Heated argument

At the regulatory level, Sacramento has made a substantial investment of time and energy in a long-term plan to use California’s southern desert as a hotbed of solar power. Earlier this month, working with state Secretary for Natural Resources John Laird, U.S. Secretary of the Interior Sally Jewel released the Desert Renewable Energy Conservation Plan’s Final Environmental Impact Statement. The document “outlines a 25-year blueprint for the development and management of 10 million acres of federal public lands in the California desert, currently managed by the Bureau of Land Management,” according to CleanTechnica. Envisioned as “part of a much larger and more comprehensive effort to develop a total of 22 million acres in California’s desert,” the site added, advocates claimed the plan could contribute to the production of some 20,000 megawatts of alternative energy, meeting federal and state benchmarks “through to 2040.”

But solar development in desert communities has not met with universal acclaim. “California’s rooftop solar industry is at war with the state’s major utilities over a program known as net metering, which determines how much money solar customers are paid for the electricity they generate,” as the Desert Sun explained. “Utility companies want to slash those payments and charge solar customers special monthly fees, while solar companies want things to stay the way they are, at least for the next few years. The public utilities commission is expected to make a decision next month.”

Pricing problems

The conflict has drawn in consumer groups, which agree with the utilities that solar customers aren’t being charged enough “to keep the electric grid running. As a result, they say, non-solar customers are increasingly shouldering the burden of higher rates. That claim is partly supported by independent research, although most academic experts say many more people need to go solar before the ‘cost shift’ becomes a serious problem,” the Sun noted. Ironically, however, solar industry advocates have insisted that rates should be kept low enough to encourage large numbers of people to consider the switch to solar.

In casting blame, advocates have pointed the finger at Sacramento. “The California Legislature has raised the cap on net metering several times,” said Brad Heavner, policy director at influential solar energy association CALSEIA, in an interview with CleanTechnica. The CPUC, he explained, was recently directed by lawmakers to consider “whether the net metering structure needs to be changed before removing the cap altogether” — set at 5 percent of combined peak demand among customers. “So the timing is somewhat arbitrary and is potentially disastrous because it coincides with the scheduled changes to the federal Investment Tax Credit.” Analysts like Heavner worry that if California solar customers lose tax credits while having their rates raised, the critical mass of users the solar industry needs will swiftly dissipate.

Unintended consequences

In an added twist, the same regulations responsible for utility ratepayers bearing a disproportionate share of costs have excluded solar owners from clean-energy subsidies that utilities and some developers have cashed in on. “If a home or business has a rooftop solar system, most of the wattage isn’t included in the ambitious requirement to generate half of the state’s electricity from renewable sources such as solar and wind by 2030, part of legislation signed in October by Gov. Jerry Brown,” as the Los Angeles Times observed. “That means rooftop solar owners are missing out on a potentially lucrative subsidy that is paid to utilities and developers of big power projects. It also means that utility ratepayers could end up overpaying for clean electricity to meet the state’s benchmark because lawmakers, by excluding rooftop solar, left out the source of more than a third of the state’s solar power.”

Only about one-third of Californians can afford to realize the American dream of owning their own home. The homeowners’ property tax exemption of $7,000 (worth a $70 deduction on your property taxes) has not been increased since 1972 when the median priced home sold for $28,660. Currently, an average home is selling for nearly 10 times that amount, and yet the homeowners’ exemption remains unchanged.

Increasing the homeowners’ property tax exemption from $7,000 to $32,000 will save every homeowner in California an additional $250 per year. This will help to mitigate the heavy financial burden placed on homeowners from property tax increases to repay local bonds, and provide some relief from excessive utility fee and charge increases.

By increasing the renters tax credit, this act will provide tax relief to renters, who also face severe housing affordability problems.

Details on the renters’ credit can be found on page 5 of this PDF.

Spotlights on existing CA programs

At a time when affordable housing and poverty are emerging as big issues in California, the Howard Jarvis measure is likely to have little trouble gathering signatures. The cost of housing pinches everyone.

