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The stiff competition among states to lure the multibillion-dollar film and television industry with lucrative tax credits may be going through a Darwinian period where only the strongest survive.
At incentives’ peak, 44 states offered them in 2009, according to the National Conference of State Legislatures. Now there are 37. Moreover, some states are scaling back their programs and reviewing whether the credits are providing enough return on investment in the face of widespread criticism.
Kathleen Quinn, a research analyst at NCSL, said budgetary constraints and limited returns have led some states to eliminate or trim their programs.
“While there are some states, such as California and Kentucky, who have recently expanded their programs, the general trend has been a decline in the popularity of film incentives across states,” Quinn told Bloomberg BNA in an email.
Programs have recently been eliminated in Alaska, New Jersey, Michigan, Florida, and Wisconsin, she said. Louisiana, which has one of the earliest and most aggressive programs, has scaled back its program by placing an annual cap on the amount of credits provided.
Vans Stevenson, senior vice president for state government affairs at the Motion Picture Association of America, said changes in political leadership have also caused some states to kill or trim their programs. In Michigan, for example, Republicans took control of the Legislature and have opposed most business tax incentives on philosophical grounds, he said.
Stevenson said tax credit programs are stable in states with well-established programs, like Georgia.
“There’s a reason why there were more motion pictures produced in Georgia last year than anywhere in the world,” he told Bloomberg BNA. “Because they have one of the most stable, predictable, competitive tax incentive programs in the world.”
The last three parts of “The Hunger Games” trilogy and “Captain America: Civil War” are among the recent high-profile productions to film in the state.
Joe Chianese, executive vice president of Entertainment Partners Financial Solutions, an advisory firm on film tax incentives, said states have been refining their programs since 2002, when Louisiana and New Mexico enacted the first such credits. He said states aren’t competing only against one another, but against other countries like Canada and the UK.
Over the years, the surviving programs have become “smoother and cleaner,” and better at avoiding fraud or mismanagement, he told Bloomberg BNA.
States that have ended their credits, such as New Jersey, didn’t have enough of an industry there to begin with and their programs never got far off the ground, he said. Successful credit programs in California, Georgia, Louisiana, New Mexico, and North Carolina are in states that have a large amount of activity.
“Production is following where there is certainty in the incentives,” Chianese said. “Incentives are always going to be a key factor.”
The return on investment for film tax incentives is the central issue for states, one that has been debated for some time. Critics call the incentives giveaways, while the industry and supporters contend that they are good investments.
An oft-cited 2016 study by Michael Thom, assistant professor at the University of Southern California, found that transferable credits had a small effect on motion picture employment and no effect on wages, while refundable credits had no effect on employment and a temporary impact on wages.
Greg LeRoy, executive director of Good Jobs First, which promotes greater accountability in economic development subsidies, said numerous studies from left- and right-leaning groups have criticized the film credits.
“Calling them tax credits is misleading since they far exceed tax liabilities and really amount to cash gifts, especially when they are transferable,” he told Bloomberg BNA in an email. “They can influence site choice because they are so excessive.”
The California Legislative Analyst’s Office has criticized the state credits, calling them a “race to the bottom.” It said in a 2016 report, however, that California’s revised credit was well-targeted to reach productions that are most likely to be lured to the state.
The MPAA and a number of Democratic and Republican governors with successful programs dismiss the criticisms.
“The numbers don’t lie,” Stevenson said, referring to the return on investment that many states are getting on their credits. “If they weren’t, I don’t think they’d continue these programs.”
Even Louisiana, whose budget has taken a hit from declining oil prices, has renewed its program, which has drawn many high-profile productions like “The Curious Case of Benjamin Button” to the state, Stevenson said.
The Bayou State, however, has scaled back its program. In 2015, the Legislature passed a law capping the credit at $180 million a year and passed another law ( S.B. 254) in 2017 lowering the base production credit issued, while giving preferential treatment to local projects.
The new law came on the heels of a report commissioned by the Louisiana Economic Development agency that found the state got back roughly 22 cents for every dollar it spent luring the entertainment industry. In 2016, Louisiana certified more than $289 million in entertainment tax credits, which generated about $64.4 million in state tax revenues, the report said.
The state’s budget totals about $28 billion this year.
Total certified entertainment spending generated more than $2.5 billion in new sales within the state, almost $1.8 billion in new household earnings for Louisiana, and an average of 14,171 jobs over the two-year period, the report said. The state collected about $126.9 million in various taxes and fees based on the $1.8 billion in new earnings.
But the benefits came at a steep price, the report said. In 2016, the value of all entertainment tax credits certified in 2016 was $289.3 million, of which $282.6 million was for the film industry.
That means in the film industry, for example, each job created cost the state $15,460, the report said.
