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Fledgling film industry may lose out on tax credits

The $70 million Gateway Studios in Mesa would sit on 55 acres and include soundstages, production and post-production facilities. (Photo courtesty of www.gatewaystudios.com)

The $70 million Gateway Studios in Mesa would sit on 55 acres and include soundstages, production and post-production facilities. (Photo courtesy of www.gatewaystudios.com)

Supporters of a bill that aims to extend tax credits for motion picture companies face a new hurdle: A fiscal analysis shows the program would cost the state as much as $40 million beginning in fiscal 2012.

That potential revenue loss outlined in the nonpartisan Joint Legislative Budget Committee report is huge.

Put in the context of a state deficit, the problem becomes magnified; the amount is a significant hit to the general fund at a time when the state’s finances could still be on shaky ground.

The challenge to supporters of Arizona’s film industry: No lawmaker would want to be seen as contributing to the state’s historic budget deficit by millions of dollars without proof that the state would reap measurable benefits.

“I think it makes it very hard to justify voting for something that is going to have a $40 million impact when we are saying we don’t have money for anything and we’re cutting you name it – education to KidsCare,” said Sen. Rebecca Rios, a Democrat from Tucson. “And that’s the dilemma that myself and some others have had.”

At stake is the fledgling film industry itself. Two planned production studios – the $100 million Avondale Live and the $70 million Gateway Studios in Mesa – may never get off the ground if the bill fails.

The existing tax credit program is set to expire at the end of this year.

Indeed, the debate on S1409 on March 31 buttressed Rios’ view. The bill, which was amended to try and address concerns that were raised against it, initially failed to get approval to move forward.

But its sponsor, Glendale Republican Sen. John Nelson, was persistent.

He tried again, and it finally cleared the floor debate by a very slim margin – 15 to 14.
What probably saved the bill for now was the promise of another economic analysis commissioned by the film industry that could show the amended bill would have a positive effect on the state.

But if the study, which is set to be completed in the next several days, shows that the state won’t make money from the program, Nelson said he would kill the bill.

S1409 now heads to the floor for a full vote by the Senate. But judging from the level of support it received during the debate, Nelson and its backers have their work clearly cut out for them.
The JLBC analysis said the bill is expected to reduce income tax collections between $10 million and $40 million annually, starting in three years.

That fiscal impact could be even deeper – depending on how the industry fares in the state – but the new program would also result in increased economic activity and offset some of the direct revenue loss, according to the analysis.

It considered other states’ motion picture tax credit programs, saying these types of incentives can offset between 15 percent and 20 percent of the direct cost to the state.

But Nelson said the JBLC study is out of date; a lobbyist pushing the measure said the analysis is irrelevant since the bill was going to change.

The fiscal analysis was not the driving force behind amendments to the bill, but it confirmed the need to tweak it, he said.

“You can say it added impetus to do it,” Nelson told the Arizona Capitol Times, adding that the bill’s supporters decided to make changes after it was heard in committee and before the fiscal note came out.

The bill’s supporters do not want Arizona to lose out on a potentially viable, high-paying and technologically savvy industry. They point out that other states are also offering incentives to lure film producers.

The challenge, therefore, is to find a delicate balance between minimizing the potential revenue loss to the state and maximizing the conditions to grow a stable film industry here. Put another way, the tax incentive program must be attractive enough for filmmakers to choose Arizona over other states and yet conservative enough so it actually adds, rather than reduces, state revenue.

Supporters of the measure hope to capitalize on a mood among policymakers who want to prevent dramatic swings in state revenue by diversifying the state’s economy.

“Quite frankly, at this point what we need to be doing, as I have said over the last two years, is we need to be creating jobs,” said Sen. Thayer Verschoor, a co-sponsor of the bill.

He said he doesn’t think the bill would cost the state any money.

“There is a real interest in attracting new and diversified industries and professions,” said Kevin DeMenna, who lobbies for Avondale Live.

In scouting for locations, film companies no longer look just for the right scenery, they also look for the right incentives, according to DeMenna.

Arizona can take advantage of this situation because it has the backdrops – its gorgeous desert landscapes and mountain passes – and the proximity to California.

But it needs to attract those companies to not only shoot pictures here but also stay in Arizona for post-production work by offering incentives, he said.

Critics said no amount of tweaking will improve the bill.

Sen. Ken Cheuvront, a Democrat from Phoenix, said it would carve out a special subsidy for one industry.

“It’s a boondoggle,” he said. “It’s subsidizing Hollywood at Arizona taxpayers’ expense.”

Tax Credits for Film Companies
Arizona film-industry tax credits are set to expire at the end of the year. S1409 would extend the following incentives to the fledgling industry:
The aggregate amount of tax credits annually would cap at $70 million. Of the $70 million, $10 million is set aside for infrastructure.
The amount a company can claim in tax credits for each production has been lowered to $15 million from $20 million.
The percentages of the tax credit that production companies can claim against their expenses have been lowered. A company, however, can get an extra 5 percent if it uses an Arizona studio that cost at least $50 million to build.
In order to qualify for the credit, a company must employ 25 percent of its workforce from Arizona.

Click here to read sidebar: “Supporters: 2 studios would not build without incentives”

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