But the measure is also likely to put the spotlight on existing affordable housing programs in the state. A 2003 report by the Public Policy Institute of California on those programs was not flattering, depicting them as helping relatively few people and as being inefficient and ineffective. I have cited this report on CalWatchdog.com and in U-T San Diego editorials. Here’s a previous summary:

The study cited profound flaws in the state’s primary affordable-housing law. It forces cities to plan for needs that are much more appropriately addressed on a regional level. It emphasizes process — laborious long-term planning — over results — more housing units.

The PPIC analysis identified high-cost states with similarities to California that had significantly more success with affordable housing. In New Jersey, the “builder’s remedy approach” gives developers concessions in return for helping a community meet its affordable-housing obligations. Giving developers a profit motive has yielded “far more housing units” than previous policies. California’s version of this approach is much more constrained.

In Massachusetts, the state radically simplified the approval process for residential projects in which at least one-quarter of the units had “long-term affordability restrictions.” To limit NIMBYism, developers can appeal permits rejected at the local level to a state board.

Assembly speaker wants to ramp up approach PPIC knocked

But instead of heeding the PPIC, Assembly Speaker Toni Atkins, D-San Diego, seeks to double-down on the approach the think tank criticized. She’s calling for hundreds of millions of dollars in new state subsidies to create a few thousand new units across California.

New York Mayor Bill de Blasio, by contrast, argues that housing prices will only come down in a significant way if there is much more housing stock. He’s seeking to add 240,000 units in his city.

The Howard Jarvis proposal is less ambitious than de Blasio’s, but it would also offer broad benefits. As the PPIC report laid out, the current California approach of providing affordable housing to a few lucky families is more comparable to a lottery than to a program offering help to a broad category of residents.

The PPIC report can be read here.

With a unanimous vote, the appropriations committee passed a $300 million increase in tax credits for film and television, bringing the size of the controversial program up to $400 million. Assembly Bill 1839 is coauthored by Assemblymen Raul Bocanegra, D-Pacoima, and Mike Gatto, D-Los Angeles.

The committee has put its fingerprints on the bill, tinkering with some key provisions. As Deadline Hollywood reports, the legislation now strips out at least one part of the current system — a complex lottery system that came in for criticism even from advocates of subsidizing production. “Applicants will be ranked according to the net new jobs created and overall positive economic impact for the entire state,” said Senate President Pro Tem Kevin de Leon, D-Los Angeles, calling the lottery “flawed and arbitrary.”

Lottery reform is designed to enable lawmakers to better prevent subsidy abuses by studios and production companies. Falsely inflated job creation numbers, for instance, would run afoul of the new incentive rankings, whereby recipients are chosen for a greater share of tax credits. De Leon explained that, under the new system, applicants for credits would be ranked according to jobs created and overall economic benefit to the state of California.

Having agreed on the legislative tweaks, the committee now sends AB1839 to the full Senate, as well as the Assembly floor, where it passed overwhelmingly in its original form.

There is some uncertainty as to whether Gov. Jerry Brown will extend his support, however. The governor has been silent on the issue for months. Pressed by Variety, Los Angeles Mayor Eric Garcetti sounded an optimistic tone. “I wouldn’t be naive enough to say that the governor is going to come down on that exact number,” he said. “But I have just watched the evolution, where this governor understands that this is a key industry, where he and his staff have told us privately we are not going to preside over its decline, and where understands it is no longer just a Southern California issue.”

An industry arms race

In addition to expanding the already sizable subsidy program, the bill would extend the program at least to 2019 — a concerted effort to stay competitive with the state of New York. Legislators in the Empire State maintain their own $400 million-plus Film Tax Credit Program, and ensure that TV production receives attractive credits as well. These measures have been so effective in luring production away from Hollywood that last year, for the first time on record, New York City surpassed Los Angeles in the production of hour-long pilot episodes of televised dramas.

To discourage jockeying across types of production and apples-to-apples competition for cash, AB1839 set up individual baskets of money for four categories of productions: independent films, TV pilots and renewed series, feature films, and — in a telling move — productions coming back to California from out of state.

A losing battle

Although AB1839 boasts powerful support in Los Angeles and Sacramento, evidence strongly suggests that California is fighting a losing battle — by fiscal standards if not political ones. A recent Legislative Analyst’s Office report concluded that the Golden State is actually failing to recoup its supposed investment in keeping the entertainment industry local, losing some 35 cents on the dollar.