The type of scrutiny that Louisiana’s program underwent has become common practice in states. Most states have conducted reviews to make sure they’re getting the bang for the buck they intended.
New York, for example, commissioned a study by Camoin Associates, an economic development firm, earlier this year. The study gave New York’s program favorable marks, in terms of job creation and economic activity. It said the credits helped create 70,812 jobs in 2015 and 2016, with earnings of more than $4.2 billion. It said the industry generated $12.5 billion in spending in two years.
At least five other states—Maryland, Massachusetts, North Carolina, Pennsylvania, and Wisconsin—have undertaken reviews of their programs, according to the NCSL.
Republican leaders in the Georgia Senate decided this year to take a closer look at tax credits and exemptions given for various economic development purposes. A Senate study committee held its first meeting in July, with the goal of analyzing each of the state’s tax credits and developing a process for routinely evaluating their return on investment.
The study committee will evaluate the film tax credits, but initially sees them as providing a strong return on investment, said Sen. John Albers (R), who chairs the group.
“It’s just incredible what the industry has blossomed to,” Albers told Bloomberg BNA. “Whenever you can invest a nickel and earn a dollar, you’re doing good.”
Georgia hosted more feature film productions in 2016 than any other market, including the UK and California, according to a study from FilmL.A. Inc., a nonprofit film office in Los Angeles. Pinewood Studios Atlanta recently hosted shoots for Marvel productions “Ant-Man,” “Captain America: Civil War,” and the “Guardians of the Galaxy” sequel.
The state’s film industry was virtually nonexistent 10 years ago, but its direct spending in the state grew to $2.7 billion this year from $67 million in 2007, according to the governor’s office.
The state awarded about $500 million annually in film production tax credits, which includes TV production, in tax years 2015 and 2016, according to numbers provided to Bloomberg BNA by the Georgia Department of Revenue. The state’s budget for the latest fiscal year was about $23 billion.
A large portion of the credits is carried over for use on a future tax return. As of the end of 2016, the revenue department recorded $1.1 billion in carried-forward tax credits waiting to be claimed.
Gov. Nathan Deal (R) released an economic impact study on the program July 10, finding $9.5 billion of economic benefit to the state from 320 film and TV projects shot during fiscal year 2017.
“Georgia’s film industry supports thousands of jobs, boosts small business growth and expands offerings for tourists,” Deal said in a statement announcing the study. “We are committed to further establishing Georgia as a top film destination and introducing film companies to the Camera Ready backdrops available across Georgia.”
The left-leaning Georgia Budget and Policy Institute takes a more skeptical view. It “appears to be working at first glance, but has a lot of questions when you look under the hood,” said Wesley Tharpe, a research director for the institute.
For example, state leaders should be routinely evaluating how much the jobs pay and whether they are filled by Georgia citizens or transplants from Hollywood, as well as what other programs could be funded by comparable state funding, Tharpe told Bloomberg BNA.
The state’s annual tax expenditure on film tax credits is more than the state general fund allocation for the entire Georgia technical college system, he said.
Tharpe said he’s cautiously optimistic that Albers’s Senate committee will move the state closer to using a rigorous, routine evaluation process for all its tax credits, including the film and TV credit.
New York state has one of the most expensive tax credit programs, spending $420 million a year to bring Hollywood to the Hudson. The state budget is about $153 billion.
Gov. Andrew M. Cuomo (D) has repeatedly heralded the program as a great success and has lured some big fish since the program began in 2004. In 2013, for example, NBCUniversal Media LLC announced that it was bringing “The Tonight Show” starring Jimmy Fallon back to New York City.
Cuomo said at the time that the move was part of a “surge of television and film production happening here in New York that has restored our state as a global film production capital and driven the creation of new jobs and business growth throughout the state.”
The move didn’t come cheap. New York provided $20.8 million in tax credits to the show during the first quarter of this year, according to a quarterly report released in March by the Empire State Development (ESD), the agency that oversees the program.
In return, the show has hired 1,904 workers with wages of $11.4 million, according to the report. The show spends an estimated $93.5 million in the state.
The Walt Disney Co. has been another big winner in the New York tax credits game. The company has received $43.7 million in credits over the past two years for the production of the Marvel Television mini-series shown on Netflix.
Disney has spent $185 million in the state, including $61 million in wages, according to quarterly ESD data analyzed by Bloomberg BNA.
Disney and Marvel announced July 31 that they would be continuing production of a new season in New York. Cuomo, in a statement, said it was the largest television production project commitment in the state’s history.
The project will employ 500 vendors and small businesses and generate more than 14,000 production jobs, Cuomo said.
The governor said New York has received 1,151 tax credit applications over the past six years, representing $17 billion in statewide spending and more than a million new hires.
Forty television series have applied for the film tax credit program this year and are projected to spend $1.4 billion, with 94,185 hires across the state, he said.
