Revenue and Taxation

Revenue and Taxation
Chapter 10: Run Home to Hollywood! Run to California!
Ashley Lavon Hines
Code Sections Affected
Revenue and Taxation Code §§ 6902.5, 17053.80, 17053.85, 19136.8,
23623, 23685, 25128.5, 25136 (new); §§ 17039.2, 23036.2, 23101,
25120, 25135 (amended); §§ 17053.80, 23623, 25136 (repealed).
ABX3 15 (Krekorian); 2009 STAT. Ch. 10 (Effective February 20, 2009).
“There’s no place like home.”
1
—Dorothy
I. INTRODUCTION
Pastel yellow dress with purple polka dots. Check. Sky blue belt with a gold
butterfly buckle. Check. Bright orange and green striped shoes. Check. Ruby red
faux-snakeskin handbag. Check. Now, with her silver braces brushed and thick
eyeglasses on, America Ferrera is dressed and ready to act. She leaves her New York
dressing room on the set of her hit show, Ugly Betty, on which she plays the ever-so2
sweet, but-very-unlikely glamour girl, Betty.
While walking to the set, Ferrera sees many people who aid in making the show
a success. The New York-based “below-the-line” employees—technical crew
members, production assistants, art directors, costume designers, make-up artists,
prop crews, and many others—are building the set, making sure the lighting is
3
perfect, and ensuring that the shooting day runs smoothly and productively.
This was not always the case. Although the show is focused around the
production of a New York-based fashion magazine—with Betty’s home set in
Brooklyn—the show became a hit while taping in film and television’s hometown:
4
Hollywood. Once the show learned of the film and television tax incentives
available in other states, it decided to “run away” from the high-cost of California
5
and moved the production to New York. The move resulted in job losses for the
many “below-the-line” employees living in California, because these employees do
1. THE WIZARD OF OZ (MGM 1939).
2. See Betty’s Ugly Outfits, EW.COM, available at http://www.ew.com/ew/article/0,,20011931,00.html
(last visited Sept. 15, 2009) (showing pictures of some of Betty’s worst outfits).
3. See Bonnie Reiss, Goodbye Ugly Betty—And 75 Million Dollars, FOX & HOUNDS DAILY, May 22,
2008, http://www.foxandhoundsdaily.com/blog/bonnie-reiss/goodbye-ugly-betty-and-75-million-dollars (on file
with the McGeorge Law Review) (listing some of the below-the-line employees that work on a production).
4. Michael Ventre, Battle for Film, TV Production Gets ‘Ugly’, MSNBC, July 14, 2008, http://www.
msnbc.msn.com/id/25664707/wid/7279844 (on file with the McGeorge Law Review).
5. Id. (reporting that Ugly Betty will save more than $8 million a year by moving from Los Angeles to
New York).
759
2010 / Revenue and Taxation
6
not move with the production. Also, unfortunately, Ugly Betty was not the first
production—or the last—to leave the state in search of lower-cost production
7
opportunities.
8
The film and television industry is not the only area where jobs are being lost.
9
Due to the state of the economy, small businesses are cutting positions. Also, some
argue that multi-state businesses are not creating new job opportunities in California,
because existing law increases the amount of state income taxes businesses must pay
10
if they expand in California. As a result, the Legislature enacted Chapter 10 in order
11
to stimulate the economy by creating jobs and encourage hiring. By providing three
distinct tax incentives, Chapter 10 addresses the runaway production dilemma, the
ability for small businesses to hire, and the decision for multi-state businesses to
12
expand in California.
II. BACKGROUND
A. Attracting and Retaining Film and Television Production
1. California Film Commission
California is home to the unique motion picture industry, which provides
13
significant economic contributions to the citizens of California. In 1984, the
Legislature created the California Film Commission (CFC) to facilitate, retain, and
14
attract filming in California. The Legislature found that the creation of the CFC was
necessary, because the motion picture industry in California was in danger due to
15
other states’ and countries’ efforts to lure away productions. The CFC is now a
“one-stop” permit-processing shop, providing free permits and no location fees for
16
production on state-owned property in California.
6. Reiss, supra note 3.
7. Richard Verrier, As the Hollywood Machine Abandons L.A., Its Supporting Workers Struggle, L.A.
TIMES, July 12, 2009, available at http://articles.latimes.com/2009/jul/12/business/fi-ct-runaway12 (detailing
the impact of losing the television show Deal or No Deal in Connecticut).
8. See ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 1-3 (Feb. 15, 2009) (describing the
need for a small-business tax credit and a change in the corporate income tax apportionment to stimulate the
economy).
9. Cyndia Zwahlen, Job Losses at Small Companies Could Reach 2 Million by 2010, L.A. TIMES, Feb. 9,
2009, available at http://articles.latimes.com/2009/feb/09/business/fi-smallbiz9.
10. E.g., Evan Halper, California Budget Plan Includes Corporate Tax Breaks, Individual Tax Hikes,
L.A. TIMES, Feb. 14, 2009, available at http://articles.latimes.com/2009/feb/14/local/me-budget-taxbreaks14
(finding that supporters believe that multi-state business do not expand because it increases the corporate taxes
they pay).
11. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 1-4 (Feb. 15, 2009).
12. Id.
13. CAL. GOV’T CODE § 14998.1 (West 2009).
14. Id. §§ 14998, 14998.1.
15. Id. § 14998.1.
16. Id. § 14998.8(b); Cal. Film Comm’n, Other California Film Incentives, http://www.film.ca.gov/
productiontools/incentives.html (last visted Sept. 14, 2009) (on file with the McGeorge Law Review).
760
McGeorge Law Review / Vol. 41
In 2000, the Legislature created the State Theatrical Arts Resources
17
Partnership (STAR) within the CFC. STAR allows the CFC to collaborate with
other state agencies to identify and offer an online directory of state-owned
18
surplus properties available for use in filmmaking. The CFC provides the
properties listed at a nominal fee, although the production companies are
responsible for any related costs that the State incurs due to filming at the
19
properties. However, despite these incentives, runaway productions still pose a
20
significant threat to the state’s film and television industry.
2. “Film California First”
In July 2000, the Legislature took the first aggressive step to combat
“runaway productions” by enacting the Film California First program under the
21
22
CFC. To “stop the decline of California film production,” the program
23
24
reimbursed certain film costs incurred by production companies. The program
contained a $300,000 cap for reimbursement of costs incurred for any one
25
production.
More than 800 productions received reimbursement under the program in
just the first eleven months; as of January 2002, the CFC reported that “nearly $6
26
million [had] been requested for reimbursement.” The CFC also reported in
2002 that major films, such as Kill Bill, The Italian Job, The Hulk, Catch Me if
You Can, and Biker Boyz, took advantage of the Film California First program
27
and the STAR partnership. In particular, a scene in Kill Bill—set originally to
28
be shot out-of-state—was filmed in a Los Angeles house owned by Caltrans.
The CFC permit records indicated that, from January through September 2002,
17. CAL. GOV’T CODE § 14999.55(a).
18. Id. § 14999.55(b)-(c).
19. Id. § 14999.55(d).
20. See GREGORY FREEMAN ET AL., L.A. COUNTY ECON. DEV. CORP., WHAT IS THE COST OF RUNAWAY PRODUCTION? JOBS, WAGES, ECONOMIC OUTPUT AND STATE TAX REVENUE AT RISK WHEN MOTION
PICTURE PRODUCTIONS LEAVE CALIFORNIA 1 (2005), available at http://www.film.ca.gov/pdf/press_release/
California_Film_Commission_Study.pdf (on file with the McGeorge Law Review) (calculating the potential
economic effects of runaway productions on the California economy).
21. 2000 Cal. Stat. ch. 127, § 13 (enacting CAL. GOV’T CODE § 15363.70, repealed by 2003 Cal. Stat.
ch. 229); see also CAL. GOV’T CODE §§ 15363.60-15363.65 (West 2009) (reenacting the regulatory structure for
the Film California First program).
