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Subsidies for moviemakers: Disappointing results lead to second thoughts

Bigger than 3-D … bigger than comic-book superheroes … in the past decade, the most significant trend in making movies is that taxpayers have helped finance them.

But, in what sounds like the working title for a Hollywood sequel, the taxpayers are striking back.

In 2009, 44 states were offering subsidies to lure movie productions; that number has dropped off to 35.

As balancing state budgets has become an annual cliffhanger, and with nearly 300,000 state and local government jobs lost in 2011 in the United States, the question is surfacing as to whether government and the movie business still have the chemistry to be co-stars.

That question isn’t being asked in New York, with more than 90,000 workers directly employed by the film and television industries (according to the Motion Picture Association of America). New York recently tripled a tax credit strategically aimed at making the Empire State a center of post-production, a term that includes such finishing touches as the addition of special visual effects.

Nor is there much dissent in Louisiana, currently basking in national media attention for a film-subsidy strategy that has also spurred a wave of digital startups in New Orleans.

Since the era of state tax subsidies for filmmaking began, New York and New Orleans have established themselves as “Hollywood East” and “Hollywood South,” respectively. They are the best advertisements for state incentives for filmmaking.

Both states provide a 30 percent tax credit — essentially a cash rebate — for in-state production costs. Louisiana gives an additional tax credit if a production company hires Louisiana workers, and New York adds a tax credit if the company constructs permanent buildings in the state.

Louisiana also expanded the definition of the kinds of firms eligible for the tax credit to encompass the digital-game industry, and eventually all digital-media startups. In effect, Louisiana is channeling part of its tax incentive toward companies more likely to stay and employ residents longer than a few weeks.

When New York announced its $400 million post-production tax credit, the Los Angeles Times wrote that “[t]he credit will give New York another competitive advantage over its main rival California, which does not offer a specific credit targeting post-production expenses for such costs as visual effects — commonly a big part of movie budgets.”

Crucially, the credit can be obtained even by production companies that did not film in New York. All they have to do is use a New York post-production facility for their films.

Among the other states that provide such incentives, a 20 to 30 percent tax credit is typical, but a few states go even higher, such as Michigan, whose treasury rebates 42 percent of film production costs.

California’s doubts about subsidies

In California, home of the original Hollywood, enthusiasm for the rebates as an economic development tool shows signs of waning. A nonpartisan state analyst recently made headlines by claiming California is losing money on its $100 million California Film and Television Tax Credit program, a subversive assertion when the state is trying to soak up a reservoir of red ink.

Mac Taylor, of the State Legislative Analyst’s Office, attacked two think-tank studies the motion picture industry was using to sell the continuation of California’s program.

One, by the non-profit Los Angeles Economic Development Corporation, concluded that the state overall was returned $1.13 in increased economic activity or tax revenues for every dollar invested. The LAEDC arrived at that estimate by looking at nine production budgets of subsidized films, estimating the economic activity and the tax revenues they generated, and comparing that total with the total tax credit.

The UCLA Institute for Research on Labor and Employment calculated a lower margin, a $1.04 return on each dollar in state money spent, using a similar methodology. The study’s authors challenged some of the LAEDC’s conclusions, but stood by the value of the subsidy to the California economy.

“Even though there is likely a small benefit to the state, I think the California film and television tax credit is a worthy program because, without it, in the long run, California is likely to lose dominance in an industry that is very important to the state’s economy,” Lauren Appelbaum, who directed the UCLA research, told the Los Angeles Times.

Taylor contradicted the claims in both studies. The tax return from every dollar invested was “perhaps well under $1 for every tax credit dollar,” so the program results in “a net decline in state revenues,”

an incendiary charge at a time when California faces a $16 billion deficit. Taylor also said the claim of added jobs was “likely overstated.”

But Taylor’s most controversial assertion was that the tax credits were not needed. He said many also-rans in the state’s annual film-tax- credit lottery — a process necessitated by a $100 million cap on the program and a long waiting list — went on to spend millions to film in California anyway.

That fact suggested the cluster of film-related businesses and talent in California mattered more to producers than what a tax credit could add to the bottom line.

Taylor’s assertion is at odds with what most film industry leaders and sympathetic economic development officials say. Their experience in recent years is that each new film production launches a bidding war among states that have appropriate filming locations and money in their budgets, with the movie and its short-term but significant economic effect going to the highest bidder.

