Prioritize People Over Hollywood: Alternatives to Expanding the Film Tax Credit

Last week, lawmakers moved forward legislation that could expand California’s film tax credit. The bill — AB 1839 — may end up like much of Hollywood’s output these days: a reboot of an old idea, but with a much bigger budget. The current film tax credit allocates a total of $100 million annually to companies that make movies or television shows in California instead of outside of the state. Some proponents now argue that the state’s tax credit should offer up to $400 million annually, which would make the credit four times as large.

This proposed expansion of the film tax credit comes at a time when policymakers are prioritizing fiscal austerity over investments in workers and their families. Despite the good intentions of promoting job growth, film tax credits fail to generate the economic or budgetary benefits needed to justify their upfront costs.  Moreover, the suggested $400 million price tag could instead provide essential funding for the kinds of programs that California families need today. For example, policymakers could use these dollars to:

• Significantly expand access to affordable child care. California could increase the number of childcare and preschool “slots” by 40,000 at the cost of approximately $300 million, according to the California Legislative Women’s Caucus. This would mean additional and much-needed support for working parents through affordable and safe child care and preschool options.

• Provide additional support for California’s renters.  Each year, over 1 million taxpayers claim California’s renter’s credit, which offers a small nonrefundable tax credit to eligible renters. In 2012, the total cost of this credit was $106 million. At a time when housing costs are a significant burden for families, this program could be significantly expanded to reach more renters than it currently does.

• Ensure access to Medi-Cal services.  California recently implemented a 10 percent cut in Medi-Cal payments to doctors, dentists, and other providers. This rate cut could discourage health care providers from participating in Medi-Cal and potentially hinder access to critical care.  The Assembly Budget Committee estimates that repealing this cut would cost $312 million in 2015-16.

These are just a few examples. If AB 1839 passes and is signed into law, it will be a discouraging display of misplaced priorities. The latest budget agreement made only modest progress in reinvesting in the public systems and services that were battered by cuts in prior years, and now is not the time to implement costly and ineffective policies.

—  Luke Reidenbach

Enterprise Zone Reform — At Last

Earlier this month, Governor Brown signed into law several bills included in the 2013-14 budget agreement that, at long last, reform the state’s controversial Enterprise Zone (EZ) Program. The program was created nearly 30 years ago with admirable intentions — to provide tax breaks to promote job creation in economically distressed areas. However, independent studies, including our own, have questioned the effectiveness of EZ tax breaks in achieving their goals — even as program costs skyrocketed. Among the problems highlighted in our most recent report:

• The annual cost of the EZ tax credits and deductions had grown to $700 million and — without program changes — were expected to reach $1 billion in 2016;
• The EZ program’s tax breaks primarily benefited very large corporations, with two-thirds of the credits being claimed by corporations with assets of at least $1 billion; and,
• The hiring tax credits, which comprised nearly 60 percent of the total cost of the EZ program, were poorly structured, allowing companies to claim the credits without actually creating new jobs.

Since its inception, the California Budget Project has critiqued the structure, usage, and rising costs of the EZ program. We’ve consistently called for significant reforms to the program, including narrowing the hiring tax credits and zone designations to better ensure that the credits result in new job creation in economically distressed areas. Reform was a long time in coming, despite a body of evidence showing that the program failed to produce its intended outcomes at an increasingly high cost to the state.

The 2013-14 budget agreement puts in place a series of reforms that effectively phase out the EZ program and replace it with a new and revised package of incentives (see our prior blog for more on the specifics of the budget agreement). In brief, the budget agreement:

• Modifies the current EZ designations to include the use of the credits in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty;
• Alters key elements of the hiring tax credit, including requiring businesses to create new jobs (as opposed to hiring new workers for existing positions) and narrowing the hiring tax credit to fewer categories of disadvantaged workers; and,
• Creates a manufacturing equipment sales and use tax exemption for use within manufacturing and biotech industries. The exemption is available statewide, rather than just within certain geographic areas, helping reduce incentives for jurisdictions in California to compete against each other for businesses.

The budget agreement also includes a number of provisions designed to enhance our ability to evaluate the performance of the credits. The new policy requires businesses to return money to the state if certain terms are not met, sets benchmarks to ensure small businesses benefit from the new incentives, and includes sunset dates for the credits.

In short, the package of reforms more effectively targets job creation in the state’s most distressed areas and allows us to evaluate and revisit the programs over time based on performance. That’s a win, at long last, for Californians and California.

