Cash-strapped locales step up scrutiny of tax incentives

With state economies in turmoil, local tax incentives for film and TV production are becoming the latest political football in the battle to bolster local fortunes.

In Michigan, which has the most aggressive rebate in the country (up to 42%), debate is heating up after a report issued last week cast doubts about the economic benefits of the state’s program.

Released by the nonpartisan Senate Fiscal Agency, the issue paper concluded, “The state will never be able to make the credit ‘pay for itself’ from a state revenue standpoint, even when the credit generates additional private activity that would not have otherwise occurred.”

Other states are looking at their programs as well:

n New Mexico’s 25% rebate program, widely hailed as a success, came under scrutiny last year after two separate economic impact studies arrived at divergent conclusions.

n Last year, Wisconsin rolled back its efforts to lure Hollywood because of budget shortfalls and a damning study by the Commerce Dept.

n After allegations of fraud in the state’s Film Office led to criminal indictments in Iowa, Democratic Gov. Chet Culver vowed to shut down the state’s program. “We’re not going to be taken for suckers,” he said recently.

n And in cash-strapped New Jersey, Republican Gov. Chris Christie suspended its rebates for one year to review them. “We’re trying to see if the program is workable as it is or whether it should be retooled,” says Steven Gorelick, exec director of the New Jersey Film Commission, who says the results of the state’s study are due in mid-October.

Industry lobbyists, however, remain bullish on state incentives.

Economist David Zin, author of the Michigan report, says his study findings weren’t meant as a condemnation of the state’s production credits but rather to clear up misconceptions.

“People look at private-sector impact and equate it with public-sector returns,” he says. “But when they make the claim that we spent $69 million and it attracted $180 million in spending, that’s not $180 million in the state’s coffers.”

In 2009, for example, the study indicates a positive net private impact of $21.05 million, but a net public loss for the state of $33.83 million.

The report has caused an uproar across the state and given fuel to opponents of the subsidy program, which has brought in approximately $350 million in spending in the last two years, according to the Michigan Film Office, and lured big-budget productions such as “Transformers 3″ and a raft of independents.

Mandalay Vision, the indie spinoff of Mandalay Films, has made “Vanishing on 7th Street,” “Salvation Boulevard” and “The Reasonable Bunch” in Michigan in the last year. “The Michigan incentive helped us get a greenlight for all three films by improving the risk profile for our investors,” says company president Celine Rattray.

Michigan Film Office director Carrie Jones says the Zin report doesn’t take into account the ancillary benefits to small businesses and only surveys the first 20 months of the program.

This year “has been the most successful,” she says. “We’re going to end up seeing another $300 million in the state and they’re hiring more” Michiganders than ever.

But while incentives across the U.S. have proven a boon to film and TV productions and local commerce, there’s increasing pushback by those in state legislatures and budget offices regarding the value and efficacy of the lures.

Ever since Michigan’s bill passed in 2008, Republican Sen. Nancy Cassis, chair of the Senate Finance Committee and the lone dissenting vote on the original measure, has been one of the most vocal opponents.

“These refundable film credits are very expensive, and while state budgets are suffering, and national and individual state revenues continue to decline due to the recession, this kind of spending to one industry is becoming much more difficult to maintain and to justify,” says Cassis.

But advocates say the array of production incentives does yield a return on investment, even if the benefits aren’t always easy to quantify.

“Once they look at the analysis, they’re going to find that these kinds of tax credits create jobs and tremendous economic stimulus,” says the MPAA’s Vans Stevenson.

“The overwhelming majority of states, even in challenging economic times, have either kept their credits or actually enhanced them,” Stevenson argues, citing New York’s five-year, $2.1 billion extension and augmented programs in North Carolina, Florida and Georgia. “Most states are finding that they’re not just creating jobs but (that) there’s a return on investment.”

A growing chorus of critics disagrees, however, arguing that a “race to the bottom” among states to lure Hollywood with ever-greater giveaways further jeopardizes state budgets.

“Bidding wars to attract the movie industry have led states to pay out much more in subsidies to movie producers than anyone has been able to show that they receive in benefits,” says Noah Berger, president of the Massachusetts Budget and Policy Center. He specifically criticizes programs that include producer’s above-the-line costs, effectively subsidizing what are already multimillion-dollar wages for name actors.

“There is very little benefit because those stars will likely take that money out of state,” he adds.

Robert Tannenwald, senior fellow of the Center on Budget & Policy Priorities, says film incentives have a poor record of permanent job creation for residents. “A large chunk of these subsidies benefits highly paid out-of-state workers,” he says.

“Film subsidies rob Peter to pay Paul,” continues Tannenwald. “Since states must balance their budgets, they have to raise taxes elsewhere or cut services to finance the subsidies.”

Whether tax incentives will actually take a hit from such rhetoric remains to be seen. But Cassis believes Michigan’s lawmakers “will make some attempt to modify the credit and make it more responsible,” she says.

Michigan economist Zin isn’t making any predictions.

“But when you’re looking at a $1.6 billion deficit,” he says, “at some point, you need to look at everything that you’re giving away. And just like any tax expenditure, when things get tight, it’s vulnerable.”

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