As KPCC reported, the LAO admitted, “[I]deally, states would not compete on the basis of subsidies.” Nevertheless, the political pressure to spend anyway remained strong, “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.”

Unless Brown takes a firm stand against his own party, it’s likely that California’s entertainment industry subsidies will continue into the rest of this decade and beyond.

Assembly Bill 1839 has been introduced by Raul Bocanegra, D-Pacoima, and Mike Gatto, D-Burbank. The bill offers enlarged tax breaks to the big-budget productions that lawmakers from Los Angeles to Sacramento want to see back in California.

Back in 2009, then-Gov. Arnold Schwarzenegger won support for the $100 million-a-year credit program still in place today. Now, however, funds have run out. Tallying up the economic productivity boosted since then,  Bocanegra and Gatto say AB1839 should extend California’s industry tax credit to 2022. Some 270 projects under the current law yielded $4.75 billion and 51,000 new jobs, mostly high-paying, the assemblymen told the Los Angeles Times.

Fifty-nine legislators have co-sponsored AB1839, prepared to quadruple the $100 million annual credits that current law provides.

In Los Angeles, the effort has the strong backing of Mayor Eric Garcetti. “Film Czar” Kenneth Ziffren, head of the city’s Entertainment Industry and Production Office, talked up the benefits of the bill when it passed out of committee by a unanimous bipartisan vote.

According to the Hollywood Reporter, however, the state Senate lacks the Assembly’s unbridled enthusiasm for AB1839, and Gov. Jerry Brown remains noncommittal, although he has signed incentive bills in the past. So far, the governor’s office has expressed optimism, but little more.

Bidding war

Despite the bill’s strong support among industry figures and top Los Angeles officials, critics say studios are now simply exploiting a bidding war among states convinced their productions are worth the tax gift. “Regional on-location film production” has actually risen this year in California, but production dependency on tax credit has increased, too.

Meanwhile, other cities lavish credits on productions they say pump up the local economy. New York City’s “Filming is Good for NYC” campaign is estimated by city officials to funnel some $400 million from film production into the municipal economy.

The New York initiative has played a powerful role in pulling big-ticket programs away from Hollywood. Today, top brands and shows across the spectrum haven’t hesitated to follow the money.

When Jay Leno was replaced with Jimmy Fallon on “The Tonight Show,” for instance, it relocated from Los Angeles to New York City for a cool $20 million in tax incentives. Garcetti is now fighting against New York Gov. Andrew Cuomo for the favor of CBS’ “Late Show,” which could move to Los Angeles now that Stephen Colbert will take over from longtime host David Letterman.

Foreign competition

Los Angeles doesn’t just face competition from other American cities. Foreign countries have even gotten in on the act. The United Kingdom measured gains equivalent to $368 million after its tax credit package was expanded last April from feature films to high-end television shows like “Game of Thrones.” Kiefer Sutherland’s “24” series is getting a London reboot thanks to the package.

California could once count on the economic benefits of the powerhouse entertainment industries. Over the past several decades, that’s changed dramatically. Sensing an opportunity, legislators in states ranging from Louisiana to Minnesota to Maryland to New York created a new way to attract production companies, films and television shows.

The idea was simple: pay them.

Rather than shelling out money up front, states offered tax incentives. The size and significance of these benefits have increased steadily over the years, and California’s entertainment industry has contracted apace. By one estimate, 16,000 jobs have been lost over the past decade.

Still, there are signs that the nationwide effort to poach Hollywood talent has hit a peak. Maryland’s tax credit negotiations over “House of Cards” dragged on for months, with some lawmakers angrily portraying the impasse as an attempted extortion. In Florida, that state’s $300 million incentive package is drawing fire for a new mandate requiring counties to help foot the bill.

With California just beginning to regain its budgetary footing, however, the political jockeying surrounding AB1839 is set only to intensify.

The California Tax Code is a monster. Just the first 136 sections of the code fill up 202 pages with more than 100,000 words. The entire code contain 60,709 sections. If those first 136 sections are indicative, the entire code contains more than 90,000 pages and in excess of 45 million words.

