Legislature(2015 - 2016)HOUSE FINANCE 519
04/16/2015 08:30 AM House FINANCE
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SENATE BILL NO. 39 "An Act repealing the film production tax credit; providing for an effective date by repealing the effective dates of secs. 31 - 33, ch. 51, SLA 2012; and providing for an effective date." 8:38:07 AM SENATOR BILL STOLTZE, SPONSOR, explained that SB 39 was a very serious bill which he had introduced in the previous year [HB 112 was introduced during the second year of the 28th legislature]. He indicated that although HB 112 had been reported out of the House Finance Committee in 2014 he did not push for a floor vote. Instead, he reported working with the committee chairman on a compromise measure, House Bill 306 [Short Title: Eval. Indirect Expenditures; Tax Credits], which evaluated all tax credits. He added that tax credits were ultimately general fund expenditures. In order to ensure the passage of HB 306 there were some compromises that had to be made which lead to drafting new legislation in the form of SB 39. He suggested that the state was in a vastly different financial condition currently and opined that a value judgement made at present would be much different than three or five years prior. He believed a fresh look at whether the state wanted to continue subsidizing the film industry was necessary. He reiterated that film tax credits were general fund expenditures. He mentioned that the governor was slowing the breaks and relayed that, when queried, the Department of Revenue (DOR) took the position that SB 39 provided clarity. He highlighted the deliberative process that accompanied the evaluation of the film tax credit as well as all other tax credits. He noted that the "tax credit" reference was a bit of a misnomer because the film industry did not pay taxes. 8:43:24 AM Senator Stoltze continued to explain that it was money being depleted from the general fund including a charge for a third-party broker that would otherwise be available for roads, schools, and other items. He relayed that in his legislation he left the film office in place in case there were opportunities where the state could act as an agent. He felt that it was an appropriate economic component of Department of Commerce, Community and Economic Development (DCCED). However, in the governor's budget deliberations the funding was removed. He would have left the funding in place, but it was a time of difficult decision making. He pointed out his main theme; economics. He added that there had been many positive outcomes within communities of Alaska and for select business people as a result of the film tax credit. He made clear that he was not impressed with the audit which found that for every dollar the state spent two dollars feed the economy. He voiced that the state dividend was far better at enriching the economy than the film tax credit. He elaborated that although monies might go into the state's economy, there were no dollars going back into state coffers. He acknowledged that there was no expectation that tax credits would result in money being put back into the treasury. At the time the tax credit was instituted significant funding was available. However, he argued that due to the current fiscal situation the state needed to make different decisions. Senator Stoltze further discussed some of the positive economic benefits resulting from the tax credits for individual communities including bed taxes and short-term employment. He stressed that there had been benefits, but argued that if a person was spending their own money they might make a different choice. He suggested that some people view tax credits as an economic diversification tool for Alaska. He stated that the largest employer in the state was the commercial fishing industry in which the state received unrestricted general fund revenues from both business and landing taxes in the amount of $24.7 million in the current year. Costs such as insurance premiums were about $58.5 million. He wanted to provide a perspective comparison and added that nothing was going to replace oil revenues. He argued that the only thing that really created jobs and provided revenue was when outside capital came into the state without the state paying for it. A film tax credit or other types of subsidies would not provide the diversification needed in the economy. Co-Chair Thompson acknowledged that Representative Guttenberg and Representative Pruitt had joined the meeting. 8:48:17 AM Vice-Chair Saddler assumed the chair and asked if members had questions. Representative Gara asked about the current sunset date. Senator Stoltze responded 2018, which was changed from 2016 on the Senate floor. Representative Guttenberg asked if the film office would stay open. Senator Stoltze responded that the film office was not funded. Representative Guttenberg asked what the film office would accomplish by staying in place. Senator Stoltze responded that the office would provide assistance with identifying locations, would be involved with Department of Natural Resources, and help in identifying land sites. The rational was that a person would be available to help someone wanting to spend money in the state. Representative Wilson asked about the film group. She believed the group had changed and wondered exactly who would be impacted and where the state stood. Vice-Chair Saddler invited Mr. Burnett to the table. Senator Stoltze explained that he had tried to clarify what