New York offers three tax credits—for film production, post-production, and production of commercials. The film production credit, the largest, provides a refundable credit equal to 30 percent of qualified production and post-production costs.
The state program, which was extended this year until 2022, has its critics. E.J. McMahon, research director for the conservative Empire Center for Public Policy, has called the program a “gratuitous giveaway” that hasn’t paid for itself.
In addition, Cuomo’s overall program economic development tax incentives has come under increased scrutiny from Democratic and Republican lawmakers in the Legislature.
Another perennial big player is California, home to Hollywood and the entertainment industry. The state is tallying the impact of its updated film and TV credits so it can be prepared when it comes time to renew or change them in 2020.
A 2014 bill ( A. 1839) tripled the size of the credit to $330 million a year and expanded the types of projects eligible for the credit. The California state budget approved in June is $183 billion.
The rebooted credit, called the California Film and TV Tax Credit Program 2.0, shifted from a first-come, first-served credit that began in 2009 to one that requires applicants to quantify jobs and economic activity their projects would create. Credits go to non-independent feature films, independent films, TV projects, and relocating TV series.
Chianese said California was becoming less competitive compared with other states before the reboot.
The big-budget film “Captain Marvel” is among eight recipients of the credit in the most recent round of film awards announced by the California Film Commission July 24. The eight films (from a pool of 92 applicants) promise to employ more than 2,600 cast and crew and generate about $385 million in qualified spending to off-screen workers such as camera operators, makeup artists, and payments for equipment.
The projects receive the credit only after they complete post-production, verify that in-state jobs were created, and provide required documentation.
Unlike some other states, Illinois has seen a steep drop in use of the state’s film production services credit in recent years, despite an apparent boom in production activity.
Tax expenditures for film credits dropped more than 70 percent between 2014 and 2015, the most recent years for which data is available, according to the Office of the Illinois Comptroller’s fiscal year 2015 Tax Expenditure report. The report shows Illinois’s film credit expenditures totaled $44.8 million in FY 2014, but the total dropped to $13.2 million in FY 2015.
The 2015 total was also down from FY 2013, when the state granted film companies $18.7 million in tax benefits, according to a 2014 report from the comptroller. The state budget is about $37 billion.
The film industry generated $499 million in economic activity for Illinois in 2016, with Hollywood producers seeing potential for big screen projects filmed in the state and television networks seeing Chicago as the perfect backdrop for small-screen projects.
The Illinois Department of Commerce & Economic Opportunity’s (DCEO) Film Office pointed to significant growth last year, with spending on film-related projects rising 51 percent to $499 million. Spending of about $330 million in 2015 was up 18 percent from the previous year, it said.
DCEO said the state assisted 345 television, commercial and film projects during 2016, creating 13,377 non-extra job hires.
The state’s benefits were established under the Film Production Tax Credit Act of 2008. Producers can claim a credit of 30 percent of all qualified production spending and 30 percent for all salaries paid up to $100,000 per worker. Unused credits can be carried forward for up to five years.
Colorado’s program shows that states have different ways to provide incentives to the industry.
The state’s Office of Film, Television & Media pays incentives to companies producing content in the state if at least 50 percent of a company’s employees are Colorado residents and if it spends $100,000 (in-state companies), $250,000 (out-of-state companies producing commercials, video games or TV shows), or $1 million (out-of-state companies making films) while in production.
The incentives are rebates, not tax credits, which brings certain advantages to Colorado, Donald Zuckerman, director of the office, told Bloomberg BNA.
Most state tax credits are refundable, and since many out-of-state companies don’t have a taxable presence in the state in question, they ultimately have to sell the credit to a third party to receive the benefit, usually at a discount and with a fee for the broker of the transaction.
“So they’ll get paid 90 cents on the dollar for selling their tax credit,” Zuckerman said. Companies that produce in Colorado get 100 percent of the rebates awarded, meaning Colorado can offer lower amounts, costing state taxpayers less, he said.
A performance audit of the rebate program released in May said the film office paid about $1.9 million in incentives for 10 projects in fiscal year 2015 and $6.7 million in FY 2016 for 13 projects.
The audit said the film office lacks information to assess the overall benefit it provides to the state. It also said the office paid some $1.3 million for projects for which no contract or purchase order was ever executed. State law prohibits state agencies from disbursing funds unless the disbursement is supported by an approved purchase order or a contract.
With assistance from Tripp Baltz in Denver, Michael Bologna in Chicago, Nushin Huq in Houston, Laura Mahoney in Sacramento and Chris Marr in Atlanta.
To contact the reporter on this story: Gerald B. Silverman in Albany, N.Y., at GSilverman@bna.com
To contact the editor responsible for this story: Jennifer McLoughlin at email@example.com
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