22. CAL. GOV’T CODE § 15363.61(a)(4).
23. Id. § 15363.62(c) (defining “film costs”).
24. Id. § 15363.61(a)(4); id. § 15363.62(e) (defining “production company”).
25. Id. § 15363.63(c)(1).
26. Press Release, Cal. Film Comm’n, Governor Davis Proposes Tax Credit for California-Based Film
Production (Jan. 11, 2002), available at http://www.film.ca.gov/AboutUs/Press/011102.html (on file with the
McGeorge Law Review).
27. Press Release, Cal. Film Comm’n, Governor Davis Announces Film California First Success Stories
(Oct. 30, 2002), available at http://www.film.ca.gov/AboutUs/Press/103002.html (on file with the McGeorge
Law Review).
28. Id.
761
2010 / Revenue and Taxation
filming on state property was up forty-eight percent from the same time the
29
previous year. In addition, 300 of the 2,712 days spent filming occurred on
30
STAR properties. These figures indicate that the Film California First program
31
was successful in attracting and retaining film production in California.
Nevertheless, although the CFC deemed the Film California First program a
32
success, the program was defunded by the Legislature in 2003. In his signing
message, former Governor Davis urged the Legislature to restore the authority of
33
the program in the future. That same year, the Legislature “restore[d] the
34
statutory framework” of the program but did “not provide or restore funding.”
3. The Cost of “Runaway Productions” in California
The most recent report regarding the impact of “runaway productions” in
35
California was released in August 2005. The study—funded by a coalition of
leading entertainment industry groups—details the tax and revenue dollars that
36
the state continues to lose due to “runaway productions.” In the CFCcommissioned study, the statistics supplied by the Motion Picture Association of
America (MPAA) reported that, of the $56.6 billion spent nationally on motion
picture production payrolls and purchases from vendors in 2002, $34.3 billion
37
was spent in California. In addition, as reported by the MPAA, 353,076 people
were employed in the film industry nationwide in 2002 and 245,900 of those
38
people were employed in California.
Even with these statistics, the report concluded that “[t]he biggest threat to
39
motion picture employment and payrolls in California is runaway productions.”
According to the report, each time a one-hour drama—with twelve episodes—
leaves California, the state loses almost $27 million in production spending,
40
$76.5 million in economic output, and $3.1 million in state taxes. Additionally,
41
approximately 404 people lose the opportunity to work on the production. When
a “Big-Budget Feature Film” leaves California for a lower-cost location, the state
29. Id.
30. Id.
31. See supra text accompanying notes 29-30.
32. See 2003 Cal. Stat. ch. 229 (repealing Film California First Program).
33. Id. (Governor Davis’s signing message) (stating that the Governor agreed that the program had an
important mission, however, due to the tight budget constraints, the program could not continue at that time).
34. SENATE FLOOR, COMMITTEE ANALYSIS OF AB 1277, at 1-2 (Sept. 8, 2003). The relevant provisions
of the Film California First Program now appear in California Government Code sections 15363.60 to15363.65.
35. Press Release, Cal. Film Comm’n, California Film Commission Releases Comprehensive Study on
Tax Benefits/Revenues Generated by Film & Television Production (Aug. 22, 2005), available at
http://www.film.ca.gov/AboutUs/Press/082205.html (on file with the McGeorge Law Review).
36. Id.
37. FREEMAN ET AL., supra note 20, at 2.
38. Id.
39. Id. at 4.
40. Id. at 18.
41. Id.
762
McGeorge Law Review / Vol. 41
loses $69.7 million in production spending, $198.5 million in economic output,
and $10.6 million in state taxes—leaving 1,300 people without employment
42
opportunities.
B. Existing Hiring Credits for Businesses
In an effort to improve distressed areas in California and give disadvantaged
individuals employment opportunities, the Legislature created the Enterprise
43
Zone Hiring Credit in 1984. Also, existing law provides three additional hiring
tax incentive programs for taxpayers that employ qualified individuals in areas
44
that are targeted for economic development. The qualifying geographic
locations are labeled Enterprise Zones, Local Agency Recovery Military Base
45
Recovery Areas, Manufacturing Enhancement Areas, and Targeting Tax Areas.
Taxpayers that employ in these areas are eligible for a hiring credit for qualified
46
wages during the first five years of the employee’s tenure. In the first year of
employment, the taxpayer receives a tax credit for fifty percent of qualified
47
wages. For the following four years, the credit percentage decreases in intervals
of ten percent each year, providing a final ten-percent credit for the employee’s
48
fifth year of employment.
C. Apportionment of Multi-State Businesses State Income Taxes
In California, businesses that operate in multiple states may only be taxed on
a portion of their income; therefore, existing law provides a three-factor test to
49
determine the income on which a multi-state business is taxed. The existing
three-factor test requires most businesses to calculate their corporate taxes by
multiplying their business income by a fraction; the fraction represents the
average of “a business’s proportion of sales, property, and payroll in California
42. Id.
43. LEGISLATIVE ANALYST’S OFFICE, AN OVERVIEW OF CALIFORNIA’S ENTERPRISE ZONE HIRING
CREDIT 1-2 (Dec. 2003), available at http://www.lao.ca.gov/2003/ent_zones/ezones_1203.pdf (on file with the
McGeorge Law Review); see also CAL. REV. & TAX CODE § 23622.7 (West Supp. 2009).
44. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 5 (Feb. 15, 2009).
45. CAL. GOV’T CODE § 7072(c)(1)-(3) (West 2008) (providing criteria that areas must meet in order to
qualify as “enterprise zones”); id. § 7107(h) (defining “Local agency military base recovery area” as “any
military base or former military base or portion thereof”); id. § 7073.8(a)(1)-(4) (defining “manufacturing
enhancement areas” as areas that meet certain criteria regarding unemployment rates, population, median
household income, etc.); id. § 7097(a)(1)-(5) (defining “targeted tax areas” as those areas that meet four out of
five criteria regarding average unemployment rates, median family income, percentage of persons below the
poverty level, and community ranking among other communities that receive aid for Families with Dependent
Children).
46. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 5 (Feb. 15, 2009).
47. CAL. REV. & TAX. CODE §§ 23622.7(a), 23646(a), 17053.47(a), 17053.34(a) (West Supp. 2009).
48. Id. §§ 23622.7(a), 23646(a), 17053.47(a), 17053.34(a).
49. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 6 (Feb. 15, 2009); see also CAL. REV. &
TAX. CODE § 25128(a) (West 2004).
763
2010 / Revenue and Taxation
50
(with the sales factor double-weighted).” In theory, the current test decreases
the incentive to expand, because a business’s income tax payments in California
increase when the business “expands” its payroll, property, and sales in the
51
state.
III. CHAPTER 10
Chapter 10 was enacted as a part of the economic stimulus provisions in the
most recent state budget, meant to stimulate the California economy, create jobs,
52
53
and encourage hiring. Chapter 10 has three job-creating provisions. First, the
major provisions of the bill focus on the Legislature’s efforts to provide a $500
million tax incentive for films and television shows that are produced in
54
California. Also, Chapter 10 provides a temporary tax incentive for small
55
businesses that hire new, full-time employees. Lastly, Chapter 10 changes the
tax code for multi-state businesses, affecting how they calculate the state taxes
56
they pay.
A. Film and Television Tax Incentive
To address the concern of “runaway productions,” beginning with the 2011
57
tax year, those who pay taxes on qualified motion pictures may elect to receive
a twenty-percent tax credit for “qualified expenditures attributable to the
58
59
production of a qualified motion picture.” In addition, independent films and
television productions that relocate to California may elect to receive a twenty60
five percent tax credit.
In order to qualify for the credit, the motion picture must be one of the types
enumerated in California Revenue and Taxation Code section 17053.85(b)(15)(A)
50. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 2 (Feb. 15, 2009); see also CAL. REV. &
TAX. CODE § 25128(a). On the other hand, businesses that derive more than fifty percent of their gross receipts
from business activity involving agriculture, producing or refining oils, gas and minerals, savings and loans, or
banks and financial activities use the same three-factor test but with slight differences. Id. § 25128(b)-(c)
(stating that, in these instances, the sales factor is not double-weighted and therefore the denominator is three,
rather than four).
51. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 6 (Feb. 15, 2009).
52. Id. at 1.
53. Press Release, Cal. State Assembly, Film Production Incentive (Feb. 26, 2009), available at http://
democrats.assembly.ca.gov/members/a43/News_Room/OpEd/20090226AD43ED01.aspx [hereinafter Cal. State
Assembly Press Release] (on file with the McGeorge Law Review).
54. CAL. REV. & TAX. CODE § 17053.85(i)(1)(A) (enacted by Chapter 10).
55. Id. § 23623(a) (enacted by Chapter 10).
56. Id. § 25128.5(b) (amended by Chapter 10).
57. Id. § 17053.85(b)(15)(A)-(B) (enacted by Chapter 10).
58. Id. § 17053.85(a)(4)(A) (enacted by Chapter 10).
59. Id. § 17053.85(b)(6) (enacted by Chapter 10) (defining an “independent film” as a motion picture
with a budget between $1 million and $10 million that is “produced by a company that is not publicly traded”
and in which publicly traded companies have limited ownership).
60. CAL. REV. & TAX. CODE § 17053.85(a)(4)(B) (enacted by Chapter 10).
764
McGeorge Law Review / Vol. 41
61
and must satisfy four criteria listed in section 17053.85(b)(15)(B). “Qualified
motion pictures” are defined as productions “produced for distribution to the general
public” that are also one of the following types of productions: a production with a
budget between $1 million and $75 million, “[a] movie of the week or miniseries
with a minimum production budget of . . . $500,000,” “[a] new television series
produced in California with a minimum production budget of . . . $1,000,000 . . .
licensed for original distribution on basic cable,” independent films, or “[a] television
62
series that relocated to California.” In addition to meeting the definition of
“qualified motion picture” above, the production must satisfy all four of the
following criteria: at least seventy-five percent of the production days must occur in
California or seventy-five percent of the production budget must be used for services
63
performed within the state, including the purchase or rental of property; the motion
64
picture’s copyright must be registered; filming must commence no more than 180
65
days after the date of approval; and production must be completed within thirty
66
months from the date the application was approved.
Under Chapter 10, “qualified expenditures” that may be used to calculate the
refund include those incurred to purchase or lease tangible personal property and
“payments, including qualified wages, for services performed [within California]
67
in the production of a qualified motion picture.” In turn, “qualified wages”
include all wages that are required to be reported under the Unemployment
Insurance Code, payments in the form of fringe benefits, and payments to certain
68
individuals and independent contractors. “Qualified wages” do not include costs
incurred from reuse, licensing, or creation of an ancillary product such as “a
69
soundtrack album, toy, game, [or] trailer.” In addition, “qualified wages” do not
include expenses incurred from acquisition, development, overhead, financing,
70
promotion, or distribution of a qualified motion picture. Lastly, wages paid to
writers, directors, producers, performers, music composers, supervisors, and
71
background actors with no scripted lines also do not qualify.
Chapter 10 sets aside $500 million, apportioning $100 million a year to fund
72
73
the credit for the next five years. The CFC issues and regulates the credit and
61. Id. § 17053.85(b)(15)(A)-(B) (enacted by Chapter 10).
62. Id. The tax incentive does not apply to the production of commercial advertising, music videos,
productions for noncommercial use, news programs, public events programs, talk shows, game shows, sports
shows, awards shows, telethons, reality television programs, daytime dramas, strip shows, documentaries, halfhour episodic television shows, or programs for which licensed footage comprises more than fifty percent of the
production. Id. § 17053.85(b)(15)(D) (enacted by Chapter 10).
63. Id. § 17053.85(b)(15)(B)(i) (enacted by Chapter 10).
64. Id. § 17053.85(b)(15)(B)(iii) (enacted by Chapter 10).
65. Id. § 17053.85(b)(15)(B)(iv) (enacted by Chapter 10).
66. CAL. REV. & TAX. CODE § 17053.85(b)(15)(B)(ii) (enacted by Chapter 10).
67. Id. § 17053.85(b)(16) (enacted by Chapter 10).
68. Id. § 17053.85(b)(18)(A) (enacted by Chapter 10).
69. Id. § 17053.85(b)(18)(B)(i) (enacted by Chapter 10).
70. Id. § 17053.85(b)(18)(B)(ii)-(iii) (enacted by Chapter 10).
71. Id. § 17053.85(b)(18)(B)(iv) (enacted by Chapter 10).
72. CAL. REV. & TAX. CODE § 17053.85(i)(1)(A) (enacted by Chapter 10).
765
2010 / Revenue and Taxation
processes and approves or rejects all applications on a first-come, first-served
74
basis.
At the end of the five-year period, the Business Transportation and Housing
75
Agency must report on the success of the program. At the minimum, the report
must consider increases or decreases in the number of qualified motion pictures,
the amount of qualified wages paid, and the number of employment
76
opportunities.
B. Small Business Hiring Tax Incentive
77
To encourage the hiring of full-time employees by small businesses,
Chapter 10 provides a $3,000 tax credit for each new qualified full-time
78
employee that a qualified small business hires during a taxable year. “Qualified
full-time employees” are employees who are paid qualified wages—subject to
79
the Unemployment Insurance Code —on an hourly basis and average at least
80
thirty-five hours per week or are salaried and paid for full-time employment.
81
The Franchise Tax Board is responsible for implementing this credit. Unlike the
82
existing credits mentioned above, an employer does not have to be in a targeted
geographic area to receive the new credit under Chapter 10; however, an
employer may not receive a “double credit” and, therefore, cannot receive the
new credit for any employee for which the employer already receives one of the
83
tax credits mentioned above.
C. Multi-State Business Income Tax Apportionment
To encourage businesses to expand in California—by hiring new employees
and purchasing property in the state—beginning with the 2011 tax year, Chapter
10 allows multi-state businesses to choose annually between two methods of
84
apportioning state income taxes. A provision of Chapter 10, amended by
Chapter 544 in October 2009, allows multi-state businesses to calculate their
California income tax using the existing three-factor test—which multiplies the
73. See id. § 17053.85(e) (enacted by Chapter 10) (“The California Film Commission may prescribe
rules and regulations to carry out the purposes of this section . . . . The regulations shall include provisions to set
aside a percentage of annual credit allocations for independent films.”).
74. Id. § 17053.85(g)(1)(D) (enacted by Chapter 10).
75. 2009 Cal. Stat. ch. 10, § 15(a).
76. Id.
77. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 1 (Feb. 15, 2009).
78. CAL. REV. & TAX. CODE § 17053.80(a) (enacted by Chapter 10).
79. Id. § 17053.80(b)(5) (enacted by Chapter 10).
80. Id. § 17053.80(b)(2)(A)-(B) (enacted by Chapter 10).
81. Id. § 17053.80(h)(1) (enacted by Chapter 10).
82. See supra Part II.B.
83. CAL. REV. & TAX. CODE § 17053.80(b)(3)(A)-(D) (enacted by Chapter 10).
84. Id. § 25128.5(a) (enacted by Chapter 10).
766
McGeorge Law Review / Vol. 41
business’s income by an average of its “sales, property, and payroll in California
85
(with the sales factor double-weighted)” —or by “using only their percentage of
86
sales in California,” beginning on January 1, 2011.
The Legislature also amended existing statutory language to clarify the
income apportionment provision for multi-state businesses that choose to
87
apportion income based only on sales in California. First, Chapter 10 specifies
that a taxpayer is “doing business” in the state if any of the following conditions
are met: “the taxpayer is organized or commercially domiciled in [California]”;
the taxpayer’s sales in California exceed either $500,000 or twenty-five percent
of the taxpayer’s total sales, whichever is lower; the value of the taxpayer’s real
and tangible property in California exceeds $50,000 or twenty-five percent of all
of the taxpayer’s total real and tangible property, whichever is lower; or the
taxpayer pays $50,000 or more in compensation in California or the
compensation paid in California exceeds twenty-five percent of the taxpayer’s
88
total compensation, whichever is lower. Also, to determine if sales are in
California and included in the numerator of the sales factor, Chapter 10 defines
89
“sales” (beginning in the 2011 tax year) to include all gross receipts of the
taxpayer not already allocated under other sections of the Revenue and Taxation
90
Code. Importantly, Chapter 10 clarifies that, although “gross receipts” will
“include all gross amounts received for goods or services, or for use of property
to produce business income,” it “explicitly exclude[s] purely financial corporate
91
transactions.”