his bill did and did not do. 8:51:42 AM JERRY BURNETT, DEPUTY COMMISSIONER, TREASURY DIVISION, DEPARTMENT OF REVENUE, restated Representative Wilson's question about the amount in the budget for the film office if the bill did not pass. He reported that in the governor's version of the DOR budget all of the funding for the Alaska Film Office was removed. He explained that it equated to three positions totaling $347 thousand in personal services. The three people in the positions had been made aware of the situation. The governor's stance was to place a freeze to the office and avoid creating additional liabilities to the state. Representative Kawasaki referred to the fiscal note that mentioned the $350 thousand that was not appropriated in the governor's budget. He wondered how a film tax credit would exist without the film office and mentioned the 2012 law. Mr. Burnett relayed that the way the statute was written DOR would operate the film office subject to appropriation. Department of Revenue would not be reviewing film scripts and the film tax incentive review commission would not be meeting under the current budget. He added that without funding for the program the department would not take new applications after July 1. There were existing and pre- approved films that were ongoing and the associated credits would be processed with existing staff within DOR. Representative Kawasaki clarified that without the additional funding for the film office in DOR the film industry credit was defunct. Mr. Burnett responded that no new credits would be approved. Representative Kawasaki asked if Mr. Burnett's answer was yes. Mr. Burnett responded in the affirmative. Representative Munoz asked how many notices of qualifications were issued prior to July 1, 2015. Mr. Burnett was unsure of the exact amount. He offered that there were approximately $38 million in outstanding credits that had not been paid. He stated that in the current program, which had a $200 million cap, there would have been $172 million left under the cap. He suggested that it did not fit with the $38 million because there was a previous program. 8:55:22 AM Representative Munoz reiterated that the legislation would allow for the payment of outstanding credits. Mr. Burnett responded that it would allow for any of the outstanding credits. Representative Munoz reconfirmed that anything after July 1st would not be allowed. Mr. Burnett stated that no new applications would be processed. He did not believe there were any applications that were approved since Governor Walker took office for films that were actually going to be made in Alaska. He could not verify his information due to the nature of the proprietary applications. Representative Edgmon wanted to hear from DOR about the broader impact of the film industry. He believed that it was a clear case that the state was paying more in terms of tax credits than the state was receiving in benefits. He wanted to know if any documentation was available such as a McDowell study, or a Northern Economics study that pointed to an economic multiplier effect. In other words, the state was paying a significant amount of money for a significant number of bad reality shows in return. Senator Stoltze stated that he was not a spokesman for the film industry. He believed that there had been some positive impacts on individual towns. He also relayed that the City of Unalaska had to hire a public relations firm to undo some of the damage to the economic wellbeing and to the perception that the community experienced as a result of some of the non-fiction reality television shows. Many people of Alaska had issues of how they were portrayed as well. He added that some from the film industry stated that the introduction of the bill killed the film industry in Alaska. He reported that the governor had suspended the program prior to Senator Stoltzes' bill introduction. He wanted to clarify the sequence of events. 8:58:56 AM Representative Gara stated that Alaska had "C" corporation taxes but did not have "S" corporation taxes and that the taxes collected were based on company profits. He wondered if the state had received corporate income tax from any of the film corporations. He wanted to know if Alaska pursued any taxes and whether the state was entitled. Mr. Burnett replied that the question was very difficult to answer for a number of reasons. He understood that most of the production companies that came to Alaska were set up as limited partnerships and limited liability companies (LLC). He suggested that there might be a corporate sponsor entity that received income. However, he made it clear that identifying the entity was next to impossible. He added that if a "C" corporation was actively doing business in Alaska and earned an income anywhere in the country they would be required to file an Alaska tax return and pay taxes. He was unsure how the production companies were organized and did not believe any were organized as "C" corporations in Alaska. Representative Gara asked if the state had received any revenue and whether he thought the department's efforts had been adequate in determining whether the state was entitled to any corporate tax revenue. Mr. Burnett could not speak directly to whether the state had received any income, but believed that the department's efforts to pursue income from corporate entities had been adequate. Representative Gara wanted confirmation about the receipt of revenue. He opined that there were "C" corporations that had produced some of the larger films and that the state should have received some revenue. Vice-Chair Saddler asked if the bill sponsor had any new information regarding how film tax credits operated in the Lower 48. Senator Stoltze replied that the trend was that states were backing away from film tax credits. He reported that he had attended a National Conference of State Legislatures (NCSL) for fiscal policy leaders. He stated that attendees included state treasurers and state office of management and budget directors. A dominant theme of the conference was out-of-control tax credits. He argued that SB 21 [Secretary's note: Oil and gas production tax legislation passed in 2014] was legislation that attempted to reign in tax credits. He conveyed that tax credits and subsidies were part of the budget debate. At the NCSL conference a common discussion was eliminating tax credits and incentives, inherently general fund expenditures. He suggested that doing away with film tax credits was only one piece of getting control of tax credits. He added that the state had significant tax credits and only a couple of tax payers. 9:04:35 AM Representative Kawasaki asked about HB 306 and the Indirect Expenditures book from the current year. He wondered about the qualified capital expenditure credit. He relayed that the Legislative Finance Division (LFD) reported that the credit was not being used as intended and that oil companies were using the qualified capital expenditures to do general maintenance, rather than using them for development. He interjected that he had voted against the film tax credit along with the finance co-chair and the majority leader. He wanted proof that the tax credits worked. He suggested an audit had been conducted prior to the second iteration of the bill becoming law. He suggested that the legislature allow the credit to die on its own on the sunset date in 2018. He voiced that the film tax credit was effectively gutted and would not convey credits in the future. Senator Stoltze stated that a decision could be made by a single person. He spoke of his legislation providing more certainty and clarity. Representative Gara understood the resistance to paying for salaries of Hollywood actors and producers. He also understood that the state wanted the business but did not want to pay out a large sum of money. He wondered about a provision that would cap the program at a certain amount to offset travel costs to get to Alaska. Senator Stoltze opined that if the state was going to continue offering tax credits Representative Gara's suggestion would be productive in terms of subsidizing smarter. However, he was uncertain about existing structural problems and thought that it would be better to address the issue when evaluating all state expenditures. He added that there were already complexities and problems and that the ongoing obligation of tax credits and subsidies was a larger issue. He felt that it would be better to raise the house and build a better foundation with a new structure, with a new bill. 9:09:34 AM Representative Gattis commented that the film tax credit was not free marketing. She recalled Representative Gara's statement that the film tax credits were essentially free marketing for Alaska's tourism. She concluded that it was the state that was paying for the marketing. Representative Gara agreed. Representative Gattis commented about compensating for travel costs. She agreed that it was expensive to travel to and around Alaska. She recalled the television show, Northern Exposure. The show provided credit to Alaska even though it was not filmed in the state. She reported that there were other shows filmed about Alaska in a location outside the state. She stressed that the state needed to cease subsidizing during a fiscal crunch. She appreciated the idea of doing a better job. However, she suggested that the state could not afford subsidies at present. Senator Stoltze commented that he had watched one of the movies produced in Alaska that featured the Knik River valley, one of the most beautiful spots in his Senate district. He indicated that the beauty of the area was not portrayed as such in the film. He furthered that the film did not necessarily benefit or harm the area, but alleged that the state had spent a significant amount of money subsidizing the film. Vice-Chair Saddler relayed that there were several people online waiting to provide testimony. Senator Stoltze thanked the committee for its time and indicated his staff would be available for questions. He would be leaving for another committee. 9:13:01 AM Vice-Chair Saddler OPENED public testimony. 9:13:14 AM DK JOHNSON, TRI-SEVEN PICTURES, ANCHORAGE (via teleconference), opposed SB 39. He relayed that he had spent the previous few years working side-by-side with one of the most talented and dedicated production communities ever assembled. He highlighted the hard work that had been done in spite of consistent roadblocks set by the legislature. He furthered that the community had worked with lawmakers to better the state's production industry making it work for the benefit of the state and its residents. He discussed the benefits of the production industry such as diversification of the economy. He mentioned that each year members of the industry had to come before the legislature to defend the industry's progress. As a result, he opined that industry development was often delayed by a minimum of two years. He stressed that SB 39 created an unstable work environment and that the passage of the bill would put hundreds of Alaskans out of work. He mentioned that an example of a lost opportunity resulting from legislation was the feature film, "Hunter - Killer." He spoke against the elimination of the program. He opined that the state had a large gambling problem with its budget and believed that a different strategy was needed. He urged committee members to vote against SB 39. 