One of the contributors to the length and complexity of California’s tax law are the numerous tax credits built into it. There are scores of tax carve-outs for favored constituencies, for groups deemed to need help, and to incentivize activities deemed in society’s interest.

The largest credit is the mortgage interest deductions, for which taxpayers got to keep an estimated $4.4 billion that would have gone to the state in the 2012-13 fiscal year. Others deductions include the exclusion for employer contributions to pension plans ($4 billion), employer contributions to accident and health plans ($3.6 billion), Social Security benefits ($2.6 billion) and the charitable contribution deduction ($1.6 billion). Tax credits are also provided for low-income renters, the blind, low-income housing expenses, first-time home buyers, motion picture companies, student loan interest, clergy housing and on and on.

While the credits are a boon to the recipients, they have denied the state tax money that some politicians would like to get.

“Our current tax preference portfolio now exceeds $47 billion, equal to half of our total revenue,” said Sen. Lois Wolk, D-Davis on the Senate Floor April 22, speaking in support of her bill, SB 365. “This bill requires that all future bills that create tax preferences state the goals of the preference and identify specific indicators and data measurement to see if it works. It will require a 10-year sunset on these bills. SB 365 will ensure that the Legislature uses the public dollar wisely. The bill affects no current tax benefits, only future ones.”

Chamber calls it a ‘job killer’

There was no discussion or debate, and the bill passed the Senate 22-11 along party lines. But the California Chamber of Commerce, which has placed SB 365 on its list of “job killer” bills, is hoping to head it off in the Assembly.

SB 365 “creates uncertainty for California employers making long-term investment decisions by requiring tax incentives end 10 years after their effective date,” the Chamber states on its website. “When businesses choose to locate in a state, factors such as the availability of a skilled workforce, infrastructure, regulatory environment, and tax structure all play a significant role. Businesses evaluate whether they can rely on these factors to remain relatively stable and consistent in the long term.

“Furthermore, for capital-intensive industries like manufacturing and research and development, investment decisions are made many years into the future. The ability for corporate decision makers in these industries to plan anticipated costs over a span of many years is an important factor when determining locations for these investments. Establishing an arbitrary maximum 10-year sunset puts the long-term viability of any credit in jeopardy and, in many cases, could ultimately render the credit’s value useless in a company’s final decision on a location.”

Instead of an automatic sunset, the Chamber wants future tax credits “to be evaluated on their own merit. A reasonable sunset should be applied only if appropriate.”

Justification for tax credits

The Franchise Tax Board’s 2011 Tax Expenditure Report provides background on tax credits, which the government calls “expenditures” even though the state is simply allowing people and businesses to keep some of the money they earn rather than hand it over to the government.

“There are two primary policy motivations for adopting tax expenditures,” the report states. “The first is to move towards a more equitable tax system by providing relief to taxpayers facing a monetary cost due to their circumstances in life. The second is to provide taxpayers with incentives to alter their behavior.”

For example, carpooling has the societal benefit of helping reduce traffic congestion. So it may be in government’s interest to provide a tax incentive for carpooling to motivate those who would otherwise drive to work alone to instead share their commute.

“Thus, a credit for carpooling will allow the person who chooses carpooling to reap some of the social benefit of carpooling,” the report states. “This will increase the likelihood of a decision to carpool. In such a situation, if the net social benefit from carpooling is positive, the fact that the tax system alters private decisions (or violates tax neutrality) is actually good. Policy makers must be careful, however, to ensure both that tax incentives induce desired behaviors and that they do not induce too much of the desired behaviors.”

Common concerns about tax credits are that they may:

* Necessitate an increase in tax rates or a cut in expenditures.

* Complicate the tax code.

* Induce undesirable behavior from taxpayers. For example, if a tax credit is set too high, it might divert investment from other projects that would be more beneficial to the economy.

* Provide expensive windfalls to some taxpayers without furthering the intended policy goals.

Clumsy at best

And tax credits are clumsy mechanisms at best. The report lists numerous alternatives that might achieve the same policy objectives:

* Instead of providing targeted tax credits designed to improve the general economy, the same effect could be achieved by reducing overall tax rates.