85. Id. § 25128(a) (West 2004) (calculating the three-factor test using sales, payroll, and property in the
state); ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 2 (Feb. 15, 2009).
86. CAL. REV. & TAX. CODE § 25128.5(b) (amended by 2009 Cal. Stat. ch. 544) (clarifying statutory
language to ensure businesses have the option to elect the single-sales-apportionment method, which calculates
tax “by multiplying the business income by the sales factor”); ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF
ABX3 15, at 2 (Feb. 15, 2009).
87. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 2-3 (Feb. 15, 2009).
88. CAL. REV. & TAX. CODE § 23101(b)(1)-(4) (amended by Chapter 10).
89. Id. § 25120(e)-(f) (amended by Chapter 10) (“‘Gross receipts’ means the gross amounts realized (the
sum of money and the fair market value of other property or services received) on the sale or exchange of
property, the performance of services, or the use of property or capital (including rents, royalties, interest, and
dividends) in a transaction that produces business income, in which the income, gain, or loss is recognized (or
would be recognized if the transaction were in the United States) under the Internal Revenue Code, as
applicable for purposes of this part. Amounts realized on the sale or exchange of property shall not be reduced
by the cost of goods sold or the basis of property sold.”).
90. Id. § 25135(b) (amended by Chapter 10); id. § 25120(f)(1) (amended by Chapter 10).
91. SENATE RULES COMMITTEE, COMMITTEE ANALYSIS OF ABX3 15, at 3 (Feb. 14, 2009); see also
CAL. REV. & TAX. CODE § 25120(f) (amended by Chapter 10) (stating that “gross receipts” excludes corporate
transactions such as repayment, maturity or redemption of loans, bonds or mutual funds; proceeds from
issuance of stock; “property acquired by an agent”; litigation awards; “tax refunds”; “pension reversions”; and
hedge funds).
767
2010 / Revenue and Taxation
IV. ANALYSIS OF CHAPTER 10
A. Will Motion Picture Productions Run Home to Hollywood?
1. Other States
Chapter 10 provides a new film and television tax incentive for motion
92
pictures produced in California. However, over forty states and Washington,
93
D.C., offer some form of tax incentive for producing in those states. Of those
offering the incentives, Michigan and Missouri currently offer the highest film
94
production incentives, with Michigan refunding up to forty-two percent.
95
Additionally, many states, including New York, refund at least thirty percent.
New York’s film and television industry is described by some as “Hollywood
96
on the Hudson” and is touted as “America’s first motion picture capital.”
Through its tax incentives, New York is making an aggressive push to “lure . . .
97
‘runaway productions’ away from competitions and back to the Big Apple.”
The available tax credit was increased to thirty percent from ten percent in April
98
2008 due to neighboring states’ competitive tax incentive programs.
99
New York’s program is working. According to a report by Ernst & Young
evaluating New York’s program, the film credit was responsible for creating and
92. CAL. REV. & TAX. CODE §§ 17053.85, 23685 (enacted by Chapter 10); ASSEMBLY FLOOR,
COMMITTEE ANALYSIS OF ABX3 15, at 3 (Feb. 15, 2009).
93. LEGISLATIVE BUDGET & FINANCE COMMITTEE, PENNSYLVANIA GENERAL ASSEMBLY,
PENNSYLVANIA’S FILM PRODUCTION TAX CREDIT AND INDUSTRY ANALYSIS 56-59 (2009), available at
http://lbfc.legis.state.pa.us/reports/2009/35.PDF [hereinafter PENNSYLVANIA’S FILM PRODUCTION TAX CREDIT]
(on file with the McGeorge Law Review); Cal. State Assembly Press Release, supra note 53.
94. See PENNSYLVANIA’S FILM PRODUCTION TAX CREDIT, supra note 93, at 56-59 (listing Michigan, at
forty to forty-two percent, and Missouri, at thirty-five percent, as the highest production tax credits of states that
provide them).
95. N.Y. State Governor’s Office for Motion Pictures & Television Dev., New York State Film
Production Credit, http://www.nylovesfilm.com/tax/ (last visited Nov. 4, 2009) [hereinafter NY Film
Production Credit] (on file with the McGeorge Law Review); Mich. Film Office, Incentives for Producers,
http://www.michiganfilmoffice.org/For-Producers/Incentives/Default.aspx (last visited Nov. 4, 2009) (on file
with the McGeorge Law Review); Louisiana Entertainment, http://www.louisianaentertainment.gov/film.aspx
(last visited Nov. 4, 2009) (on file with the McGeorge Law Review); Conn. Comm’n on Culture & Tourism,
Film Division, Digital Media & Motion Picture Tax Credit, http://www.cultureandtourism.org/cct/cwp/
view.asp?a=2126&q=317244 (last visited Nov. 9, 2004) (on file with the McGeorge Law Review).
96. Thirteen.org, New York Voices, Hollywood on the Hudson, http://www.thirteen.org/nyvoices/
features/hollywood.html (last visited Mar. 18, 2010) (on file with the McGeorge Law Review).
97. Id.
98. Press Release, N.Y. State, Governor Paterson Signs Bill Expanding Tax Credit for New York State
Film Productions (Apr. 23, 2008), available at http://www.state.ny.us/governor/press/press_0423081.html (on
file with the McGeorge Law Review); NY Film Production Credit, supra note 95.
99. N.Y. STATE GOVERNOR’S OFFICE FOR MOTION PICTURE & TV DEV., REPORT ON THE EMPIRE STATE
FILM PRODUCTION TAX CREDIT 15, 18-19 (2008) (stating that since 2004 “the program has created more than
$3.4 billion in economic activity and over 13,000 direct jobs”); ERNST & YOUNG, ESTIMATED IMPACTS OF THE
NEW YORK STATE FILM CREDIT 2-4 (2009), available at http://blog.sceneclips.com/wp-content/uploads/
2009/04/EY%20NY%20State%20Film%20Credit%20Study.pdf (on file with McGeorge Law Review).
768
McGeorge Law Review / Vol. 41
100
retaining over 19,000 jobs and providing a 1.1 rate-of-return on investment
101
102
statewide. The State issued $184.4 million in credits and collected $208.7
103
million in state taxes. The only reported problems with New York’s program
concern the management of the credits and allocation of funds, not whether the
104
105
program actually works. In the end, New York’s program creates jobs.
Other states have not seen such a dramatic change in their film and television
industry job figures and are concerned about the future of their tax incentive
106
programs.
For example, Louisiana’s lawmakers recently revisited the state’s
film and television tax credit program, deciding to increase the incentive from
twenty-five to thirty percent, even though the State had not recouped what it paid
107
out on a yearly basis. Even so, lawmakers backed the program and opted to
expand it, citing the program’s “ripple effect” to suppliers, hotels, and non-film
businesses that reap the benefits of a motion picture being produced in
108
Louisiana. The State reported that the non-film industries racked in $700
109
million in 2007. Accounts from Michigan, Wisconsin, and Connecticut sing
110
similar songs.
100. ERNST & YOUNG, supra note 99, at 1.
101. Id. at 3.
102. Id. at 4.
103. Id.
104. See Press Release, N.Y. State Governor’s Office for Motion Picture & Television Development,
Funding Puts New York Back in Front of the Cameras (Mar. 31, 2009), available at http://www.
nylovesfilm.com/new.asp?id=75 [hereinafter New York Funding Press Release] (on file with the McGeorge
Law Review) (reporting that “due to the program’s enormous success, the allocated funds for [the] tax credit
incentives were exhausted”).
105. See ERNST & YOUNG, supra note 99, at 2-4 (finding that the film tax credit program has “created
and retained jobs”).
