Revenue and Taxation - McGeorge School of Law

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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23623, 23685, 25128.5, 25136 (new); §§ 17039.2, 23036.2, 23101, 25120, 25135 (amended); §§ 17053.80, 23623, 25136 (repealed).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.”

—Dorothy1

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-so-sweet, but-very-unlikely glamour girl, Betty.2

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 perfect, and ensuring that the shooting day runs smoothly and productively.3

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: Hollywood.4 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 and moved the production to New York.5 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).

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not move with the production.6 Also, unfortunately, Ugly Betty was not the first production—or the last—to leave the state in search of lower-cost production opportunities.7

The film and television industry is not the only area where jobs are being lost.8 Due to the state of the economy, small businesses are cutting positions.9 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 if they expand in California.10 As a result, the Legislature enacted Chapter 10 in order to stimulate the economy by creating jobs and encourage hiring.11 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 expand in California.12

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

significant economic contributions to the citizens of California.13 In 1984, the Legislature created the California Film Commission (CFC) to facilitate, retain, and attract filming in California.14 The Legislature found that the creation of the CFC was necessary, because the motion picture industry in California was in danger due to other states’ and countries’ efforts to lure away productions.15 The CFC is now a “one-stop” permit-processing shop, providing free permits and no location fees for production on state-owned property in California.16

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).

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In 2000, the Legislature created the State Theatrical Arts Resources Partnership (STAR) within the CFC.17 STAR allows the CFC to collaborate with other state agencies to identify and offer an online directory of state-owned surplus properties available for use in filmmaking.18 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 properties.19 However, despite these incentives, runaway productions still pose a significant threat to the state’s film and television industry.20

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 CFC.21 To “stop the decline of California film production,”22 the program reimbursed certain film costs23 incurred by production companies.24 The program contained a $300,000 cap for reimbursement of costs incurred for any one production.25

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 million [had] been requested for reimbursement.”26 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 and the STAR partnership.27 In particular, a scene in Kill Bill—set originally to be shot out-of-state—was filmed in a Los Angeles house owned by Caltrans.28 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 RUN-

AWAY 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.


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filming on state property was up forty-eight percent from the same time the previous year.29 In addition, 300 of the 2,712 days spent filming occurred on STAR properties.30 These figures indicate that the Film California First program was successful in attracting and retaining film production in California.31 Nevertheless, although the CFC deemed the Film California First program a success, the program was defunded by the Legislature in 2003.32 In his signing message, former Governor Davis urged the Legislature to restore the authority of the program in the future.33 That same year, the Legislature “restore[d] the statutory framework” of the program but did “not provide or restore funding.”34

3. The Cost of “Runaway Productions” in California The most recent report regarding the impact of “runaway productions” in

California was released in August 2005.35 The study—funded by a coalition of leading entertainment industry groups—details the tax and revenue dollars that the state continues to lose due to “runaway productions.”36 In the CFC-commissioned 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 was spent in California.37 In addition, as reported by the MPAA, 353,076 people were employed in the film industry nationwide in 2002 and 245,900 of those people were employed in California.38

Even with these statistics, the report concluded that “[t]he biggest threat to motion picture employment and payrolls in California is runaway productions.”39 According to the report, each time a one-hour drama—with twelve episodes—leaves California, the state loses almost $27 million in production spending, $76.5 million in economic output, and $3.1 million in state taxes.40 Additionally, approximately 404 people lose the opportunity to work on the production.41 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.


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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 opportunities.42

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 Zone Hiring Credit in 1984.43 Also, existing law provides three additional hiring tax incentive programs for taxpayers that employ qualified individuals in areas that are targeted for economic development.44 The qualifying geographic locations are labeled Enterprise Zones, Local Agency Recovery Military Base Recovery Areas, Manufacturing Enhancement Areas, and Targeting Tax Areas.45 Taxpayers that employ in these areas are eligible for a hiring credit for qualified wages during the first five years of the employee’s tenure.46 In the first year of employment, the taxpayer receives a tax credit for fifty percent of qualified wages.47 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 fifth year of employment.48

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 determine the income on which a multi-state business is taxed.49 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).


