23 Feb Film Fund-amentals: The End of the Tax Incentive

Previously I asked if everything was changing at an alarming rate. The question was meant to be provocative. But now, it is simply rhetorical.

The political landscape is changing as a battle for the economic soul of the nation erupts throughout various state houses. Diametrically opposed forces are colliding with the monotonous regularity of a pack of Rock ’em Sock ’em Robot toys, and the effect is being felt everywhere, even in the film industry.

Take for example the war now being waged on film production tax incentive programs in various states (actually, it’s being currently waged in most states). In New Mexico, it’s being rolled back from 25 percent to 15 percent. But in Michigan, they just got rid of the whole thing. OK, the new governor of Michigan isn’t exactly ending it altogether, but he has put a $25 million cap on the program (which last year handled $163 million in tax incentives), and has basically guaranteed that the incentive program will quickly starve to death. The approach just taken in Michigan is about to happen elsewhere as numerous state legislators invoke last year’s study by the Center on Budget and Policy Priorities as the Last Rites for the concept.

A quick read through this report is enough to cause most rational state politicos to hit the panic button. By the time the CBPP report is done, a state might as well host plunder raids by the Vikings rather than a film company. Heck, the CBPP practically makes it sound as if film production tax incentives are the leading cause of the national deficit (as well as a contributing factor to cancer, illiteracy, global warming and unrest in the Middle East).

Since most state politicos are not rational (at least not these days), you’ve got a real double whammy effect. A careful read of the CBPP study (that is the data, not their conclusions) would suggest that the major problem is a combination of mismanagement (for example, the Iowa Film Commission fraud case) or poor business modeling (to be honest, I think the 45 percent tax incentive in Michigan was way too high to begin with). But show me a politician who actually reads data and I’ll show you someone who lost in the last election.

The basic principle of the tax incentive is that the state is providing a rebate of a predetermined percentage on the tax monies that would otherwise be collected and kept from the production (as long as the production fulfills certain demands concerning time and work spent filming in the state). The monies returned in the tax incentive is meant to be factored against the amount that would normally be garnered by the state from the production rather than money taken out of the tax coffers that should have been spent elsewhere. In practice, the state does remove money from the general funds in order to create a basic financial pool for this purpose, but the larger idea is suppose to be factored on the taxes that would actually be raised in terms of the production. The management of this system becomes much more complex, but the core principle is pretty straightforward.

Much of the loss incurred by these incentive programs is largely due to poor management by the state agencies involved. Granted, many states have a hunger for attracting certain productions that can rush to the brain like a sugar attack. That is when the agencies overseeing the incentive program start making deals that are not in the state’s best interest. Oddly enough, this is mostly a problem with big-budget Hollywood productions. Small indie movies (many of which truly need these incentives for their own meager budgets) are largely not a problem (except maybe in Iowa, and that is due to what the defense counsel might call “other issues”).

A tax incentive program that basically works is located due north in Canada. Just go to the recent report from PricewaterhouseCooper. Granted, the Canadian system is nationally based (which is actually a plus, contrary to current American political thinking). That means you don’t have all the different provinces shamelessly competing against each other in a process that can easily circumvent common sense. The Canadian system is also helped by the fact that the program takes a wider approach to media (film, digital, games, etc.) which allows for a broader range for future development.

Which brings up the other problem that plagues the American approach. To make this type of program functional, the state would have to take a long-term approach to development. That involves the progressive creation of the type of facilities and personnel needed for professional production. The reason most Hollywood productions bring in most of their own crew (and ship a lot of work out of state) is because they need people they feel they can depend on (well, that as well as union requirements). They also want production facilities they view as reliable and meeting certain standards. Many states can develop such a system, but it does require a long-term approach.

But currently, most states are locked into a political system that is focused exclusively on the fastest short-term method available. In most cases, the political leaders will insist that they are following a sound business model. In reality, they are following the loony Wall Street model that has dominated for the past 30 years. I call it the Locust Model. You take over a company. Squeeze, loot and strip away virtually every resource for the fastest immediate financial gain for the shareholders. Then, once you have gutted everything in sight, you unload the business onto somebody else. The result is quick in rewards, short in lifespan, and absolutely devastating to everything in its path (the movie Other People’s Money is a reasonable presentation of the process).

Many states are now trying to adopt this model. Officially, they are attempting to slash everything to the bone to cover deficits. In reality, they are looking to shift state funds toward private businesses in an alleged effort to create a “trickle down effect” (which, ironically, hasn’t worked in over 30 years). In the process, anything that involves long-range planning and development is considered dead meat. So it is no surprise that the film production tax incentive idea is a goner. Many states are too busy stripping and gutting everything to the bone until the political whiz kids are ready to sell off whatever is left.

So the only real question is: To whom are we selling the states? Canada? Goody! We get a tax incentive that works.