Don't forget filming's economic impact.

In the year 2000, most people in California and, for that matter, in the United States, had not heard the term "Runaway Production." This term, which began appearing in newspapers on a somewhat regular basis shortly after 2000, is currently a household word. Until recently "Runaway Production" was used to describe the migration of U.S. content film and television production to other countries. Now it also includes migration of filming from California to other states.

Not many years ago, California was responsible for more than 80 percent of all motion picture starts in the United States. Today, statistics, as presented in a recently issued report prepared by the Los Angeles Economic Development Corporation, show that California's 2004 feature film production accounts for less than 40 percent of the nation's total. Locally, film industry jobs provided in the five county Los Angeles region decreased from 146,000 in 1999 to 111,000 in 2004, a loss of 24 percent in five years.

At first, California's only serious threat to retaining film and television production was Canada. California was unable to compete on the same level with Canada whose national and provincial governments were providing significant subsidies to lure American film production. In 2002, AB 2747 which provided a refundable tax credit (effectively a subsidy) for productions most vulnerable to migration (lower budget films, including feature films and made-for-television movies, and episodic television productions) was introduced to the California Assembly by then Speaker, Herb Wesson. The tax credit had been included in the budget submitted by Governor Gray Davis. AB 2747 fell victim to the rapidly growing deficit and was defeated. Since that time, more and more countries have entered the race to lure productions away from California and the U.S. by offering significant subsidies and other incentives. To make matters worse for California, a significant number of states are offering various incentives.

Now we have a chance to fight back. On February 18, 2005 Assembly Speaker, Fabian Nunez, introduced AB 777. This bill, having been amended three times thus far, would provide a 12% refundable tax credit on qualified wages and vendor spending to be applied (by irrevocable election at the time of application) to either income tax or sales and use tax. Eligible productions include feature films with budgets from $500,000 to $75 million, made-for-television movies with minimum budgets of $500,000, new one-hour television shows with budgets of $500,000 to $1.8 million per episode and commercials to the extent their qualified expenditures exceed an established baseline.

Eligible productions must shoot a minimum of 75% of their principal photography in California to qualify for a tax credit. Tax credits will be capped at $3 million per production for all qualified productions except commercials. Tax credits for commercials will be capped at $500,000 for each commercial production company. Wages eligible for tax credits include "below-the-line labor (electricians, carpenters, costumers, camera technicians, property people, drivers, etc.). Eligible vendor spending includes purchases and rental of goods and equipment in California used in motion picture production (lumber, camera equipment, costumes, food, truck and car rentals, dry cleaning etc.) Wages ineligible for tax credits include all salaries in excess of $25,000 for directors, producers, writers, actors, composers and music supervisors. Vendor spending ineligible for tax credits includes legal or accounting services, overhead, financing fees, marketing, distribution, development, acquisition and turnaround costs, and any expenses related to clip use, licensing, reuse, secondary markets, residual compensation and ancillary products.

Many people ask:" Why should we give incentives to the film industry, a (perceived) rich industry that pays huge salaries?" To answer this question one must consider a number of facts: (1) The "huge" salaries in the industry are paid to the "above-the-line" employees, those whose salaries in excess of $25,000 each are ineligible for the credits; (2) The motion picture industry is an essential source of economic activity, tax revenue, jobs and tourism. The Los Angeles Economic Development Corporation's recent report revealed that a film with an average budget of $70 million dollars generates at least $10.6 million in state sales and income taxes and a film with a $17 million budget generates almost $2 million in state sales and income taxes. Additionally, it has been estimated that the effect on the economy of lost productions, when you consider all of the industries affected and the tax revenue lost, is seven times the cost of production; (3) Those being seriously hurt by Runaway Production are the below-the-line workers and vendors referred to above. Whereas the above-the-line workers can travel to any location to film, the below-the-line workers and vendors cannot afford to do so.

California's film production and general economy are being seriously depleted as a result of the incentives provided by other states and countries. We must fight fire with fire!

Gregory N. Lippe, CPA, is managing partner of the Woodland Hills-based CPA firm of Lippe, Hellie Hoffer & Allison LLP (LHHA) and a director and vice chair of the Valley Industry and Commerce Association.