Beyond EZ Reform

Beyond EZ reform, we will be monitoring two issues in particular. First, while there is much to celebrate in the budget agreement, the package of reforms also includes the establishment of a business incentive fund, to be administered by the Governor’s “GO-Biz” office to retain and attract business in California. The Governor used the signing of the new package to comment on Texas Governor Rick Perry’s travels to California earlier in the year in an effort to attract businesses to Texas, saying, “Those fellas in Texas, watch out…California has some new tools.” The Governor’s remarks point to an underlying problem with the new business incentive fund, in that it could be used to engage in a zero-sum, state-to-state competition for business, rather than investing in new jobs overall. A critique of the prior EZ system was that it encouraged local jurisdictions in the state to compete for businesses and jobs, rather than creating new opportunities. The same critique can just as easily be applied to the new business incentive fund if it merely results in state-vs.-state gaming of the system. Further, it perpetuates myths that lower state taxes inevitably result in state economic growth and that business location decisions are influenced by tax credits — claims that are clearly not supported by research. Fortunately, the new fund is limited in size ($30 million in 2013-14) and is subject to the same evaluation and performance requirements noted above, but how the fund is used in the coming years is worth watching closely.

Second, in the deliberations about EZ reform, local leaders opposing the reforms often noted that the elimination of Redevelopment Agencies (RDAs) in 2011 and restructuring of the EZ program would leave local governments with few available tools to promote local economic development and redevelopment. From our vantage point, RDAs and EZs were poorly structured to achieve these goals. But their elimination (RDAs) and reform (EZs) expose a significant gap in state and local economic development and redevelopment, particularly in terms of affordable housing. With EZ reform at long last a reality, it is time for state and local leaders to identify effective strategies and tools that position the state for growth and broadly shared prosperity.

— Chris Hoene and Kristin Schumacher

Phasing Out Enterprise Zones as We Know Them

The CBP has been following and informing the debate over California’s controversial Enterprise Zone (EZ) Program for several years, and has published a number of reports and blog posts that highlight the escalating costs and serious shortcomings of the EZ Program as well as opportunities for reform. This past Wednesday, AB 93 and SB 90 — budget trailer bills that phase out the EZ Program and replace it with a new package of economic development incentives — were transmitted to Governor Brown and await his signature. [Update: On Thursday, July 11, the Governor signed AB 93 and SB 90.] As a result, our analysis of the 2013-14 budget agreement has been updated with a detailed review of the changes to EZs and the state’s tax system.

Specifically, the budget agreement:

• Retains current EZ designations but modifies them to more effectively target the most economically distressed areas of the state. Current EZ designations will remain intact for the 40 existing EZs, plus two recently expired zones — Antelope Valley and Watsonville — but incentives will also be available for use in census tracts throughout the state that rank in the top 25 percent in both unemployment and poverty rate. Further, census tracts with low unemployment and low poverty rates will be removed from the existing EZs, ensuring that the hiring tax credit truly is targeted to businesses located in the state’s most economically distressed areas. Lastly, the seven existing Local Area Military Base Recovery Areas (LAMBRAs) will be preserved and eligible for incentives as well.

• Alters key elements of the EZ hiring credit to create and retain jobs for disadvantaged individuals. The budget agreement makes major changes to the hiring tax credit to improve performance. These changes include:

• Requiring businesses to create new jobs — not just make new hires — as a condition of claiming hiring credits.
• Discontinuing retroactive vouchering, whereby credits are awarded for hires made in past years.
• Maintaining the credit for a particular employee at a constant level over a five-year period, instead of having the credit decrease over time. This change removes the incentive and reward for employers that “churn” their workforces.
• Ensuring that companies that take the hiring credit pay employees a living wage. Specifically, the budget agreement increases the amount of qualified wages from up to 150 percent of minimum wage — currently $12 per hour — to between 150 percent and 350 percent of minimum wage. This currently is between $12 and $28 per hour. The credit is only available for qualified wages paid to employees who work an average of at least 35 hours per week. In five pilot areas that would be designated by the Governor’s Office of Business and Economic Development (GO-Biz), qualified wages will be set between $10 an hour and 350 percent of minimum wage to reflect working conditions in areas with average wages less than the statewide average.
• Targeting the hiring tax credit to five categories of individuals, which is much narrower than the 10 groups included in current eligibility requirements. The targeted groups will include individuals who have been previously unemployed for six months, recipients of the Earned Income Tax Credit, recipients of CalWORKs or General Assistance, unemployed veterans, and ex-offenders.

• Creates a manufacturing equipment sales and use tax (SUT) exemption. The SUT exemption will eliminate the California portion of sales and use tax for basic manufacturing and research and development (R&D) purchases for use within manufacturing and biotech industries. This exemption will be available statewide — rather than just within certain geographic areas. The maximum amount of purchases eligible for the SUT exemption statewide is not to exceed $200 million annually.

• Establishes a business incentive fund to retain and attract businesses to California. The budget agreement establishes a new fund that will be administered by GO-Biz for the purpose of negotiating business tax credits in exchange for investments and employment expansion in California. The budget agreement also creates the California Competes Tax Credit Committee — consisting of representatives from the Treasurer’s Office, Department of Finance, and GO-Biz, and an appointee from both the Senate and Assembly — which will provide final approval for GO-Biz’s allocation of tax incentives. The fund will be limited to $30 million in 2013-14, increasing to $200 million annually in 2015-16 through 2018-19.

