Report asserts California's program doesn't offset tax decline

California’s Legislative Analyst Office has poured cold water on the purported economic benefits of the state’s three-year-old tax credit incentive program.

In an eight-page report sent to Lois Wolk, chair of the State Senate’s Governance and Finance Committee, analyst Mac Taylor said the program benefits are not generating enough economic activity to make up for the decline of tax revenues.

The study comes with the fate of the program up for debate in the California Legislature as the film business touts the benefits of incentivizing producers to shoot in the Golden State. Currently, the state of California provides $100 million in annual tax credits for productions, but demand far exceeds supply, with 28 projects selected by lottery out of more than 330 in the most recent round earlier this month.

Legislation has been introduced to extend the incentive program — far smaller those in than many other states — for another five years after it runs out in 2013. Last year’s bill, authored by Assmeblyman Felipe Fuentes, hit a rough patch last year in the state Senate, which ultimately opted for a one-year extension rather than the five-year extension original planned.

Fuentes is again carrying the legislation, Assembly Bill 2026, and two Assembly committees have approved the bill. Ben Golombek, a spokesman for Fuentes, said that the office was “disappointed” about Taylor’s report and asserted it had been compiled in haste.

Taylor’s report takes issue with the assumptions in a pair of reports that tout the economic benefits of the incentive program — a study conducted by UCLA’s Institute for Research on Labor and Employment as part of The Headway Project, which found that the tax credit program is benefiting the state economically with an impact of $1.04 for every dollar spent; and a report issued last summer by the Los Angeles County Economic Development Corp. and financed by the Motion Picture Assn. of America estimated that figure at $1.13 for for every $1 the state allocated, based on the assumption that any production seeking a tax credit would leave California if it didn’t receive one.

But Taylor’s report contains five issues that questioned the results of the two studies:

– Unknown assumptions embedded in the LAEDC economic models and their failure to consider the benefits of alternative public or private uses of tax credit funds (which could result in the credit program having significantly less net benefit than shown in the studies).

– In-state film activity that would occur in California without any tax credit (which results in the credit program having less economic and tax net benefits than shown in the LAEDC study).

– In-state economic and employment activity resulting from out-of-state productions (which results in the credit program having less net benefit than shown in the studies).

– Crowding out effects (which result in the credit program having less net benefit than shown in the studies in at least some years).

– Effects of film-related tourism (which would likely not result in significant changes in net benefits in most years).

“While the total effects of these issues are impossible to quantify, their combined effects are likely to be negative in any given fiscal year — that is, resulting in the net benefit of the credit program being less than shown in both the LAEDC and UCLA-IRLE studies,” Taylor wrote. “Given the conclusion that the net benefit of the credit program is likely less than shown in the LAEDC study, the LAEDC’s finding that the output-to-credit ratio was about 20-to-1 is likely overstated, as is its estimate of job gains resulting from the credit program.”

Taylor said that the $1.04 of the projected state and local tax revenue return from every credit dollar was also overstated.

“We believe it is likely that the state and local tax revenue return would be under $1.00 for every tax credit dollar — perhaps well under $1.00 for every tax credit dollar in many years,” he said. “In any event, even if the combined state and local tax revenue return is right around $1.00 for every tax credit dollar, the state government’s tax revenue return would by definition be less than $1.00 for every tax credit dollar. The credit program, therefore, appears to result in a net decline in state revenues.”

But Golombek said Taylor had not been thorough.

“We’re disappointed that in their haste to compile a brief summary, the LAO chose to criticize the methodology in the LAEDC and UCLA reports, but didn’t take the time to actually contact the distinguished economists at either the LAEDC or UCLA to ask about the thorough months-long process that each undertook in compiling their reports,” he said.

Christine Cooper, who authored the LAEDC study, disputed Taylor’s report on several fronts such as his assertion that the studies had omitted the “crowding out” effect of incentives causing other productions to leave because California workers are tied up by incentivized productions.

“That’s laughable at a time when there are 2 million unemployed in California,” Cooper said. “His report is very frustrating to those of us who see productions leaving the state becuase of incentives elsewhere.”

Steve Dayan, a member of the California Film Commission and organizer for Teamsters Local 399, criticized Taylor’s report for not acknowledging that the program is aimed at below-the-line job creation at a time when the state’s unemployment rate is 40% above the national average.

“A lot of our members are leaving the state to work in other states like Louisiana, Georgia and North Carolina,” he said. “This is not a fat-cat boondoggle program. It’s a modest program that creates employment.”

Taylor’s letter did not include reference a study from The Milken Institute, which was issued earlier this month and urged the state of California to increase its efforts to fight runaway production. That 32-page report, “Fighting Production Flight: Improving California’s Filmed Entertainment Tax Credit Program,” urged that California lift its $75 million production budget cap for features — which makes it the only state with that kind of restriction.

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