9:16:11 AM Representative Guttenberg expressed his concern about the structure of the film tax credits. He thought the state could do a better job of encouraging the production industry. 9:16:54 AM DAN DUQUE, SEAWOLF STUDENT FILMMAKERS, ANCHORAGE (via teleconference), spoke in opposition of SB 39. He indicated that he was not a fan of reality television. He suggested that there were post production companies in Anchorage that were happy to hire new talent. He continued to relay his experience. He mentioned the talent of the people in Alaskan villages. He believed that the people of the state were the state. He did not understand how legislators could not see the benefits of the program including a 100 percent return on investment. He opposed the legislation and wanted incentives left in place. 9:20:00 AM RON HOLMSTROM, SAG/AFTRA REPRESENTATIVE, ANCHORAGE (via teleconference), clarified that reality television shows hired very few people, generated very little revenue for the state, and had programing sold prior to filming. Whereas, the motion picture industry hired hundreds of people, invested millions of dollars in the state, but still had to sell its product. He opined that the reality television shows would remain in Alaska whether or not a film tax credit continued. He furthered that the legislation ended Alaska's interest in a multi-billion dollar global industry. He mentioned other states and countries investing in infrastructure to improve programs in order to attract additional motion picture development. He suggested that Alaska adjusted its program multiple times making it unclear to producers what state incentives were in place. He pointed out that in the 27th legislature the state cut out directly paying actors, producers, and writers. He believed that Alaska's film program was unattractive. He conveyed that SB 39 suspended the program placing a hold on the film industry. He urged the committee to vote against SB 39. 9:23:04 AM KEVIN KURKA, ALPINE PRODUCTIONS, ANCHORAGE (via teleconference), spoke in opposition of the bill. He reported that he was a cameraman for reality shows and motion pictures. He discussed the benefits of the tax credits. He suggested a suspension of the tax credit rather than removing it entirely. He suggested adjusting and improving the tax credits in the interim. He thanked the committee for its time. 9:24:55 AM TESS WEAVER, SELF, ANCHORAGE (via teleconference), spoke in strong opposition to SB 39. She reported that she was a freelance stylist for the previous six years. She conveyed that she and her family made their living from film making. She describe the work she had been doing for the previous two years. She believed that SB 39 would kill the current project she was working on. She furthered that the state would lose hard-working Alaskans upon the passage of the bill. She appealed to the legislature to allow the program to continue at least until 2018 when her project would be completed. She opined that the incentive provided endless possibilities. She thanked committee members for their time. 9:26:13 AM GORDON CARLSON, SELF, CANTWELL (via teleconference), spoke in opposition to SB 39. He discussed working on a film that had been produced in Alaska and the associated benefits to the area. He reported that the film left a significant amount of revenue in Alaska. He was disheartened to hear of legislators' believing only one industry could save Alaska. He disagreed and believed in branching out. He furthered that with enough diversification oil revenues could be replaced. He asked the committee to give the film industry a chance by maintaining the current tax credits. He thanked the committee for the opportunity to testify. 9:27:32 AM STACY NICHOLI, SELF, ANCHORAGE (via teleconference), spoke in opposition to SB 39. She reported that she had heard many misconceptions about reality television shows and film companies in earlier testimonies. She purported that the two businesses were significantly different. She believed that there were very shoddy reality television shows which she admitted opposing. She was not opposed to large film groups and companies coming to Alaska that hired local Alaskans such as herself. She relayed that she took the time to vote. She also brought up oil tax credits. She expressed concern that people only took interest in Alaska when there were incentives. She expressed her frustration with the legislature. She commented that she would have difficulty feeding her two children and her husband if the legislature killed the film industry in Alaska by passing SB 39. 