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(with the sales factor double-weighted).”50 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 state.51

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, and encourage hiring.52 Chapter 10 has three job-creating provisions.53 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 California.54 Also, Chapter 10 provides a temporary tax incentive for small businesses that hire new, full-time employees.55 Lastly, Chapter 10 changes the tax code for multi-state businesses, affecting how they calculate the state taxes they pay.56 A. Film and Television Tax Incentive

To address the concern of “runaway productions,” beginning with the 2011

tax year, those who pay taxes on qualified motion pictures57 may elect to receive a twenty-percent tax credit for “qualified expenditures attributable to the production of a qualified motion picture.”58 In addition, independent films59 and television productions that relocate to California may elect to receive a twenty-five percent tax credit.60

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).


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and must satisfy four criteria listed in section 17053.85(b)(15)(B).61 “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 series that relocated to California.”62 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 performed within the state, including the purchase or rental of property;63 the motion picture’s copyright must be registered;64 filming must commence no more than 180 days after the date of approval;65 and production must be completed within thirty months from the date the application was approved.66

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] in the production of a qualified motion picture.”67 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 individuals and independent contractors.68 “Qualified wages” do not include costs incurred from reuse, licensing, or creation of an ancillary product such as “a soundtrack album, toy, game, [or] trailer.”69 In addition, “qualified wages” do not include expenses incurred from acquisition, development, overhead, financing, promotion, or distribution of a qualified motion picture.70 Lastly, wages paid to writers, directors, producers, performers, music composers, supervisors, and background actors with no scripted lines also do not qualify.71

Chapter 10 sets aside $500 million, apportioning $100 million a year to fund the credit for the next five years.72 The CFC73 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, half-hour 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).


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processes and approves or rejects all applications on a first-come, first-served basis.74 At the end of the five-year period, the Business Transportation and Housing Agency must report on the success of the program.75 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 opportunities.76 B. Small Business Hiring Tax Incentive

To encourage the hiring of full-time employees by small businesses,77

Chapter 10 provides a $3,000 tax credit for each new qualified full-time employee that a qualified small business hires during a taxable year.78 “Qualified full-time employees” are employees who are paid qualified wages—subject to the Unemployment Insurance Code79—on an hourly basis and average at least thirty-five hours per week or are salaried and paid for full-time employment.80 The Franchise Tax Board is responsible for implementing this credit.81 Unlike the existing credits mentioned above,82 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 tax credits mentioned above.83

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 apportioning state income taxes.84 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).


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business’s income by an average of its “sales, property, and payroll in California (with the sales factor double-weighted)”85—or by “using only their percentage of sales in California,” beginning on January 1, 2011.86 The Legislature also amended existing statutory language to clarify the income apportionment provision for multi-state businesses that choose to apportion income based only on sales in California.87 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 total compensation, whichever is lower.88 Also, to determine if sales are in California and included in the numerator of the sales factor, Chapter 10 defines “sales” (beginning in the 2011 tax year) to include all gross receipts89 of the taxpayer not already allocated under other sections of the Revenue and Taxation Code.90 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 transactions.”91

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).


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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

pictures produced in California.92 However, over forty states and Washington, D.C., offer some form of tax incentive for producing in those states.93 Of those offering the incentives, Michigan and Missouri currently offer the highest film production incentives, with Michigan refunding up to forty-two percent.94 Additionally, many states, including New York, refund at least thirty percent.95

New York’s film and television industry is described by some as “Hollywood on the Hudson” and is touted as “America’s first motion picture capital.”96 Through its tax incentives, New York is making an aggressive push to “lure . . . ‘runaway productions’ away from competitions and back to the Big Apple.”97 The available tax credit was increased to thirty percent from ten percent in April 2008 due to neighboring states’ competitive tax incentive programs.98

New York’s program is working.99 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).


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retaining over 19,000 jobs100 and providing a 1.1 rate-of-return on investment statewide.101 The State issued $184.4 million in credits102 and collected $208.7 million in state taxes.103 The only reported problems with New York’s program concern the management of the credits and allocation of funds, not whether the program actually works.104 In the end, New York’s program creates jobs.105

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 programs.106 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 out on a yearly basis.107 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 Louisiana.108 The State reported that the non-film industries racked in $700 million in 2007.109 Accounts from Michigan, Wisconsin, and Connecticut sing similar songs.110

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 short-lived”); Forster & Marley, supra note 106 (reporting that Wisconsin’s film tax incentive’s “[e]ffectiveness [is being] [d]ebated” among lawmakers).