106. See, e.g., Stacy Forster & Patrick Marley, Future Uncertain for Wisconsin’s Film Production Tax
Credits, MILWAUKEE, WIS., J. SENTINEL, Apr. 19, 2009, available at http://www.jsonline.com/news/state
politics/43253947.html (on file with the McGeorge Law Review) (debating the effectiveness of the program).
107. Mike Hasten, Bill to Expand Movie Tax Credit Gets Approved, LA. FILM & TELEVISION, June 25,
2009, http://www.louisianaentertainment.gov/film/content.cfm?new=1516&id=64 (on file with the McGeorge
Law Review); Stacey Plaisance, La. Lawmakers Revisit Film and Tax Credit Program, LA. FILM & TELEVISION,
June 25, 2009, http://www.louisianaentertainment.gov/film/content.cfm?new=1516&id=64 124 (on file with the
McGeorge Law Review).
108. Plaisance, supra note 107.
109. Id.
110. See PATRICK L. ANDERSON ET AL., MICHIGAN’S BUSINESS TAX INCENTIVES 6-7 (2009), available
at http://www.andersoneconomicgroup.com/Portals/0/upload/MEA_TaxAbatements_Public.pdf (on file with
the McGeorge Law Review) (finding that the “[r]elative [e]ffectiveness in [e]ncouraging [j]obs in Michigan” is
low because the program requires “very large expenditures” and there is “no comparative advantage in [the]
industry”); Memorandum from Jennifer Weiner, Pol’y Analyst, New England Pub. Pol’y Ctr., to Ellen Scalettar,
Dir. of Pol’y, Research & Legislation for the Conn. S. Democrats, Cost-Benefit Analysis of Connecticut’s Film
Tax Credit 2, 10 (Jan. 19, 2009), available at http://www.bos.frb.org/economic/neppc/memos/2009/
weiner011609.pdf (on file with the McGeorge Law Review) (stating that while Connecticut’s credit is “one of
the state’s most sizeable tax expenditures,” the “economic benefits generated by the credit are likely to be shortlived”); Forster & Marley, supra note 106 (reporting that Wisconsin’s film tax incentive’s “[e]ffectiveness [is
being] [d]ebated” among lawmakers).
769
2010 / Revenue and Taxation
The major dilemma presented by offering a film and tax credit, however, is
111
the grass-is-greener effect that may cause problems for any incentive program.
Productions will always have the option of finding a lower-cost location and
112
moving quickly. Loyalty in this regard is lacking; therefore, production
companies will always be looking for a state that offers a better incentive than the
113
state in which they are currently producing.
The California program seems to have the potential to create and retain jobs
for “below-the-line” employees; however, as enacted, the film and television
114
incentive is estimated to decrease the General Fund by $355 million.
Furthermore, the incentive provides that the twenty-five-percent tax credit for
productions that relocate to California is only for television productions that have
115
produced all of their prior episodes outside of California. Ugly Betty left
California for New York; therefore, if it returns, it is most likely ineligible to
116
receive the credit. As written, although the tax incentive encourages production
to stay in the state, productions that have already left are likely not eligible for
117
the tax credit.
B. Will Small Businesses Run and Hire?
Unlike existing law, the small-business tax credit is not dependent on the
118
geographic location of the hired employee or the employer. Proponents argue
119
that the credit will increase hiring by small businesses. Opponents, however,
argue that businesses will just be receiving a tax credit for people they were
120
going to hire anyway and that it fails to address job retention. Furthermore,
111. See TV Production Moving to Vancouver as New York Subsidies Dry Up, VANCOUVER SUN, Feb.
24, 2009, available at http://www.vancouversun.com/entertainment/movie-guide/production+moving+
Vancouver+York+subsidies/1324289/story.html (describing the decision of one production company to move to
Canada to find the best incentive available).
112. Id. (stating that television production companies are “thinking of moving to cheaper locales”).
113. Id.
114. See ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 4-5 (Feb. 15, 2009) (showing
estimated annual impacts on the General Fund).
115. CAL. REV. & TAX. CODE § 17053.85(a)(4)(B) (enacted by Chapter 10).
116. Id. (noting requirement for all episodes to be filmed out-of-state to receive credit for relocating to
California); see also Ventre, supra note 4 (reporting that the Ugly Betty “left L.A. for N.Y. thanks to tax
incentives”). Section 17053.85(a)(15)(A) of the Revenue and Taxation Code states that a qualified motion
picture must be one of five types of productions, including “a movie of the week or miniseries,” “an
independent film,” “a feature with a [specified] minimum production budget,” “a new television series produced
in California,” or “a television series that relocates to California.” CAL. REV. & TAX. CODE
§ 17053.85(a)(15)(A) (enacted by Chapter 10) (emphasis added). Ugly Betty likely does not fall into any of
these categories, because it is not a new show, and it is not eligible for the relocation tax because it did not
produce all episodes outside of California as required by section 17053.85(b)(22), which pertains to television
series that relocate to California. However, the statute does not define “feature,” so there may be an argument
that Ugly Betty qualifies under this category.
117. CAL. REV. & TAX. CODE § 17053.85(a)(4)(B) (enacted by Chapter 10).
118. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 5-6 (Feb. 15, 2009).
119. Id. at 6.
120. Id.
770
McGeorge Law Review / Vol. 41
over the budget period, the hiring credit is estimated to result in revenue loss of
121
$435 million.
C. Will Multi-State Businesses Run to California?
Currently, over twenty states require multi-state businesses to calculate their
corporate state income taxes using some version of the single-sales factor
method; however, California is the first to allow the businesses to elect which
122
method to use. Furthermore, giving businesses the opportunity to elect the
single-sales-factor method is estimated to “cost $750 million in the 2012-2013
123
budget year” alone and $1.5 billion over the five-year period.
Companies that have numerous employees and a substantial amount of
property in the state, but that sell mostly out-of-state, argue that the doubleweighted apportionment test creates a disincentive to expand their businesses in
124
California, because expansion increases the income taxes they pay. For
example, if a company “has 75% of its property and of its payroll in California,
but only makes 10% of its sales in this state,” the doubled-weighted sales factor
125
will make 42.5% of the company’s income subject to California tax. However,
if the same business uses the single-sales-factor method, only the 10% of sales it
makes in California is subject to income tax in California, regardless of how
126
many persons the company employs or how much property it possesses.
Therefore, proponents argue that Chapter 10 will reward businesses that invest
heavily in property and payroll in the state and that California will see a “nice
127
return on this investment.” The single-sales-factor method also discourages
businesses that currently have substantial employees and property in the state
from downsizing, because doing so will not reduce the income taxes they pay in
128
the state.
On the other hand, opponents believe that because multi-state businesses
have a choice as to the method of income calculation, they “will now be able to
report more revenue to the state in good years and move losses into the state in
129
bad ones,” giving them the ultimate opportunity for manipulation. Further,
121. Id. at 4-5.
122. Id. at 2-3; see also Malcolm Maclachlan, California Tries a New Direction on Corporate Taxation,
CAPITOL WEEKLY, May 21, 2009, http://www.capitolweekly.net/article.php?xid=xzsczul8kiltna (on file with
the McGeorge Law Review) (reporting that although “20 states have now moved to versions of the single sales
factor model,” none have “let companies choose between the two systems”).
123. ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 4-5 (Feb. 15, 2009).
124. Id. at 6.
125. Id.
126. Id.
127. Maclachlan, supra note 122.
128. See Inst. on Tax’n & Econ. Pol’y, Corporate Income Tax Apportionment and the “Single Sales
Factor,” Policy Brief #11 (2008), http://www.itepnet.org/pb11ssf.pdf [hereinafter Policy Brief #11] (on file with
the McGeorge Law Review) (reporting that Massachusetts adopted the single-sales-factor test because one
company threatened to downsize).
129. Maclachlan, supra note 122.
771
2010 / Revenue and Taxation
opponents argue that businesses that employ a small number of California
residents and have little property in the state, but sell a large quantity of product
in the state, will not benefit from electing the single-sales-factor method, even
though they are providing citizens of the state with a significant amount of
130
products. Also, there is no guarantee that the tax incentive will prevent
131
companies that want to downsize from doing so.
