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SacBee: “Timing of Schwarzenegger-backed Hollywood tax breaks questioned”

An interesting article on film tax credits from The Sacramento Bee:

Arnold Schwarzenegger accomplished little for Hollywood during his first five years as governor despite industry pleas to stop film and television crews from fleeing to states like Louisiana.

Last year’s publicized defection of the television show “Ugly Betty” to New York may have been the final straw.

Now, as state programs grapple with spending cuts, California has begun dedicating millions of dollars in tax credits toward movie and television productions in an attempt to bolster the industry.

That money was set aside in a February budget deal negotiated behind closed doors, part of an agreement between the movie-star governor and lawmakers to give hundreds of millions of dollars to the film and television companies through the tax credits and a change in how corporate taxes are calculated starting in 2011.

A Bee analysis of Schwarzenegger’s advocacy for Hollywood found that while he has long promoted the industry in official events, he had not delivered significant financial help until that February budget agreement.

Within weeks, two donors that own major Hollywood studios gave Schwarzenegger-affiliated campaign committees their largest contributions toward his efforts since he took office in 2003.

Some question timing

Proponents say the tax benefits are a lifeline for a crucial California industry that has struggled to compete against states and countries that have thrown money at productions in the last decade. The departures threaten thousands of jobs for working-class stagehands, they say.

“In the last five years, it’s become an incentives arms race, and everyone is trying to outdo each other,” said Todd Lindgren, vice president of communications for FilmLA, which coordinates film permits for Los Angeles city and county.

The California Film Commission awarded the first round of tax credits to 25 films and television shows in July, and production began this summer.

The credits are worth $100 million annually over five years, while the tax policy change will save the film industry $58 million each year by 2015-16, according to the Franchise Tax Board. Industry officials dispute those estimates, saying they ignore the economic activity and jobs that would otherwise leave.

But critics charge the tax benefits occur at the wrong time, as California works to overcome deficits and cuts billions of dollars for social services and education.

“It was a huge gift to the industry,” said Lenny Goldberg, executive director of the union-backed California Tax Reform Association. “Not only do they get tax credits for producing in California, but they get to take a lot of income that used to be attributable to California and not count it anymore.”

Middle-class jobs lost

The governor included film tax credits in his budget proposal last fall, receiving support from Democrats such as Assemblyman Paul Krekorian, who represents Burbank. At least 40 states offer incentives for film production.

The proposal came during a year in which the Los Angeles region had 7,043 feature-film production days, the lowest since FilmLA began tracking them in 1993. The group has reported production declines in 11 of the last 13 years.

“People should not assume that the motion picture industry is anchored to the ground in California,” said Steve Nissen, NBC Universal vice president for legal and governmental affairs. “Because of technology advances, the industry has become highly mobile.”

Lindgren said that previously, tax credits were blocked by Capitol disputes, particularly between Northern and Southern California lawmakers. In 2008, 96.6 percent of the state’s film days occurred in Southern California, according to the California Film Commission.

The industry had “a lot of hope” that Schwarzenegger would push through a film tax-credit program when he was elected in 2003, Lindgren said.

Yet despite his own Hollywood past, Schwarzenegger hadn’t done much heavy lifting for the movie industry on tax credits – or other issues – until the February deal.

He kept his distance from the writers’ strike in 2007-08. When asked this month whether he would pardon director Roman Polanski if he had the chance, Schwarzenegger said Polanski “should be treated like everyone else.” His Hollywood appointments have been in line with those of past governors.

Lindgren suggested that Schwarzenegger’s movie ties may even have hindered tax credits in a polarized Capitol.

“Some legislators didn’t understand that it’s about middle-class jobs,” he said. “They thought, ‘We’re not going to let Arnold give away these benefits to his cigar-smoking buddies in the industry. His past association with the industry may have been a negative to those who didn’t understand the jobs component.”

The cast of “Ugly Betty” took out an ad in the trade publication Variety last year asking Schwarzenegger and lawmakers to save California jobs after the television show announced it would move production to New York.

Schwarzenegger responded that he had been trying unsuccessfully to obtain tax incentives for four years.

“The entertainment industry is a large part of our image as a state and as a job creator,” said Schwarzenegger spokesman Aaron McLear.

‘Single-sales factor’

On a separate track during budget talks, Assembly Republicans sought a change allowing companies to pay California taxes based on the proportion of sales they made in the state, known as “single-sales factor.” Previous tax policy required them also to consider their property and payroll.

For California-based companies that earn significant national and international revenues – such as movie studios and biotechnology labs – the single-sales-factor change allows them to disregard sizable property holdings and employees in the state. Starting in 2011, they can pay taxes on a more diluted formula that measures their California sales only against sales elsewhere.

Walt Disney Studios and NBC Universal not only maintain corporate offices in California, but own large theme parks and other properties.

Proponents said the change was needed because at least 20 other states have moved to a similar approach, including Arizona and Oregon, making California less competitive.

“Looking at the California tax code before, if you reduced the number of employees you had, sent them out of state and made the same amount of money, your tax bill went down,” said Assemblyman Nathan Fletcher, R-San Diego. “It’s just illogical that with record unemployment, you would have a tax code that punishes firms for having employees here.”

Break called ‘unprincipled’

Martin Helmke, the longtime legislative tax expert who retired in 2006, said there were legitimate policy reasons why California and other states based taxes on property and personnel, in addition to sales. Taxes on those factors recognize the value a state provides in education, infrastructure and other public services.

Helmke and others took particular issue with the fact that the February change gave companies the option to choose whether they wanted to calculate their taxes under the old system or the new one – a win-win for most companies.

“It’s unprincipled in the best sense of the word, making it elective, because you’re basically saying, ‘How much tax do you want to pay?’ ” Helmke said.

The Franchise Tax Board has estimated the change will cost the state $260 million starting in 2010-11, up to $1.05 billion in 2015-16. An estimated 5.5 percent of those benefits help the film industry.

Fletcher and business proponents dispute such estimates because they believe companies will create more jobs in California, leading to more tax revenues. Studies in other states have had mixed results.

As the budget was finalized, the single-sales-factor change was folded with the film credit into one tax revision bill, Assembly Bill 15xxx. No hearings took place.

“Nobody had to stand up and ask the Legislature for a billion-dollar tax cut at a time when it was cutting health care for children and seniors and cutting education,” said Jean Ross of the California Budget Project, which represents low-income residents.

Political donations rise

Various beneficiaries from the February budget deal donated heavily afterward to Schwarzenegger and measures on a May special election ballot. Voters ultimately rejected five of six proposals, including one to extend temporary tax hikes in exchange for a cap on state spending.

NBC Universal lobbied extensively for AB 15xxx during budget talks. In May, parent company General Electric gave $350,000 to the governor’s ballot-issues committee and $400,000 toward two committees backing his special-election measures, according to state records. The $750,000 exceeded what the company donated to state candidates or campaigns in the previous six years combined.

The Walt Disney Co. also gave $250,000 toward the special-election committee.

Non-entertainment companies that lobbied for the single-sales-factor change donated heavily as well. Cisco Systems gave Schwarzenegger $250,000, while Intel Corp. gave him $100,000.

“They’ve always been supporters of the governor,” McLear said, “and we appreciate their support.”

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