* Tax credits aimed at spurring investment in specific activities, industries, or geographic locations could be replaced with direct government loans, loan guarantees or rate subsidies.

* Tax credits can be replaced with government mandates. For example, the Low-Income Housing Expenses Credit could be replaced with requirements that lenders or developers divert a portion of their economic activity to the low-income market.

* Almost any tax credit could simply be replaced with a direct expenditure. For example, instead of offering a Child Adoption Expense Credit, California could make direct payments, equivalent to the tax savings available under the credit, to couples who adopt children.

“There are potentially many good reasons for using tax expenditures within a tax system,” the report concludes. “However, policymakers should give careful thought to the reasons why the tax expenditure is needed, and the potential adverse consequences of adopting or retaining the tax expenditure.”

If SB 365 is approved in the Assembly and signed by Gov. Jerry Brown, there is a distinct possibility that it won’t achieve its 10-year automatic sunset objective. That’s because it would in effect allow the current Legislature to dictate to future legislatures the terms of future tax credit legislation.

“[E]ven if a general sunset requirement were included in statute, there would be nothing to prevent a future Legislature from enacting an open-ended tax expenditure ‘notwithstanding’ the statutory prohibition,” the bill’s legislative analysis concludes. “Courts have long held that one legislative body may not limit or restrict its own power or that of subsequent Legislatures, and the act of one Legislature may not bind its successors. In practical terms, it means that subsequent Legislatures are under no legal obligation to comply with the provisions of this bill.”

By Joseph Perkins

The California Film Commission is holding a lottery next week for filmmakers and television producers. The lucky winners will share $100 million worth of taxpayer subsidies.

It’s part of the state’s three-year-old Film and Television Tax Credit Program, the purpose of which is to prevent rival states from luring productions away from Hollywood.

Since the program’s inception, tax credits have gone to some 165 productions, according to Amy Lemisch, the Film Commission’s Executive Director. Those “incentives” have generated nearly $3 billion in spending here in the Golden State, she said, and created nearly 30,000 jobs.

The Film Commission is hopeful that the Legislature will approve a bill, introduced by Assemblyman Felipe Fuentes, D-Sylmar, which would extend the tax credit program, scheduled to expire next year, until 2018.

The measure passed the Assembly Revenue and Taxation Committee last week. It remains to be seen if it ultimately finds its way into the state budget the Legislature sends to Gov. Jerry Brown.

Tax Credit Program Does Not Reap Promised Benefits

Lawmakers just might consider the tax credit a luxury the state treasury simply cannot afford, giventhe $16 billion state budget deficit.

And especially considering a recent report by the UCLA Institute for Research on Labor and Employment suggesting that the $100 million-a-year state giveaway does not yield the payoff claimed by Lemisch and other less-than-objective boosters.

The report, authored by Lauren Appelbaum, Chris Tilly, and Juliet Huang, studied the economic and production impact of the state’s film and television tax credit. It concluded that the return on the Hollywood subsidy program is, at best, an economic wash for the state.

According to the report, in order for the state to break even on the tax credit, at least 88 percent of productions applying for but not receiving the credit would have to film outside of California. But of the sample the authors studied, 36 percent of productions passed over for state tax credits nonetheless filmed in California.

That’s because, while film and television producers are only too happy to take state subsidies, the handouts are not the lone determining factor in where motion pictures and TV shows are made.

Other important factors cited by the report include production crew depth and quality, technological expertise and a critical mass of production and postproduction facilities.

That echoes a 2010 report prepared for the Los Angeles Economic Development Corporation by the Kyser Center for Economic Research that listed those factors, as well as California’s unique confluence of well-regarded film schools, entertainment community and film industry suppliers.

All of those factors work in California’s favor, wrote UCLA’s Appelbaum, Tilly and Huang, and tend to keep film and television here in Golden State.

There is one tangible benefit of the film and TV tax credit, at least at the margin: and it helps to offset the high cost of doing business in California, includes state and local taxes, labor costs and regulation.

However, if the cost of doing business in California was average for the 50 states — rather than ranking worst among the states — it would have far more impact than tax credits on the share of films and TV shows produced in California, compared to other states.

By KATY GRIMES

One senator is trying to offer California manufacturers a break to help stimulate business growth. But even his modest sales-tax credit was met with resistance in a hearing at the Capitol on Wednesday.

