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Nationwide Film Tax Credit Debate Continues

Written by Tim Morral
Published: 12/22/2014

While some doubt that film industry tax credits benefit local communities, industry insiders beg to differ, noting that economic studies are not considering the full impact of film production activity on local economies.

State tax incentives that subsidize movie and television series productions have been a hot topic for years, and this year is no exception to the rule.

Movie and Film Production Tax Credits

State legislators in Maryland are digesting a recent study that found that "film production activity tax credit does not provide sustainable economic development." The study was immediately answered with challenges from the film industry that the analysis ignored the indirect benefits that film production brings to the local economy.

Similar debates are playing out in other states, and while some states may limit or eliminate film tax credits, others are happily adding new tax credit programs or increasing their existing programs. Despite the ebbs and flows from state to state, film tax credits in the United States are here to stay.

Using State Tax Credits to Fund Film Production and Boost Local Economies

The goal of state film incentives, usually issued in the form of tax credits, is to motivate production companies to spend money and create jobs. As an example, if a state offers a 30% tax credit and the production company spends $1,000,000 in qualified spending, the will receive a tax credit of $300,000.

The film companies often need the money sooner rather than later to finance the production of a film and TV series. In addition, after the production is completed, it's not always the case that they owe taxes to the state. As a result of these two market factors, state tax credits for film production are often resold to a company or individual that can use the credit.

This allows the film production company to get the money they need to finance operations, and provides a discounted tax credit to the tax credit buyer, allowing the buyer to pay less tax directly to the state. Tax credit brokers play the role of middleman, collecting a commission on the transaction.

Since tax credits are granted only after the qualified expenses are incurred and verified, film production companies will often seek financing from banks in advance of incurring expenses. The bank is willing to provide the funding because they have confidence that the company will receive the tax credits and eventually this money will be available to pay back the loan.

Why We Fund Film Production with State Tax Credits

At least 27 states provide production incentives, based on a state film incentives map provided by Entertainment Partners, a finance company that caters to entertainment industry needs.

Film production is an attractive industry for states because the companies tend to spend and hire extensively during production. Local film crews are hired, adding jobs to the state economy, and there are considerable indirect expenditures that benefit hotels, security companies, caterers and a host of other local businesses.

From the perspective of those who make films, making a film is a risky business. The state incentives reduce the risk and the cost, allowing production companies to attract investors more easily.

This is especially helpful for smaller production firms, notes Justine Nagan, Executive Director of Chicago-based Kartemquin Films. "As a small non-profit production company, film tax credits have been very helpful. We have received credits through the Illinois Film Office for two of our documentaries," she says. "Those funds will go directly to support film jobs. While film incentives mostly help larger Hollywood films, many smaller projects like ours, can benefit too."

A Boost to Local Hiring, Local Businesses and Local Reputation

While there have been some studies that suggest that states don't get a good return on film tax credits, others argue that those studies define the impact too narrowly and that film tax credits are in fact a smart investment for states.

According to Patrick Fries, a Producer at Arrowhead Films in Austin, the real-world impact of motion picture tax incentives on hiring is substantial.

"If incentives are not in place, there are a thousand guys like me who are not getting work," he says. "In recent years, we saw the work moving to places like New Mexico and Louisiana, when they were more aggressive with their tax credits."

When film incentives dwindled in California, it had an immediate impact on the local economy, according to George Lang, a Director at The Big Picture, a San Francisco-based production company.

"In the last couple of years, when film credit incentives were not readily available in California, we were restricted in our ability to hire people, purchase new equipment and experiment with new concepts," he says. "Believe me, our industry impacts the local community in a big way, driving spending for restaurants, personal services, auto repair and much more. If I paid a film crew with two-dollar bills, you'd be amazed at how quickly those bills would spread through the local community. I think people underestimate how heavily dependent our state is on the film industry and the infrastructure that surrounds it."

Elaine Sibert, an Executive Producer at Dallas-based film and commercial production company Stone Core Films, agrees that film industry incentives boost local economies. "Tax incentives make a difference on where we shoot the commercials we bid on with agencies. In states such as Texas that have incentives in the form of rebates, we bid as often as possible to shoot here," she says. "Our industry not only infuses money into the film community by hiring local crews, we also spend a great deal of money in the larger community. The larger community benefits in the form of location fees, catering, hiring of local police officers, car rentals, hotels and much more."

Sibert notes that Louisiana's economy has benefited considerably from their tax credits for the film industry: "The incentives in Louisiana have led to an enormous amount of money being brought into their economy. People from all over the country have moved to Louisiana to work and live because there is so much work there now. I know of several companies from Texas that have opened up secondary offices there in order to service the film industry."

Teri Rogers, CEO of Hint Entertainment in Kansas City, Missouri, indicates that unless there are other factors, business will seek out locations that offer incentives. "We are in the middle of a reality television series being shot in KC -- and there are no Missouri tax credits available," he says. "If the talent wasn't from here, I'm sure we would have been looking to shoot it where we could have benefited from tax credits. It's just a reality of doing business in our industry."

Rogers also notes that film production can also improve a state's image and increase tourism. "Besides the economic impact -- both direct in terms of creating jobs -- and indirect as it relates to all the ancillary economic impact, there is also the publicity impact that comes from the visibility and awareness created through a film or television series being shot in a particular city or state," he says. "It may be harder to track, but there's no better broad promotion for tourism than this -- and it should be valued as well."

Film Industry Tax Incentives Are Part of a Larger Global Tax Ecosystem

It's worth noting that film production subsidies are only one component of a larger superset of state and local tax credits. The New York Times has reported that cities, counties and states provide over $80.4 billion in tax credits each year.

Those who criticize film credits would do well to examine the bigger picture as to why we issue tax credits in the first place -- they absolutely do generate jobs and stimulate local economies. Without them, businesses go elsewhere leaving local economies in decline. It may not be the best system, but tax credits clearly impact economic decisionmaking.

To be sure, when it comes to film tax credits, there's more at stake than meets the eye.

It's not just a competition between the states. Eliminating tax credits for film production could in fact decimate the U.S. film industry, forcing filmmakers to move abroad. Entertainment industry attorney Thomas D. Selz notes that "the generous credits available in Canada and elsewhere are what led states to begin offering the credits as an alternative to foreign production. Without state credits, producers will just go to foreign countries with attractive incentive programs."

Sibert of Stone Core Films confirms that this is exactly the case. "We also bid projects to shoot out of the country in order to save money on production," she says. "Without the incentives here, we would look at overseas production much more often."

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