Tax breaks get scrutinized

Tough economy, corruption cause states to rethink credits

Last April, producer Malcolm Petal was sentenced to five years in federal prison for conspiring with a local attorney to bribe the head of the Louisiana State Film Office, both of whom were sentenced in July.

The scheme focused on $1.35 million in tax credits, far more than it cost Petal’s company to film a local music festival. Mark Smith, who headed the state’s film office, was paid $67,500. The sentencing was the culmination of a years-long federal probe into the tax credit program, which also resulted in an infamously generous check of more than $27 million to “The Curious Case of Benjamin Button.”

Film production tax credits partially refund state taxes to filmmakers, luring them to areas in need of economic growth. Some have gone badly wrong, while almost identical programs have sparked urban renewal and generated good, much-needed jobs.

Now, the recession has pressured many of the 40 states that offer them to revisit their incentive programs as lawmakers cut corners. Few have moved to dissolve them, but several officials fought hard to have their states’ credits scaled down or eliminated last year.

New York’s program, which many other states have used as a model, has been expanded under then-Gov. Eliot Spitzer and pushed even further by his successor, David Paterson. It has attracted new biz to the state and beefed up a sector of the economy to help regain some of the tax revenue that bankrupt bankers were no longer paying.

“It’s a bright light in a really dismal time,” said Steiner Studios prexy Douglas C. Steiner. “But it’s not the same boost in other states. It has to do with both the tax structure in New York and the crew base in New York, and the fact that people want to shoot here.”

The credit program, along with the talent pool and steady crew base it maintains, encourages studios to venture far out of their way to shoot in New York, according to the head of the Governor’s Office of Film, Pat Swinney Kaufman: Warners’ “Sherlock Holmes” shot everything up to and including the climactic Tower Bridge sequence at studios in New York City before a whirlwind tour of “hero” shots in England. CBS’ Chicago-set legal drama, “The Good Wife,” just announced it will be filming its second season — in New York.

But as the recession begins to take its toll on less film-centric areas of the country, other states are studying their tax credit programs’ results and finding them lacking.

In Iowa, for example, the film tax credit has been suspended since last fall amid allegations of misspent money and the unceremonious dismissal of Iowa Film Office head Tom Wheeler by Gov. Chet Culver.

The Iowa Dept. of Economic Development commissioned a report on the film office from private consulting firm Clifton Gunderson, which cited “incomplete or inadequate records” for 20 of the 22 projects the state had approved, as well as dummy companies set up so film productions could claim in-state expenditures on out-of-state costs — sometimes more than $1 million, according to the report.

The study did not name specific producers, but a full criminal investigation has been under way in Iowa for months. An Iowa Film Office spokesperson refused comment, citing the investigation. But a memo from former Iowa Dept. of Economic Development director Michael Tramontina referred on its list of sins to “luxury vehicles” purchased through the incentive program that “were not used directly on a film.”

Michigan, meanwhile, underwent a protracted legislative battle to stay at the top of the tax credits pile in 2009. The state provides far and away the most generous tax break: a 42% max rebate on in-state expenditures for above-the-line and below-the-line expenses, and another 30% break on costs paid to non-resident crew. Such perks, critics say, discourage the creation of local infrastructure in Detroit, where the unemployment rate hovers just below 30%. The credit has attracted production, as 31 movies set for 2010 release alone list Detroit as a shooting location, though one of those is admittedly a documentary called “Requiem for Detroit.”

At least the hospitality biz is booming. Film workers booked 50,000 hotel rooms in the Detroit area in 2008 and 2009, spending about $10 million on food and rooms.

Some attempts to calculate the impact of these incentives have themselves come under fire.

The Massachusetts Dept. of Revenue commissioned a study, which resulted in a sternly worded report that took issue with a widely quoted Ernst & Young survey putting New York’s return on investment at $1.90 for every $1 spent. While it doesn’t specifically analyze the New York program, it points out that another Ernst & Young study claims New Mexico’s tax credit generates 94¢ per $1 spent even while a study by New Mexico State U,’s Arrowhead Center sets the figure closer to 14¢ on the dollar.

Other states have discovered both faults and perks in their programs depending on their individual situation: Oklahoma has more than doubled its tax credit, trumpeting a 37% break in the hopes of attracting new productions; Connecticut has altered its program to provide breaks only for films that do all their work in-state, since the program was inadvertently funding movies shot in New York.

So far, the only definite loser in the tax credit furor is California — the place from which most states are trying to lure production.

Stephen Katz, who wrote several studies about runaway production through the Center for Entertainment Industry Data and Research, said California’s program is small potatoes compared with others.

“In today’s international food fight for production jobs, $100 million per year in tax credits is like putting a Band-Aid on an elephant,” he said. California gives a 20%-25% break to in-state production, but it only rebates $100 million in taxes annually.

Katz also said it’s an open question if California’s program will be able to be expanded or continue after 2013, when it will be up for renewal.

“The key factor in keeping production incentive programs funded is how well the gatekeeping works. If they’re able to get a good track record in California, they might be able to ask for more money.”

Katz believes the key factor in persuading California lawmakers to step up last year stemmed from the departure of “Ugly Betty” for New York “when the state was bleeding jobs already.”

Even with actor Arnold Schwarzenegger backing such legislation since becoming governor in 2003, California lawmakers had been reluctant to grant any aid to showbiz due to a combo of the state’s financial crunch and concerns that state assistance would be going to already-wealthy producers.

California film commissioner Amy Lemisch, who’s been in that post for more than five years, said it had been a long journey to get any kind of substantive program going — particularly with California’s profound fiscal problems. “The state has been kind of moving from one crisis to another, so it took a long time to educate the legislators about the nuances of the problem,” she said.

Lemisch agrees that the departure of “Ugly Betty” served a useful purpose for proponents of state incentives. “There was something about that particular show moving that really helped illustrate the problem,” she said.

As for bolstering the current program, Lemisch said she needs a bit more time to make that case. “We’ve only been operating for six months so we’re going to need a full fiscal year before we can do that,” she said.