Spotlight on State Film Tax Credits: Economic Blow or Boost?

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By Che Odom

More controversial than which film earns the Oscar for best picture may be the benefit states receive in providing the movie industry tax credits.

Academics, as well as some states, give two thumbs down to such incentives, which are a hit with production companies that say certain tax breaks are essential to project financing.

“After significant time and effort researching and evaluating these types of programs, I have come to the conclusion that film industry incentives are generally not very good programs,” Don Bruce, a University of Tennessee business professor, told Bloomberg Tax.

States such as Georgia, Louisiana, New Mexico, and Ohio, have tinkered with their incentives in the past few months, trying to lure movies from California while limiting the bite to their revenue.

Since the first state-level incentives were established by Louisiana in 2002, the number of states offering film tax incentives grew to 44 by 2009. It has shrunk to 31 states today, according to the National Conference of State Legislatures (NCSL).

Measuring Effectiveness

The push and pull over incentives is driven by the difficulty in measuring their effectiveness. The industry may argue that without the incentives, a movie wouldn’t have filmed in a particular state—but site selection involves many factors, said John Buhl, media relations manager of the conservative Tax Foundation and former economic policy researcher for the Pew Charitable Trusts.

Film tax incentives, whether credits or rebates, are “politically popular,” Buhl, a critic of the tax breaks, told Bloomberg Tax.

Backers will say, “Hey, look, we have this cool movie coming,” he said. “What’s often missed is a discussion on what exact economic benefit is earned.”

One sign of the effectiveness and necessity of such incentives is that most states offer them, according to Benson Berro, deputy tax industry leader for media and entertainment at KPMG LLP. “They are an important financing tool.”

“The industry relies heavily on these incentives,” Berro told Bloomberg Tax. “And the trend among states is to make their programs as appealing as possible.”

Making Credits Appealing

Last week, Ohio state Rep. Kirk Schuring (R) introduced a bill that would expand the state’s annual entertainment-industry tax credit cap to $100 million from $40 million, making it the 11th most generous in the country.

Also this year, New Mexico lawmakers have been looking at eliminating the $50 million annual limit on tax credits for movies and television production in the state.

Last fall, the Georgia Department of Revenue adopted a post-production film tax credit, adding to the breaks it offers filmmakers.

“The most appealing incentives are those that have the biggest bang for the buck, and with the least amount of uncertainty,” Berro said.

A trend has developed among state programs, allowing for transferable or refundable tax credits, Berro said. If the value of a company’s credit is higher than its tax liability, then it can sell the excess to another taxpayer who needs it.

Refundable credits allow a company that earns more in credits than it owes to receive refund payment from the state, creating a negative tax balance.

Cutting Back

Other states are leaving some of their incentives on the cutting room floor. West Virginia eliminated corporate and individual income film tax credits as of Jan. 26 in a bill that also ends the state film office effective July 1.

Kentucky’s governor is calling for a two-year pause in the state’s refundable film tax credits, which have cost the state $143 million since 2015. The state doesn’t cap the program, and it approved $90 million in credits last year.

In fiscal year 2018, Colorado, Maryland, and Texas reduced the annual appropriation for film incentive programs, according to a NCSL report. Oklahoma reduced its annual cap to $4 million from $5 million.

These changes are notable because once a credit is adopted, the pressure by various interest groups to preserve them is immense, Buhl said.

“We’re starting to see states cutting back,” he said. Such tax breaks “hollow out” your code and create additional pressures on funding of essential services, Buhl said.

Tracking Benefits

The incentives result in substantial revenue losses and “accrue benefits that do not necessarily remain with the incentive-granting jurisdiction,” Bruce said.

“It is not apparent that these programs have generated a degree of activity that is worth their cost, and it is not clear that changes in program structure would change this overall conclusion,” he added.

States, however, have done analysis after establishing programs, determining that a justified level of economic activity takes place, Berro said.

The programs also serve another goal: the building of infrastructure for future filmmaking, he said. Georgia and Louisiana are examples of states that didn’t have a significant industry presence before the incentive programs, Berro said.

“Part of the infrastructure is the workforce,” he said, “having a base of local crew that would not have to be brought in.”

Federal Tax Changes

Domestic film production may have received a shot in the arm from the 2017 federal tax act ( Pub. L. No. 115-97). A provision allowing for full, immediate expensing of large capital purchases, such as equipment, helps to create a better tax environment within the U.S., Berro said. However, states will still use various incentives to compete for movies, he said.

States focus on tax breaks because “everyone else” uses them and production companies lobby heavily for them, Bruce said.

“It is also appealing to try to shine a brighter light on their state—the fame factor is relevant, but certainly not sufficient to warrant the costs of the incentives,” Bruce said, adding that states could use far more efficient ways to generate economic activity than to use film industry credits.

To contact the reporter on this story: Che Odom in Washington at codom@bloombergtax.com

To contact the editor responsible for this story: Ryan C. Tuck at rtuck@bloombergtax.com

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