Lastly, some believe that it is just unfair to discriminate among businesses
132
The
based on their financial contributions to the state’s economy.
discrimination is evidenced by the fact that a company that has all of its property
and employees in the state but makes all of its sales outside of California may
133
pay no income tax. Therefore, opponents argue that corporate taxes should be
based on the benefits businesses receive from public assets, such as “education,
transportation, [and] infrastructure,” and businesses should not be allowed to
manipulate the value of their economic activities in the state by electing the
134
apportionment method.
V. CONCLUSION
Predictions about Chapter 10’s success must take into account all of the
potential benefits it promises: jobs for “below-the-line” employees with film or
television production companies, greater opportunities for employment with
small businesses, and increased presence and employment in California by multi135
state businesses. However, it is difficult to predict whether Chapter 10 is a sure
136
win for anybody. Economic projections indicate that the three job-creating
provisions of Chapter 10, as a whole, will cost the General Fund an estimated
$2.5 billion from 2008-09 budget year to 2012-13 budget year, which should be
137
offset by the law’s positive effects on employment.
130. See Policy Brief #11, supra note 128.
131. Id. (reporting that Raytheon still cut jobs after Massachusetts adopted the single-sales factor test).
132. Id. (noting that allowing income tax apportionment based solely on the businesses sales in the State
“makes corporate income taxes less fair”).
133. Id.
134. Cal. Tax Reform Ass’n, Single Sales Factor: The Continued Destruction of the Corporation Tax,
Feb. 27, 2009, http://caltaxreform.org/?p=77 (on file with the McGeorge Law Review).
135. See ASSEMBLY FLOOR, COMMITTEE ANALYSIS OF ABX3 15, at 5-7 (Feb. 15, 2009) (describing the
potential benefits various provisions of Chapter 10 will provide).
136. See id. at 4, 7 (stating that the upfront cost will be an overall loss to the General Fund).
137. Id.
772
Chapter 11: California’s New-Home Tax Credit:
Rekindling the Dream for a Place of One’s Own
Jessica R. Lee
Code Section Affected
Revenue & Taxation Code § 17059 (new).
SBX2 15 (Ashburn); 2009 STAT. Ch. 11 (Effective February 20, 2009).
I. INTRODUCTION
1
In what some refer to as the “Great Recession,” residential-building
2
construction grinds to a halt under the weight of a collapsing housing market.
Like fallen giants, partially completed new-home developments stand abandoned
if not forgotten, “still sheathed in yellow insulation panels and surrounded by
3
steel scaffolding.” In some areas, thieves come out at night to tear copper wiring,
pipes, and other valuables from abandoned housing projects, and neighbors lie
4
awake to the sound of buildings being destroyed as bonfires blaze until morning.
These stories are commonplace in California, where approximately 250
residential developments, including over 9,000 new houses and condominium
5
units, were abandoned at various stages of construction. In hopes of rekindling
the California Dream, Chapter 11 is an effort to “[s]tabilize housing markets and
create jobs by immediately stimulating home purchases and new-home
6
construction.”
II. LEGAL BACKGROUND
A. The Mortgage Meltdown
Some say it all started in 2001 with the burst of the “tech-bubble,” our
frenzied reaction to the attacks on the World Trade Center, and subsequent hasty
7
invasions of Iraq and Afghanistan. As oil prices skyrocketed and the stock
market plunged, the Federal Reserve Board responded by cutting interest rates to
1. Robert J. Samuelson, The Great Recession’s Aftermath, NEWSWEEK, Jan. 4, 2010, available at
http://www.newsweek.com/id/229210 (on file with the McGeorge Law Review).
2. Roger Vincent, As Projects Grind to a Halt, Home Sites Turn to Wasteland, L.A. TIMES, Mar. 4,
2009, available at http://articles.latimes.com/2009/mar/04/business/fi-develop4.
3. Id.
4. Id.
5. Id.
6. California Building Industry Association, Housing = Jobs: A Housing Stimulus for Economic
Recovery, available at http://www.cbia.org/go/cbia/?LinkServID=FBC44561-0F95-4484-B9562A0DAAFCF6
8F&showMeta=0 (last visited Jan. 3, 2010) [hereinafter Housing Stimulus] (on file with the McGeorge Law
Review).
7. MARK ZANDI, FINANCIAL SHOCK: A 360º LOOK AT THE SUBPRIME MORTGAGE IMPLOSION, AND HOW
TO AVOID THE NEXT FINANCIAL CRISIS 9 (2009).
773
2010 / Revenue and Taxation
8
stabilize the economy. “By summer 2003, the federal funds rate . . . was at a
record low,” and, in an effort to remain competitive, major central banks around
9
the world followed suit.
Consequently, the housing market heated up and home prices increased an
10
average of nine percent each year between 2000 and 2006. In extreme cases, “a
11
home worth $150,000 in 2000 was worth $251,565 in 2006.” Purchasers and
12
lenders responded enthusiastically to this environment, and mortgage investors
began to bankroll borrowed money acquired at low interest rates in order
13
“magnify returns many times over.” Additionally, as lenders became more
14
confident with the rising housing market, they elicited “subprime” borrowers
with attractive loan incentives, such as easy initial terms and low down
15
payments.
The sudden influx of subprime mortgages created a temporary rise in the
16
economy. But as interest rates rose in response and housing prices started to
drop moderately in 2006 and 2007, refinancing became more difficult, and
17
subprime borrowers began to default on their loans. In 2007, these defaults
emerged as a substantial problem, forcing over twenty subprime mortgage
lenders to close down and triggering substantial losses in the financial services
18
industry.
8. Id.; see also F. William Engdahl, The Financial Tsunami: Sub-Prime Mortgage Debt Is But the Tip of the
Iceberg, GLOBAL RESEARCH, Nov. 23, 2007, http://www.globalresearch.ca/index.php?context=va&aid=7413 (on
file with the McGeorge Law Review) (explaining that Alan Greenspan, former Chairman of the Federal Reserve
Board, embarked on an unprecedented series of rate cuts between 2005 and 2006 and that “Greenspan’s intent, as
he admitted at the time, was to replace the Dot.com internet stock bubble with a real estate home investment and
lending bubble”).
9. ZANDI, supra note 7, at 9-10.
10. JAMES R. BARTH ET AL., A SHORT HISTORY OF THE SUBPRIME MORTGAGE MARKET MELTDOWN 3
(2008), http://www.milkeninstitute.org/pdf/SubprimeMeltdownv2.pdf (on file with the McGeorge Law Review)
(comparing this rate to the 1990s, when home prices increased less than three percent annually).
11. Id.
12. Id.
13. ZANDI, supra note 7, at 13.
14. CHARLES BROWNELL, SUBPRIME MELTDOWN: FROM U.S. LIQUIDITY CRISIS TO GLOBAL RECESSION
12-13 (2009). “‘Subprime’ is a financial term used to identify borrowers who don’t qualify for a ‘prime’ loan.”
Id. Generally, subprime borrowers have a credit score of 620 or lower. Id.
15. See Tom Abate, California Had Most Subprime Loans, Study Says, S.F. GATE, May 7, 2009,
http://articles.sfgate.com/2009-05-07/news/17203711_1_subprime-lenders-mortgages/2 (on file with McGeorge
Law Review). “Subprime lenders created mortgages that gave people with low credit ratings cheap initial
payments that grew much more expensive over time. Some subprime lenders allowed people to state their
income without documenting it.” Id.
16. See ZANDI, supra note 7, at 13-16 (describing the “Housing Boom” and its effects on the economy).
17. See Engdahl, supra note 8. The majority of subprime mortgages with Adjustable Rate Mortgage
(ARM) contracts were written in 2005 and 2006. Id. This created a large wave of mortgage defaults beginning
in January 2008, when over $690 billion in mortgages adjusted and borrowers faced sudden rate increases. Id.
