California’s relatively young TV and motion picture tax-credit program helped produce “Moneyball,” the exploration of pro baseball’s business side. Credits went to “We Bought a Zoo,” the Matt Damon comedy about a family’s foray into zoo ownership.
But perhaps the highest-profile production claiming the tax break was “Argo,” the 2012 rescue drama centered on a government agent posing as a movie producer.
Now the film credit has a marquee role in an “Argo”-esque Capitol bribery scandal involving an FBI agent posing as a film studio owner. Last week, cable news channel Al Jazeera America released an FBI affidavit, filed under seal in U.S. District Court, that detailed a sting targeting state Sen. Ron Calderon, D-Montebello. Calderon allegedly received $60,000 in bribes from the agent in return for pushing legislation to make low-budget independent films eligible for the credit.
“It’s all about creating jobs, keeping the movie industry here in California, right? Um. Let me do this,” Calderon told the agent last summer, according to the affidavit, adding, “I know that it can happen.”
Championed by then-Gov. Arnold Schwarzenegger and Los Angeles-area lawmakers, the 2009 tax credit allows TV and film companies to avoid some taxes if they keep production in California. It was touted as a job creator as lawmakers struggled to close a $40 billion shortfall with a mix of cuts and temporary tax increases. Since then, the tax break has been extended twice amid disagreements about how much the incentive has actually helped prevent productions from leaving for other states.
Demand for the credits far exceeds supply, with as few as one in 10 qualified applicants surviving an annual lottery. There are plans for legislation next year that would increase the credit program’s $100 million annual budget as well as expanding it to include network TV shows and blockbuster movies such as “Transformers.”
The credit, supporters contend, has preserved thousands of well-paying jobs while maintaining California’s status as the nation’s entertainment leader. They dismiss the Calderon case as a sideshow.
“The only way we can do those things is to expand the incentives,” said Ed Duffy, vice president of Teamsters Local 399, which represents drivers, location managers and casting directors. “We’re in a competition and we’re losing jobs.”
The film incentive is one of an estimated $50 billion worth of exemptions, deductions and credits woven into California’s tax code.
Hollywood unions and studios tried several times during the last decade to pass legislation creating the tax credit, without success. That changed in 2009, with a global movie star as governor and politicians of both parties trying to meet the call to create jobs during a deep recession. Schwarzenegger included the credit in his January budget proposal.
The legislation included $500 million through 2013-14. A 2011 bill extended the program through 2014-15. And a Calderon measure last summer continues the program through at least June 2017.
The perk applies to feature films with budgets between $1 million and $75 million, movies of the week with a budget of at least $500,000; and new television series with budgets of at least $1 million. The minimum is meant to exclude bargain-basement features and the pornography industry.
The credits can be applied against a project’s income and sales-and-use-tax liabilities. Expenses eligible for the credit include crew and staff salaries, construction and other production costs, such as food and lodging. The credit cannot be claimed for salaries for writers, actors and publicity campaigns. Seventy-five percent of production days have to be in California.
Calderon carried bill
While the FBI affidavit leaves unclear why the agency made the film credit the focus of its sting, Calderon, seen as a business-friendly Democrat, carried the 2009 bill that created the tax break. He was the chairman of the Select Committee on California’s Film and Television Industries. He also sat on the California Film Commission.
According to the affidavit, when Calderon met the undercover agent in February 2012, he noted that he had carried that bill and that his daughter, Jessica, had helped write the script for a movie called “American Gigolo 2.” He asked the agent/studio owner, who called himself Rocky Patel, if he would like to look it over.
The two met up again in June. There, the agent told Calderon that the script would cost about $500,000 to produce. “The (agent) suggested that it might be worth investing in the film if the threshold for the tax credit legislation was lowered to $500,000. The (agent) told Ronald Calderon that just the mention of the tax credit would put his investors ‘over the roof,’ ” according to the affidavit.
If Calderon had succeeded in his attempt to lower the independent film threshold, the purported film studio owner would have been just another applicant seeking credits, facing long odds with the lottery system.
“Why would he have pushed something he had little chance of getting?” said lobbyist Barry Broad, who represents unionized TV and movie workers. “You’d think that would have been something that occurred to Senator Calderon.”
Experts have debated the economic value of the credits. Last year, the Legislative Analyst’s Office weighed in on a pair of studies by the Los Angeles County Economic Development Corporation and UCLA’s Institute for Research on Labor and Employment. The LAO concluded that both studies likely overstated the economic benefit and said the incentive likely resulted in an overall loss of tax dollars.
Lenny Goldberg of the California Tax Reform Association, said there is no way to measure how much the benefit has prevented productions from leaving the state. Some projects that got the money likely had no plans to go elsewhere, he said.
“In California, how do you tell what’s going to be made here and what’s not going to be made here?” Goldberg said.
About 40 states offer some type of incentives to film productions. New York’s program exceeds $420 million annually. Louisiana and Georgia, meanwhile, have an open-ended supply of credits.
John Bails, executive vice president of Film Production Capital, a New Orleans-based company that tracks the incentives, said the California program falls into its own category: While other states are trying to attract TV shows and movies, California’s credit is focused on keeping them from leaving.
“If it wasn’t working, I don’t think they would be continuing to fund it,” Bails said. He noted, though, that the credit is a favorite of the state’s TV and movie industry and the many lawmakers representing the Los Angeles region.
“Does it still exist because of the lobbying effort or does it still exist because it has a proven track record of keeping things in California?” he said. “Probably a little bit of both.”
A tax break lottery
The California Film Commission began accepting credit applications in July 2009 and gave out two years worth of credits in the first several months. As of July, $600 million worth of credits have been allocated.
Credits for a given fiscal year usually are gobbled up in a day, with lengthy waiting lists. Commission workers pull applications from a spinning plexiglass cylinder under the watch of law enforcement.
“If they get our credit, great. If they don’t, they go to one of the other places where they’ve put a business plan together,” commission executive director Amy Lemisch said.
Independent films are guaranteed $10 million of the $100 million, and the law allows them to sell credits to raise up-front money for their project. Democratic political consultant Chris Lehane took that approach after he received $400,000 in tax credits to help make “Knife Fight,” his 2012 movie starring Rob Lowe as a political consultant advising a fictional candidate for California governor.
“We would not have produced the film but for those tax credits,” Lehane said. “You do have a responsibility to the investors in these films to do what makes sense economically.”
Despite the current scandal, a group of Democratic lawmakers from districts with significant film and TV industries wants to revamp the 5-year-old film tax credit. One of the lawmakers, Assemblyman Mike Gatto, D-Los Angeles, said possible changes include expanding the credit to movies costing more than $75 million and network television shows based in the state. Network shows currently are eligible for the incentive only if they relocate to California.
Gatto and other tax-credit supporters said they hope the FBI investigation won’t have an impact on any legislation, but they also are realists.
“It’s impossible to ignore,” Gatto said. “But they could have picked anybody from any industry.”