The California state analyst’s report didn’t deter the Legislature from renewing the tax credit program, but wary legislators passed only a two-year extension. Motion picture industry and labor lobbyists wanted five years. Gov. Jerry Brown has yet to sign the bill.

Threat to the movie/TV ‘cluster’?

California was late to the business of providing tax credits for motion picture projects, having started its program in 2009. According to Adrian McDonald, manager for the Los Angeles-based Stop Runaway Production campaign, California’s program is “purely defensive,” a response to dozens of states’ incentive programs since Louisiana and New Mexico started the trend in 2002-2003.

Although McDonald wrote that California’s incentives are worthwhile, protecting the nation’s foremost cluster of moviemaking talent and facilities, he criticized most states’ incentives.

“The economic impact is great,” McDonald wrote, “but not if it takes away vital public funds from cash-strapped states that are making cuts to vital services to things like education, health care, police and fire protection, infrastructure and so on.”

In the past 18 months, eight states, including Arizona, Arkansas, Idaho, Iowa, Kansas, Maine, New Jersey and Washington have suspended their subsidies, according to the Tax Foundation, a nonprofit tax- research group based in Washington. Nine other states, including Michigan and Missouri, are examining cutbacks in or cessations of the programs, the foundation reported.

With many state budgets far out of balance, the need for austerity is the biggest reason.

In 2011, New Jersey Gov. Chris Christie was facing a $10.5 billion budget shortfall. His spokesman Michael Drewniak told The New York Times the film tax credit “was one of the first things to go, and it wasn’t that difficult a call.”

A report released by the Center on Budget and Policy Priorities, a think tank, spotlighted a finding by the Massachusetts Department of Revenue that the Bay State lost $88,000 in tax revenue for every new job created by the state’s film tax credit in 2008. Similar to California’s legislative analyst, Massachusetts officials saw every dollar of the program earning only 69 cents in income for residents and generating 16 cents in tax revenue for a total of 85 cents on the dollar.

Nevertheless, Massachusetts kept its program.

To sweeten the incentive, many states (including Michigan, New York and North Carolina) make the tax credits refundable, in effect turning the tax credit into a subsidy. Ostensibly, the tax credit is supposed to be applied against the production company’s tax liability. But in many cases, the tax liability is smaller than the incentive available.

If the credit is refundable, the government makes up the difference with a check to the producers.

In other states, including Massachusetts and Louisiana, the tax credits are transferable to other taxpayers who had no involvement in the film. The Boston Globe reports that, in Massachusetts, the 25 percent tax credits are worth more than most film companies owe in taxes. Under the law, brokers can sell the unused credit at any price to any Massachusetts taxpayer. Because of this law, brokers sell 98 percent of the tax credits to wealthy people and financial firms looking for a tax cut.

The Globe quotes the legislative director of the Massachusetts Public Interest Research Group as saying, “The public assumes that the film tax credits are going to the film industry to bring jobs — not to Wal- Mart. I think the general public would have a problem with that.’’

North Carolina’s drama

The conservative, Raleigh-based John Locke Foundation’s report on North Carolina’s tax credit program shows how during the past decade, a pattern repeated itself: A state would lose a bidding war with another state over a high-profile movie project. Then its leaders would lobby its legislature for an even more generous, less restrictive program so as not to miss out next time.

After the Walt Disney Corporation at the last moment shifted “The Last Song,” starring Miley Cyrus, from North Carolina to Georgia, even though it was written by North Carolina author Nicholas Sparks and was based on his novel set in North Carolina, Gov. Beverly Purdue turned to the Legislature and won passage of a more generous program than it had previously.

Now, North Carolina rebates 25 percent of film production expenses, including a proportional share of employee salaries up to $1 million and fringe benefits, even if the employees don’t pay taxes in North Carolina. The subsidy is a refundable tax credit, so producers will be paid in cash if their tax bill isn’t large enough.

North Carolina’s enhanced generosity has attracted more filmmaking, with recent productions including “The Hunger Games,” and the TV series “Homeland” and “One Tree Hill.”

But the cost to the state has jumped from $2.4 million in 2010 to $30.3 million in 2011 because for every dollar spent on the program, the state loses 31 cents, according to the Heartland Institute, a Chicago-based think tank that advocates free-market policies.

And the taxpayers aren’t the only losers in the state’s quest to woo filmmakers. Despite North Carolina’s increased incentive, the sequel to “The Hunger Games” is being filmed in Georgia and Hawaii.

— John Stodder Jr., The Dolan Company’s national affairs correspondent and web editor

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