The budget agreement includes a number of provisions intended to ensure that the new economic development package is effective, transparent, and available to small businesses. First, the hiring tax credit, the SUT exemption, and the GO-Biz fund require annual evaluations to ensure that program administrators, policymakers, and the public are able to track program usage, and they each contain provisions that require businesses to return money to the state if certain terms are not met. Second, the budget agreement creates clear benchmarks to ensure that small businesses — defined as having less than $2 million in gross receipts in the previous year — benefit from the economic development package. Specifically, 25 percent of the hiring tax credit will be reserved for small businesses, and industry restrictions on the hiring tax credit will be lifted for small businesses as well. In addition, 25 percent of the funds allocated to GO-Biz will also be reserved for small businesses. Lastly, the budget agreement includes sunset dates for the programs, a provision that does not exist within the current EZ Program.

— Kristin Schumacher

California Taxes: What’s a Fair Share?

Today, April 15, is tax day — the deadline for filing California and federal income tax returns. It’s also an opportunity to reflect on the shared investment in our communities that taxes represent.

The dollars we pay to the state in taxes are invested closer to home than you might think. More than 70 cents out of every dollar spent through the state budget goes to local communities to fund public schools and community colleges, health and human services programs, public safety, and more.

While we all benefit from these public investments, the question of who does and doesn’t contribute their fair share provokes passionate debate. Last week, the CBP released our annual tax day report, Who Pays Taxes in California?, a snapshot of how tax payments — and tax breaks — are distributed among Californians.

The simplest answer to the question posed by the report’s title is that we all pay California taxes in some form. California households of all income levels pay sales taxes on most purchases, including household staples like soap and tissue. Those of us who drive pay fuel taxes. Californians who consume beer, wine, or cigarettes pay the alcohol tax or the cigarette tax on those purchases. Homeowners pay property taxes — and renters do, too, since this cost generally gets passed on in the form of higher rents.

The thornier question is how the overall tax bill is distributed among various income groups, and whether that distribution is fair. (For an in-depth discussion of tax fairness, see our recently released report Principles and Policy: A Guide to California’s Tax System.) Here at the CBP, we believe a stronger case can be made for a progressive tax structure — in which higher-income households pay a larger share of their incomes in taxes — than for a proportional (“flat”) tax structure, in which all households pay the same share of income in taxes, or a regressive tax structure, in which lower-income households pay a larger share of their incomes in taxes.

But as we report in Who Pays?, when all California taxes are taken into account, a family making $13,000 a year pays a larger share of their income in state and local taxes, on average, than a family making $1.6 million a year.

Even factoring in Proposition 30’s temporary tax increases, which on the whole are progressive, California’s overall tax system remains modestly regressive. The lowest-income families pay the highest share of their incomes when all state and local taxes are counted — including regressive taxes such as the sales tax and alcohol and tobacco taxes.

Another important consideration is who benefits from the spending that occurs through the tax code in the form of exemptions, deductions, credits, and exclusions. Here again, the simple answer is all of us. For instance, anyone who has ever bought groceries or filled a prescription in California has benefited from the fact that many purchases — including food and prescription medicine — are exempt from the sales tax.

However, corporations — especially large corporations — receive outsized benefits from spending in the tax code. For the corporate income tax, the revenue loss from tax expenditures is almost 80 percent of the actual revenues collected from the tax. This is substantially greater than the percentage of revenue lost from tax expenditures for either the personal income tax (54 percent) or the sales tax (48 percent).

The CBP has always emphasized that California’s budget embodies our choices and values as a state. The same is true of our tax system. On tax day, and every day of the year, it’s worth shining a light on certain aspects of the state’s tax system and reflecting on whether we are making the right choices. Does asking the lowest-income Californians to pay the most in state and local taxes, and delivering a large share of tax benefits to corporations, truly represent the vision and priorities of California’s residents?

— Hope Richardson

New From the CBP: Who Pays Taxes in California? and a Guide to the State’s Tax System

Taxes represent our collective investment in our communities and our quality of life. They support our public schools, streets and highways, public hospitals, parks and beaches, and the public health infrastructure that ensures that our food is safe to eat and our water is safe to drink, as well as a range of other systems and services.

As tax day approaches — the day Californians are required to file their income tax returns — a new CBP analysis examines who pays taxes, who doesn’t, and how California’s tax system compares to those in other states. Who Pays Taxes in California? shows that even with the temporary tax increases put in place by voter approval of Proposition 30, California’s lowest-income families still pay the most in state and local taxes as a share of their incomes. The report also shows that over the past three decades, more of the cost of funding state services has shifted from corporations to personal income tax filers.

The CBP is also pleased to be releasing — in advance of tax day — a comprehensive overview of the state’s tax system. Principles and Policy: A Guide to California’s Tax System explains fundamental concepts in tax policy, examines the types of state taxes paid by individuals and businesses, and discusses key trends, policy issues, and options for reform.

— Steven Bliss