Inland Empire Republican Sen. Bob Dutton authored SB 395, which would provide a 6 percent manufacturer’s investment tax credit on equipment purchases before July 1, 2011, and 5 percent after the July date.

Dutton explained to the Senate Committee on Governance & Finance that the exemption is not a tax break, but a partial exemption of sales tax on equipment purchases. It only assists a business that is making an equipment purchase.

Since 2000, California has lost 600,000 manufacturing jobs, according to the California Manufacturers and Technology Association (CMTA). “Many of the jobs are good paying jobs,” said Dutton. A Senate committee analysis reported, “These jobs represent quality middle class careers that have an average wage of $60,000, provide for upward mobility and typically include health benefits.”

And manufacturers have a large financial impact on a network of suppliers and vendors, which also employ thousands of Californians.

The Manufacturer’s Investment Tax Credit of 1994 (MIC) was first enacted to stop the mass exodus of manufacturing jobs to other states or countries during the recession of the early 1990s. That’s a place we find ourselves again since the investment credit ended in 2003.

And the U.S. recession that began in 2007 has been especially devastating in California, which still has 12.4 percent unemployment, second highest among the 50 states. The recovery that began in 2009 has been modest.

During the decade the MIC was in effect, more than 265,000 manufacturing jobs were created.

“California is only one of three states in the U.S. that taxes manufacturing equipment purchases with no credit or exemption,” said Dutton, a statement supported by the CMTA. He added that “the current policy has resulted in less production in California. Out-of-state companies electing to grow elsewhere and in-state companies continuing to shift workers or facilities to other regions that do not burden capital investments with excess taxation.”

What many do not realize is that there is an additional 1 percent tax assessed on manufacturing equipment annually, like a personal property tax on the business, benefitting the state well beyond just the potential for increased sales tax and employment taxes.

Despite the apparent benefits, some claim that SB 395 would result in a revenue loss to the state. “There is no debate on this — this bill costs too much,” said Sen. Christine Kehoe, D-San Diego. Kehoe said the state was faced with the possibility of losing up to $1 billion in revenue, while also losing “important programs,” and questioned the public policy of the issue.

High-Cost California

SB 395 would provide manufacturers some relief from the high cost of doing business in the state. According to the Milken Institute’s annual study, that cost is currently more than 23 percent higher than the national average. “Removing barriers to investments to promote new machinery and equipment purchases in California will only serve to foster productivity gains, making manufacturers more competitive and allow them to keep employees and grow the middle class in California,” the CMTA said.

Lenny Goldberg, executive director of the California Tax Reform Association, opposed the bill. He said, “It’s not really an incentive.” And Goldberg also stated his concern for “the substantive revenue loss.”

But Dutton’s press secretary, Larry Venus, reported that the idea behind the tax exemption is to “stimulate something that is not currently happening.”

Venus provided Dutton’s staff analysis, which found a substantial jobs-creation stimulus. Referencing Milken Institute research, they found “a 5-cent reduction in sales tax for the purchase of manufacturing equipment would create 500,000 jobs over 10 years, of which 140,000 would be created in manufacturing, and contribute $459 million in new net revenues to the state.”

Reinstatement of the exemption would reduce operating costs and help California companies become competitive in the marketplace.

Double Taxation

The exemption also would go a long way toward ending double taxation, which California manufacturers have suffered under for many years. “Most states recognize that exempting equipment used in manufacturing or research and development from the sales tax eliminates a double tax on businesses. Property is taxed when it is purchased (sales tax) and later it is taxed as business personal property (property tax),” stated Dutton’s analysis.

For many years California was the national leader in the development of technology. Yet now technology manufacturing has been shifting to other states. And now the state has fallen far down in nationwide rankings for tax incentives to attract businesses, according to the Tax Foundation.

According to the CMTA, Dutton’s bill would at least offer a proven option for manufacturing business owners: “A new and improved tax treatment for manufacturing and R&D investments will send a strong message that California is able to maintain fair and stable tax policies and to make the state more business-friendly even during difficult economic times.”

SB 395 passed out of the committee by a vote of six for and three against.