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The major dilemma presented by offering a film and tax credit, however, is the grass-is-greener effect that may cause problems for any incentive program.111 Productions will always have the option of finding a lower-cost location and moving quickly.112 Loyalty in this regard is lacking; therefore, production companies will always be looking for a state that offers a better incentive than the state in which they are currently producing.113

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 incentive is estimated to decrease the General Fund by $355 million.114 Furthermore, the incentive provides that the twenty-five-percent tax credit for productions that relocate to California is only for television productions that have produced all of their prior episodes outside of California.115 Ugly Betty left California for New York; therefore, if it returns, it is most likely ineligible to receive the credit.116 As written, although the tax incentive encourages production to stay in the state, productions that have already left are likely not eligible for the tax credit.117 B. Will Small Businesses Run and Hire?

Unlike existing law, the small-business tax credit is not dependent on the

geographic location of the hired employee or the employer.118 Proponents argue that the credit will increase hiring by small businesses.119 Opponents, however, argue that businesses will just be receiving a tax credit for people they were going to hire anyway and that it fails to address job retention.120 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.


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over the budget period, the hiring credit is estimated to result in revenue loss of $435 million.121 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 method to use.122 Furthermore, giving businesses the opportunity to elect the single-sales-factor method is estimated to “cost $750 million in the 2012-2013 budget year” alone and $1.5 billion over the five-year period.123 Companies that have numerous employees and a substantial amount of property in the state, but that sell mostly out-of-state, argue that the double-weighted apportionment test creates a disincentive to expand their businesses in California, because expansion increases the income taxes they pay.124 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 will make 42.5% of the company’s income subject to California tax.125 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 many persons the company employs or how much property it possesses.126 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 return on this investment.”127 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 the state.128

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 bad ones,” giving them the ultimate opportunity for manipulation.129 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.


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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 products.130 Also, there is no guarantee that the tax incentive will prevent companies that want to downsize from doing so.131

Lastly, some believe that it is just unfair to discriminate among businesses based on their financial contributions to the state’s economy.132 The 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 pay no income tax.133 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 apportionment method.134

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 multi-state businesses.135 However, it is difficult to predict whether Chapter 10 is a sure win for anybody.136 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 offset by the law’s positive effects on employment.137

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.

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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

In what some refer to as the “Great Recession,”1 residential-building construction grinds to a halt under the weight of a collapsing housing market.2 Like fallen giants, partially completed new-home developments stand abandoned if not forgotten, “still sheathed in yellow insulation panels and surrounded by steel scaffolding.”3 In some areas, thieves come out at night to tear copper wiring, pipes, and other valuables from abandoned housing projects, and neighbors lie awake to the sound of buildings being destroyed as bonfires blaze until morning.4

These stories are commonplace in California, where approximately 250 residential developments, including over 9,000 new houses and condominium units, were abandoned at various stages of construction.5 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 construction.”6

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 invasions of Iraq and Afghanistan.7 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).


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stabilize the economy.8 “By summer 2003, the federal funds rate . . . was at a record low,” and, in an effort to remain competitive, major central banks around the world followed suit.9

Consequently, the housing market heated up and home prices increased an average of nine percent each year between 2000 and 2006.10 In extreme cases, “a home worth $150,000 in 2000 was worth $251,565 in 2006.”11 Purchasers and lenders responded enthusiastically to this environment,12 and mortgage investors began to bankroll borrowed money acquired at low interest rates in order “magnify returns many times over.”13 Additionally, as lenders became more confident with the rising housing market, they elicited “subprime”14 borrowers with attractive loan incentives, such as easy initial terms and low down payments.15

The sudden influx of subprime mortgages created a temporary rise in the economy.16 But as interest rates rose in response and housing prices started to drop moderately in 2006 and 2007, refinancing became more difficult, and subprime borrowers began to default on their loans.17 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 industry.18

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).


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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 current economic crisis.”19 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 1990.”20 As a majority of buyers rushed to buy homes at bank repossession auctions, many big construction firms were forced to abandon projects, downsize employees, and file for bankruptcy protection.21

Because of “[d]eclining home prices,” “[t]ighter borrowing requirements,” and “[r]ecord foreclosures,” prospective homebuyers became reluctant to invest in the California housing market.22 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 recorded.23 This decline in new-home construction prompted California financial officials “to freeze nearly $4 billion in financing for construction projects across the state.”24 As the state’s economy continued to decline, commercial and construction industries suffered a rise in unemployment, increased business failures, and a loss of sales.25

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 political gridlock.”26 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.


