175 million in 2005-06, $110 million in 2006-07 and $115 million in 2007-08. A staff extrapolation calculates a loss of $115 million for the remaining two years.

Committee consultant Martin Helmke also noted the Dept. of Finance’s “dynamic revenue” model has indicated the economic stimulus from this type of credit would reduce the tax revenue loss by 20%, or $130 million. That would leave the taxpayer tab at $520 million — $105 million above a 2-month-old estimate from the Franchise Tax Board.

The California State Assembly backed AB 2747 last month, but the Senate committee hearing on the bill was delayed to Aug. 7 from its original date, today, as the Senate recessed.

AB 2747 creates a 15% wage-based tax credit for the first $25,000 paid to each employee involved in production of California-based films shot starting in 2004 and with budgets between $200,000 and $10 million.

Gov. Gray Davis first suggested the bill, which mirrors proposed federal legislation, in January — amid strong support from Hollywood unions and trade groups — designating 2004 as the start date, in order to allow the state to recover from its current budget deficit.

Backers believe such credits can provide a significant lure to filmmakers to counteract higher costs of shooting in the United States and extensive incentives from foreign governments.

But Helmke voiced skepticism as to the effect of AB 2747, authored by Assembly Speaker Herb Wesson and Assembly members Rebecca Cohn, Dario Frommer and Jackie Goldberg. “Although the credit offered by this bill is estimated to be in the $100 million range annually, it is likely to have only a marginal impact on where productions are filmed,” he wrote.

Helmke contended the credit can be applied to only about half of actual production costs and noted that state taxes are deductible against federal taxes, further reducing the effect of the state credit against Canadian productions that have a cost advantage of up to 25%.

“The bulk of the credit would be granted to those who are already producing their films here without benefit of the incentive,” he said. “The problem of runaway production is real. The proposed credit, much of which would go to producers who have no intention of leaving California, seems a blunt instrument to use in this battle.”

Helmke suggested an alternative approach, calling for an agency with knowledge of the film industry to allocate the credit to productions willing to be brought back to or stay in California.

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