9:31:34 AM DAVID MCGOVERN, SELF, ANCHORAGE (via teleconference), spoke in opposition of SB 39 and conveyed that he was a self- employed entrepreneur. He relayed his disappointment in the legislation. He opined that the bill was a vicious attack against an industry that had done nothing to harm the state, the administration, or the current budget. He mentioned the possibility of a bidding war with incentive programs. He shared three things about the people in the Alaska film industry; they were not greedy, they were not all "left-wingers", and they were not asking the legislature to create an opportunity. He shared about a current project he was working on with a veteran to help him raise funds to participate in the Challenge Alaska hand cycle race. He was not making a dime on the project. He conveyed his disappointment in state legislators and in particular the legislators in his district. He stressed that Alaskans had been making opportunities for themselves as far back as 1921 when the Native Alaskan, Ray Wise Mala, first began his film career and went on to have great success in front of and behind the camera. He thanked the committee for the opportunity to testify. 9:34:12 AM BRAD SWENSON, GOLD RING GROUP, GIRDWOOD (via teleconference), spoke against SB 39. He shared that he and his business partner were considering suspending their film production in Alaska due to the proposed legislation. He stated that their decision would be based strictly on economics. He mentioned an article in Forbes Magazine about the long range forecast for oil being at or below $65 per barrel. He opined that the economy was changing. He relayed a story about a prior legislator in the 90's ranting and raving about the economic studies in the 80's which revealed that Alaska's economy suffered from its dependence on oil. He urged legislators to promote a sustainable long- term economy. He urged legislators to keep the film industry alive. 9:36:38 AM MAXINE DOOGAN, COMMUNITY UNITED FOR SAFETY AND PROTECTION, ANCHORAGE (via teleconference), opposed SB 39. She believed there was a need for diversification in Alaska's job market. The film industry provided other types of employment. She opined that without the Alaska state subsidy movies such as "Frozen Ground" would not be made. She reiterated that she opposed SB 39 and thanked the committee for hearing her testimony. 9:37:44 AM BOB CROCKETT, PIKSIK, ANCHORAGE (via teleconference), spoke in opposition of SB 39. He discussed the nature of his business and stated that the legislation would heavily effect his business. He believed an economic incentive leveled the playing field and allowed Alaska to remain competitive globally. He suggested that it took approximately two years to process a tax credit. He reviewed a list of impacts of the bill. He suggested to legislators that they hold off on passing the legislation before the committee for a year to further discuss alternative options. He thanked members for their consideration and time. 9:39:55 AM KELLY BENDER, WHITTIER CHAMBER OF COMMERCE, WHITTIER (via teleconference), opposed SB 39. She highlighted that the film industry crossed over many different business sectors including transportation, lodging, food, and others. She discussed the benefits of the film tax credit and its contribution to feeding Alaska's economy. She estimated that her small business in Whittier would have made approximately $20 thousand to $30 thousand in revenue associated with the movie, "Hunter-Killer." She stressed the effects on her employees and her Alaskan vendors. She relayed additional details of the benefits of the film industry. She urged the committee to consider its decision. She thanked committee members for their time. 9:42:09 AM DEBORAH SCHILDT, ALASKA FILM GROUP, ANCHORAGE (via teleconference), stated that SB 39 was the wrong choice for Alaska. She recommended suspending the program rather than ending the program altogether. She relayed some statistics regarding tax credits. She opined that ending the program did not save the state money. She suggested that the program offered diversification and economic prosperity circulating dollars through the economy through local hire, local vendors, and local businesses across the state. She urged the committee to oppose SB 39 and thanked members for their time. 9:45:00 AM BYRON CHARLES, SELF, KETCHIKAN (via teleconference), opposed SB 39. He pointed out that the film industry would continue to grow. He suggested that the legislation be set aside for additional input. He thanked the committee. 9:47:00 AM CEDAR CUSSINS, GECKO SERVICES LLC., ANCHORAGE (via teleconference), spoke in opposition of the legislation. She reported having benefited greatly from the tax credit. Her husband worked on the film, "Big Miracle." She relayed that he made enough money to purchase two pieces of heavy equipment and launch a landscaping business. She conveyed another beneficial personal experience related to the film industry. She believed that the citizens of Alaska catering to the film industry profited substantially. She strongly urged the committee to vote in opposition to the bill. She thanked the committee for its consideration. 9:49:34 AM Vice-Chair Saddler CLOSED public testimony and set the bill aside [This bill was heard later in the meeting and was reported out of committee. See 10:18:53 for detail.] SENATE BILL NO. 39 "An Act repealing the film production tax credit; providing for an effective date by repealing the effective dates of secs. 31 - 33, ch. 51, SLA 2012; and providing for an effective date." Co-Chair Thompson brought CSSB 39(L&C) back up for discussion. Co-Chair Neuman MOVED to REPORT CSSB 39(L&C) out of committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, CSSB 39(L&C) was REPORTED out of committee with a "do pass" recommendation and with a previously published zero fiscal note: FN1 (DOR). Co-Chair Thompson reviewed the agenda for the afternoon meeting.