18. Subprime Meltdown: Who’s to Blame and How Should We Fix It?, KNOWLEDGE AT WHARTON,
Mar. 21, 2007, http://knowledge.wharton.upenn.edu/article.cfm?articleid=1691 (on file with McGeorge Law
Review).
774
McGeorge Law Review / Vol. 41
B. California’s New-Construction Market Freezes
California lenders issued a majority of the defaulting subprime loans, and the
State found itself in the “center of the mortgage meltdown that led to the nation’s
19
current economic crisis.” As borrowers struggled to make their mortgage
payments and foreclosure sales dominated the market, “[n]ew home sales
plunged 17 percent in 2006 compared with 2005, the biggest decline since
20
1990.” As a majority of buyers rushed to buy homes at bank repossession
auctions, many big construction firms were forced to abandon projects, downsize
21
employees, and file for bankruptcy protection.
Because of “[d]eclining home prices,” “[t]ighter borrowing requirements,”
and “[r]ecord foreclosures,” prospective homebuyers became reluctant to invest
22
in the California housing market. New home construction declined steadily, and
only around 66,000 new homes had been constructed at the close of 2008, which
was twenty-five percent of normal production and the lowest total ever
23
recorded. This decline in new-home construction prompted California financial
officials “to freeze nearly $4 billion in financing for construction projects across
24
the state.” As the state’s economy continued to decline, commercial and
construction industries suffered a rise in unemployment, increased business
25
failures, and a loss of sales.
C. “Let’s Make a Deal”
As the sun seemingly set on California’s new housing market, state
lawmakers scrambled to settle on a long-overdue budget to end “months of
26
political gridlock.” Finally, after a record-long, forty-six-hour floor session,
Republicans and Democrats agreed on a series of budget measures to help
19. Abate, supra note 15. A 2009 study that found that about fifty-six percent of defaulted subprime
loans were originated by fifteen lenders from California. Id. “Consumer and industry experts said one reason
lenders in California were so big in subprimes is that the state is the nation’s largest, and, arguably, costliest,
real estate market, making it a natural home-lending center.” Id.
20. Brian Louis, Rising Subprime Mortgage Defaults Add to Unsold Homes Inventory, BLOOMBERG,
Mar. 9, 2007, http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aC9LdDcv4.Wc# (on
file with the McGeorge Law Review).
21. Jim Wasserman, California Home Builders Publicize New State Tax Credit, SACRAMENTO BEE, Feb.
21, 2009, at 7B.
22. Housing Stimulus, supra note 6.
23. Id.
24. Rachael Dornhelm, California Freezes Construction Projects, NAT’L PUB. RADIO, Dec. 18, 2008,
http://www.npr.org/templates/story/story.php?storyId=98450424 (on file with the McGeorge Law Review).
25. See Housing Stimulus, supra note 6. California’s overall jobless rate was at a “12-year high of
7.7%,” and subcontractors and construction supply businesses (for example, plumbers, cabinet-makers,
landscapers, and places like Home Depot) experienced declines in customer traffic and sales that corresponded
with construction companies ceasing operations. Id.
26. Jennifer Steinhauer, In Budget Deal, California Shuts $41 Billion Gap, N.Y. TIMES, Feb. 20, 2009,
at A1.
775
2010 / Revenue and Taxation
27
remedy the $41 billion deficit. While this agreed-on budget calls for a $14.8
28
billion decrease in spending and a $12.5 billion increase in taxes, it also
29
includes a number of tax credits to stimulate the economy and create new jobs.
30
These credits include Chapter 11’s generous tax credit for buyers of new homes.
III. CHAPTER 11
Chapter 11 provides a tax credit to buyers who purchase qualified principal
31
residences between March 1, 2009, and March 1, 2010. Each household is
32
entitled to the lesser of $10,000 or five percent of the purchase price. This credit
is a non-refundable tax reduction that must be dispersed equally over the three
33
years following close of escrow.
In order to be a “qualified principal residence,” the home must be a “single
family residence, a condominium, a unit in a cooperative project, a houseboat, a
34
manufactured home, or a mobile home” and must never have been previously
35
occupied. The home must remain occupied by the taxpayer for a minimum of
two years following the purchase date and be eligible for the homeowner’s
property tax exemption under California Revenue and Taxation Code section
36
218.
Chapter 11 charges the California Franchise Tax Board (FTB) with the
responsibility of determining rules and procedures for implementation of the
37
credits. Specifically, Chapter 11 calls for the FTB to issue credits on a first38
come, first-served basis, and the taxpayer must file an application for credit
39
within one week from the close of escrow.
27. Id. (“Republican lawmakers voted for tax increases at the possible expense of losing the next
election; Democrats agreed to spending cuts unheard of in other downturns . . . .”).
28. Id.
29. From the Office of Senator Roy Ashburn, Ashburn E-Report: March 2009 (Mar. 2, 2009),
http://cssrc.us/web/18/publications.aspx?id=5493 (on file with the McGeorge Law Review).
30. Id.
31. CAL. REV. & TAX. CODE § 17059(a)(1) (enacted by Chapter 11).
32. Id.
33. Id. § 17059(a)(2) (enacted by Chapter 11); see also Dawn Wotapka, California New Home Tax
Credit Still Kicking Around, WALL ST. J., July 24, 2009, available at http://blogs.wsj.com/developments/
2009/07/24/california-new-home-tax-credit-still-kicking-around (explaining the credit is non-refundable,
“meaning if the home buyer owes less than $10,000 in taxes over three years he won’t receive the full
reimbursement”).
34. State of California Franchise Tax Board, Tax Credit for New Home Purchase, http://www.ftb.ca.
gov/individuals/New_home_Credit.shtml (last visited Sept. 14, 2009) [hereinafter FTB Website] (on file with
the McGeorge Law Review),
35. CAL. REV. & TAX. CODE § 17059(b)(1)-(2) (enacted by Chapter 11).
36. Id. § 17059(b)(3) (enacted by Chapter 11).
37. Id. § 17059(f) (enacted by Chapter 11).
38. Id. § 17059(e)(1) (enacted by Chapter 11); see also FTB Website, supra note 34 (stating that the
credit was issued on a first-come, first-served basis).
39. CAL. REV. & TAX. CODE § 17059(b)(2) (enacted by Chapter 11).
776
McGeorge Law Review / Vol. 41
The California Legislature set aside $100 million to fund Chapter 11, which
40
serves as a cap on the total amount of available tax credit. Chapter 11 also has a
41
built-in repeal clause with a sunset date of December 1, 2013.
IV. ANALYSIS
Chapter 11 arose from a $100 million deal to settle California’s budget
42
standoff in February 2009. The tax credit proved to be wildly popular and the
43
allotted $100 million in credit funds were quickly depleted. Supporters urge
California lawmakers to expand Chapter 11 to ensure the tax credit is available to
new-home buyers through March 2010, because “[i]t would be a shame to allow
44
this stimulus to fizzle out before reaching its full economic potential.”
A. How Will History Repeat Itself?
Supporters are adamant that Chapter 11 is a vital component in lifting
45
California from the slums of recession. In the four months following Chapter
11’s introduction, the new tax credit successfully stimulated new home
46
purchases, jump-started construction, and created employment. By June 17,
2009, nearly 9,800 consumers had used up nearly ninety-five percent of the $100
47
million fund. Supporters point to a similar tax credit that successfully stimulated
48
the housing market during a recession in 1975 and argue that “[a] recovering
housing market has pulled America out of every one of its previous recessions
49
since World War II.” History suggests it is not the size of the credit that pulls
40. Id. § 17059(d) (enacted by Chapter 11).
41. Id. § 17059(h) (enacted by Chapter 11).
42. Jim Wasserman, Deadline Passes for California’s New-Home Tax Credit, SACRAMENTO BEE, July
3, 2009, at 9B [hereinafter Wasserman, Deadline Passes].
43. Id. On July 2, 2009, the FTB announced it was no longer accepting applications for the new home
tax credit, because the number of applications had exhausted the $100 million allotment as of that date. Id.