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remedy the $41 billion deficit.27 While this agreed-on budget calls for a $14.8 billion decrease in spending and a $12.5 billion increase in taxes,28 it also includes a number of tax credits to stimulate the economy and create new jobs.29 These credits include Chapter 11’s generous tax credit for buyers of new homes.30

III. CHAPTER 11

Chapter 11 provides a tax credit to buyers who purchase qualified principal residences between March 1, 2009, and March 1, 2010.31 Each household is entitled to the lesser of $10,000 or five percent of the purchase price.32 This credit is a non-refundable tax reduction that must be dispersed equally over the three years following close of escrow.33

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 manufactured home, or a mobile home”34 and must never have been previously occupied.35 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 218.36

Chapter 11 charges the California Franchise Tax Board (FTB) with the responsibility of determining rules and procedures for implementation of the credits.37 Specifically, Chapter 11 calls for the FTB to issue credits on a first-come, first-served basis,38 and the taxpayer must file an application for credit within one week from the close of escrow.39

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).


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The California Legislature set aside $100 million to fund Chapter 11, which serves as a cap on the total amount of available tax credit.40 Chapter 11 also has a built-in repeal clause with a sunset date of December 1, 2013.41

IV. ANALYSIS

Chapter 11 arose from a $100 million deal to settle California’s budget standoff in February 2009.42 The tax credit proved to be wildly popular and the allotted $100 million in credit funds were quickly depleted.43 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 this stimulus to fizzle out before reaching its full economic potential.”44

A. How Will History Repeat Itself?

Supporters are adamant that Chapter 11 is a vital component in lifting California from the slums of recession.45 In the four months following Chapter 11’s introduction, the new tax credit successfully stimulated new home purchases, jump-started construction, and created employment.46 By June 17, 2009, nearly 9,800 consumers had used up nearly ninety-five percent of the $100 million fund.47 Supporters point to a similar tax credit that successfully stimulated the housing market during a recession in 197548 and argue that “[a] recovering housing market has pulled America out of every one of its previous recessions since World War II.”49 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.


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consumers off the fence; instead, it is the opportunity to gain a limited benefit that signals consumers to re-enter the market.50

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 same thinking that brought about [the] economic turmoil.”51 Currently, the only safeguard against fraud exists in the FTB’s procedures to eliminate “duplicate, revised, and invalid applications,”52 as well as continued monitoring that the residence remains occupied for at least two years.53

Additionally, critics frown on the notion of providing an incentive for building and purchasing new homes when so many of California’s existing homes remain unsold after foreclosure.54 They argue that excess inventory is the real estate market’s biggest problem, and the market cannot stabilize until that surplus inventory is reduced.55

B. Expanding the Credit

Supporters urge the Legislature to expand Chapter 11 to ensure availability to new-home buyers through March 1, 2010.56 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 applications window.57 Supporters propose language to stretch the $100 million allocation of funds “further than the 10,000 buyers originally targeted.”58 Other suggestions include amending the language “to add $200 million to the tax credit allocation”59 or simply eliminating the cap all together.60

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.


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On the other hand, some lawmakers are wary of expanding the tax credit, especially because California still faces a substantial deficit.61 Critics argue that a tax credit aimed only at new homes does not address the surplus of foreclosures in California,62 and the market could alternatively be stimulated by builders simply selling houses for $10,000 cheaper.63 They warn that California should “‘be very careful what we do with general-fund money’ given the state’s budget deficit.”64

A concern regarding this expansion is that it will cost California $59 million over the next three years if the Legislature removes the cap on the tax credit.65 However, supporters explain that over $300,000 in economic activity is stimulated from building a single new home, which provides much-needed new jobs in California.66 While Chapter 11 successfully enticed hesitant homebuyers back into the market,67 “activity stopped as quickly as it started” upon expiration of the tax credit, causing critics to question whether California’s housing market rebound is reality, or merely illusion.68

V. CONCLUSION

The new-home tax credit successfully pulled leery buyers off the fence.69 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’ for the second half of the year.”70 Building industry consultants continue to urge the Legislature to consider a bill allowing additional applications.71 This is fueled, in part, by fear of recent progress remaining stalled without the tax credit as an incentive for homebuyers.72 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.


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applications window for Chapter 11’s benefit and the entire $100 million is depleted.73 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 credit could become part of the deal-making process in the future. 74

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.”).

Revenue and Taxation - McGeorge School of Law

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