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Runaway Production: The United States of Tax Incentives

The competition to offer Hollywood lucrative tax rebates is fierce even as some local pols begin to question the value of givebacks

Producers looking for a location weigh many factors — screenplay, crew base, availability of stages, travel and lodging — but these days, first and foremost, they consider the local incentives and tax breaks that can reduce a production’s budget. Forty-two U.S. states and territories now offer such benefits, says Joe Chianese, who tracks incentives for payroll services firm Entertainment Partners.

But while such givebacks can be good for the bottom line, they can also be tricky: Incentives can change on a dime, often subject to the whims of a state’s political party when power changes hands.

Michigan’s once-generous incentive program, for example, came under fire when Republican Gov. Rick Snyder came into office in 2011. Snyder cut the state’s 42% refundable tax credit down to 32%, which damaged production infrastructure that had been lured to the state.

“The scaling back of the incentive drastically affected the waterfall of film activity pouring into the state,” says Hopwood DePree, owner of Michigan-based production outfit TicTock Studios. Applications for the state’s tax program fell off almost immediately. That same year, one of Michigan’s largest production houses, Raleigh Studios, which had come to the state two years prior, defaulted on its $18 million bond.

SEE ALSO: L.A. Mayor Declares State of ‘Emergency’ As Movie, TV Production Flees Hollywood

Another critique is that incentives are open to corruption.

The industry was spooked in 2011 when Iowa’s film commissioner was charged with criminal misconduct in his handling of the state’s film tax credits. The case became a poster child for opponents of film incentives coast to coast.

“There are always individuals with ill intent,” acknowledges Chris Stelly, exec director of Louisiana Entertainment, which oversees the state’s transferable tax credit of up to 35%. “We won’t tolerate any abuse toward these programs.” He adds that Louisiana has a stringent review process in place, denies expenditures that don’t qualify and turns cases that don’t pass the sniff test over to law enforcement.

SEE ALSO: Runaway Production: TV Drama Spreads Out All Over the Map

Some cases are under investigation now, he says.

Other arguments against incentives hold that they don’t help the states that offer them. In March, the Massachusetts revenue commission issued a scathing report on the state’s tax credit program, which stated that two-thirds of the total $175 million awarded in 2011 went to out-of-state spending. “The critique is that while they appear to bring in short-term temporary activity to a state or community, a lot of those benefits flow to the production companies,” says Eileen Norcross, a senior research fellow at George Mason U. “The people who are hired locally tend to be (in) more low-wage service industry jobs. It provides a temporary economic blip on the radar, and then it’s sort of fleeting.”

Meanwhile, Chianese says Michigan’s cash rebate, while still no higher than 32%, keeps it in the game. Moreover, the fund’s $50 million annual cap has been approved through the next fiscal year, which begins Oct. 1. The biggest recent project to shoot in the state is the fourth “Transformers” movie, which is spending $80 million there, says a film office spokeswoman.

But the changing incentives make for a constant game of musical chairs. “Iron Man 3,” which had originally planned to film in Michigan, went to North Carolina instead. The state, which offers a 25% refundable tax credit, in turn lost the two final “Hunger Games” installments to Georgia, where the credit can be as high as 30% if the producers display the state logo in the credits roll. Yet, in 2102, North Carolina logged $276 million direct production spending from such productions as Showtime’s “Homeland,” according to North Carolina film office topper Aaron Syrett.

SEE ALSO: Where in the World Will the New ‘Star Wars’ Films Shoot?

A drawback, Syrett admits, is that the North Carolina legislature funds the program only a single year at a time. The current incentives will end on Jan. 1, 2015. Though they’ll likely be extended in next May’s legislative session, such uncertainty is anathema to studios, which won’t tolerate any instability that might upset their carefully constructed production budgets. Such uncertainty isn’t an issue in Louisiana, Stelly says. The state’s transferrable credit of up to 35% is permanent. The state continues to lure projects of all stripes, from A&E’s “Duck Dynasty” to the fifth “Pirates of the Caribbean.”

Ultimately, though, state incentive programs aren’t without controversy, and many film commissions are battling to get lawmakers to extend them. While Syrett expects a renewal, he adds that the process entails “educating” a slew of freshman legislators that the incentives create jobs. “Some people get it,” he says. “Some don’t.”

(Pictured: “The Hunger Games” franchise sparked competition among several states with incentive offers.)

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