44. Letter from Kenneth T. Rosen, Chairman, Fisher Ctr. for Real Estate and Urban Econ., Univ. of Cal.,
Berkeley, to Arnold Schwarzenegger, Governor, State of Cal. (May 8, 2009) [hereinafter Rosen Letter] (on file
with the McGeorge Law Review).
45. See id. (“The collapse of the housing market is at the core of the economic recession in California
and the U.S. . . . .”).
46. Press Release, Housing Builds Jobs Coalition, New Home Tax Credit Is Working to Create Jobs and
Economic Activity in Senate District 18! (July 2009) (on file with the McGeorge Law Review); see also
Kenneth T. Rosen, Op-Ed., California’s Housing Tax Credit Is Working; Don’t Let It Expire, SAN JOSE
MERCURY NEWS, June 22, 2009 [hereinafter Rosen Op-Ed.] (on file with the McGeorge Law Review) (noting
that new building construction permits rose twenty-one percent between February 2009 and March 2009).
47. See Rosen Op-Ed., supra note 46.
48. See Housing Stimulus, supra note 6. New home construction ground to a halt during a similar real
estate slump in 1975. Id. Congress responded by enacting the Tax Reduction Act of 1975, which offered a tax
credit for the purchase of new homes. Id. The credit was five percent of sale price, not to exceed $2,000. Id.
Within the first year, home purchases increased twenty-five percent and “[n]ew housing starts doubled in two
years.” Id.
49. Rosen Letter, supra note 44.
777
2010 / Revenue and Taxation
consumers off the fence; instead, it is the opportunity to gain a limited benefit
50
that signals consumers to re-enter the market.
However, critical remarks from the housing industry suggest a large part of
how California stumbled into this recession was by making it easier for home
buyers to temporarily afford a home, and Chapter 11 is simply a “repeat of the
51
same thinking that brought about [the] economic turmoil.” Currently, the only
safeguard against fraud exists in the FTB’s procedures to eliminate “duplicate,
52
revised, and invalid applications,” as well as continued monitoring that the
53
residence remains occupied for at least two years.
Additionally, critics frown on the notion of providing an incentive for
building and purchasing new homes when so many of California’s existing
54
homes remain unsold after foreclosure. They argue that excess inventory is the
real estate market’s biggest problem, and the market cannot stabilize until that
55
surplus inventory is reduced.
B. Expanding the Credit
Supporters urge the Legislature to expand Chapter 11 to ensure availability to
56
new-home buyers through March 1, 2010. Because the average Californian is
not eligible for the full $10,000 tax credit, supporters of Chapter 11 suggest the
FTB overestimated the amount of allotted credits and prematurely closed the
57
applications window. Supporters propose language to stretch the $100 million
58
allocation of funds “further than the 10,000 buyers originally targeted.” Other
suggestions include amending the language “to add $200 million to the tax credit
59
60
allocation” or simply eliminating the cap all together.
50. Cal. Building Indus. Ass’n, $10,000 California New Home Tax Credit Getting Consumers Back in
the Housing Market (Mar. 2009), http://biaoc.com/wp-content/uploads/2009/03/309-tax-credit-overview.pdf (on
file with the McGeorge Law Review).
51. New Homes Section, $10,000 Tax Credit for Home Buyers in California, Feb. 21, 2009,
http://www.newhomessection.com/blog/10000-tax-credit-for-home-buyers-in-california/2009/02/21 (on file
with the McGeorge Law Review).
52. FTB Website, supra note 34.
53. See CAL. REV. & TAX. CODE § 17059(f) (enacted by Chapter 11) (placing responsibility for
implementing the credit with the Franchise Tax Board); id. § 17059(b)(3) (enacted by Chapter 11) (requiring
repayment of the tax credit if the taxpayer does not use the home as his principal residence for two years
immediately following purchase of the home).
54. Wasserman, Deadline Passes, supra note 42.
55. Peter G. Miller, Making the First-Time Buyer Tax Credit Better—Or Worse?, OURBROKER, June 19,
2009, http://www.ourbroker.com/making-the-first-time-buyer-tax-credit-better-or-worse (on file with the
McGeorge Law Review).
56. See Rosen Op-Ed., supra note 46.
57. See Wasserman, Deadline Passes, supra note 42.
58. Id.
59. Id.
60. Rosen Op-Ed., supra note 46.
778
McGeorge Law Review / Vol. 41
On the other hand, some lawmakers are wary of expanding the tax credit,
61
especially because California still faces a substantial deficit. Critics argue that a
tax credit aimed only at new homes does not address the surplus of foreclosures
62
in California, and the market could alternatively be stimulated by builders
63
simply selling houses for $10,000 cheaper. They warn that California should
“‘be very careful what we do with general-fund money’ given the state’s budget
64
deficit.”
A concern regarding this expansion is that it will cost California $59 million
65
over the next three years if the Legislature removes the cap on the tax credit.
However, supporters explain that over $300,000 in economic activity is
stimulated from building a single new home, which provides much-needed new
66
jobs in California. While Chapter 11 successfully enticed hesitant homebuyers
67
back into the market, “activity stopped as quickly as it started” upon expiration
of the tax credit, causing critics to question whether California’s housing market
68
rebound is reality, or merely illusion.
V. CONCLUSION
69
The new-home tax credit successfully pulled leery buyers off the fence.
While the country takes a deep breath because the worst seems to be over,
economists suggest the housing market will “‘be bouncing around the bottom’
70
for the second half of the year.” Building industry consultants continue to urge
71
the Legislature to consider a bill allowing additional applications. This is fueled,
in part, by fear of recent progress remaining stalled without the tax credit as an
72
incentive for homebuyers. But, despite initial estimates that taxpayers would use
just seventy percent of the allotted funds and the credit could be extended to as
many as 4,200 additional new-home buyers, the FTB declined to re-open the
61. Bobby White, California Bills Seek to Lift Home Sales, WALL ST. J., June 29, 2009, at A4.
62. Id. (quoting California Assembly Member Ira Ruskin).
63. See Wasserman, Deadline Passes, supra note 42.
64. White, supra note 61.
65. See Rosen Op-Ed., supra note 46.
66. See id. (“[E]very new home in California generates more than $300,000 in economic activity and
three permanent jobs. . . . When a new home is built, it benefits myriad industries including retailers, furniture
and appliance manufacturers, banking and insurance, painters, contractors, loggers, truckers and many more.”).
67. Jim Christie, California Tax Credit Expires, Home Permits Sink, REUTERS, Aug. 24, 2009, available
at http://www.reuters.com/article/gc03/idUSTRE57N5QZ20090824.
68. Id. (quoting president of the California Building Industry Association, Robert Rivinius).
69. See Rosen Op-Ed., supra note 46 (advocating to remove the tax-credit cap so that the increase in
new home construction and sales will continue); Wasserman, Deadline, supra note 42 (providing suggestion
from critic, Chris Thornberg, for “another way of solving” the slow-down in the rate of home sales (emphasis
added)).
70. Adrian Sainz et al., Welcome to the Bottom: Housing Begins Slow Rebound, ASSOC. PRESS, Aug. 2,
2009, available at http://www.newsday.com/welcome-to-the-bottom-housing-begins-slow-rebound-1.1341456.
71. Id.
72. See Wotapka, supra note 33.
779
2010 / Revenue and Taxation
applications window for Chapter 11’s benefit and the entire $100 million is
73
depleted. Therefore, as California continues to struggle with deals to remedy a
$26 billion budget gap and underlying structural issues, it is likely a similar tax
74
credit could become part of the deal-making process in the future.
73. Id.; see also FTB Website, supra note 34 (noting that, as of August 31, 2009, the FTB is no longer
accepting applications because the $100 million has been allocated).
74. See Stu Woo, California Budget Woes to Persist, WALL ST. J., July 24, 2009, at A6, available at
http://online.wsj.com/article/SB124839685627477833.html (“Legislative leaders, who negotiated the budget
deal with the governor, have defended the use of one-time fixes in the current budget. . . . [T]he temporary
solutions come in lieu of more spending cuts that would have hurt the poorest Californians.”).
780