Film Tax Incentives

FILM TAX INCENTIVES

Congress imposed the first federal income tax in 1862, to finance the Civil War. It levied a 3% tax on incomes above $600, rising to 5% for incomes above $10,000. In 1895, the Supreme Court struck down the income tax, ruling that the portion of the income tax that applied to income on property was a direct tax that, under the US Constitution, could not be levied without apportioning the tax by population.

In 1913, the modern income tax system become possible when the states ratified the 16th amendment to the US Constitution. That same year, the first Form 1040 appeared after Congress levied a 1% tax on net personal incomes above $3,000 with a 6% surtax on incomes of more than $500,000. As the nation sought greater revenue to finance the World War I effort, the top rate of income tax rose to 77% in 1918. It dropped sharply in the post-war years, down to 24% in 1929, and rose again during the Depression.

To combat alcohol abuse, Congress passed legislation to reduce crime and corruption, solve social problems, reduce the tax burden created by prisons and poorhouses, and improve health and hygiene in America.

During prohibition, Al Capone ruled Chicago with relentless power using Tommy gun raids to quash rival gangsters. Ironically, brute strength and machine guns did not bring Capone to justice. Using the latest in criminology techniques, U.S. Treasury Agent Eliot Ness arrested Capone for tax evasion.

The IRS discovered that Capone had not filed an income tax return for several years during which his lavish lifestyle suggested a very high income. Capone did not personally own bank accounts, sign checks or own any assets in his name. Legal precedent, however, allowed for the prosecution of people whose extravagant lifestyles had no visible means of legal support. It also permitted the government to seize anything of value that might be used to repay the tax debt. This gave Ness and his men their most powerful ammunition – permission to shut down the mobster’s breweries.

On March 13, 1931, a federal grand jury met secretly and returned an indictment in support of the government’s claim that Capone had a tax liability of approximately $200,000. A quick trial found Capone guilty, fined him $50,000 and sentenced the most powerful gangster to eleven years in jail.

Given the probability that Capone was responsible for more than 100 murders his sentence may not seem overly harsh. Nevertheless, Capone never regained his stature of mob leader and died after spending hard time in Alcatraz.

Now, that I layed the groundwork on tax evasion, let talks about legitimate tax incentives that movie makers can use to lower their taxable income on their projects.

Many states offer tax incentives to get TV and Film to shoot in their states. The incentives are usually designed to attract top talent who can bring buzz to the local economy. In many cases, the incentives are tied to hiring local people, thus creating jobs, which politicians can talk about with the Press.

After years of observing the effects of successful foreign film and television-production tax incentives, the United States amended its views and tax policy to counteract the effects of runaway production (i.e. US film production in Canada attracted by Canadian tax incentives).

This US change of position was evidenced by a number of states’ recently amended
production tax incentive programs such as Hawaii’s Investment Tax Credit, New Mexico’s Film Production Tax Credit and its Filmmaker Gross Receipts Tax Reduction and Missouri’s Film Production Tax Credit.

In total, more than 40 states now offer different forms of soft money. It is my experience that many of these incentives are worthless to independent filmmakers because the large studios with lots of money use them to lower their overall cost, thus saving millions to investors who really do not need them. In particular, the paperwork is not easy and most states shut down the credits when they run out of money; especially in this tough economy.

For example, let’s talk about New York.

The four major television networks unveiled nearly 40 new shows for the coming season during the annual upfront dog-and-pony show in May, 2010. But so far, only one of them, Tom Selleck's police drama, Blue Bloods, is set to be filmed in New York.

Executives at the city's sound stages, where the shows are filmed, are still scrambling to land new programs, but that effort is being severely hobbled, they complain, by the lack of a crucial state tax incentive that production companies depend on to lower the cost of working in the city.

The state's hugely popular tax incentive program, which offers a 30% credit on production expenditures if a number of stipulations are met, ran out of money more than a year ago. It was then extended for just 12 months and is now up for renewal. In his most recent budget proposal, Gov. David Paterson included $420 million for the film tax credit and extended the program through 2014. Film executives, who have been lobbying relentlessly, are confident the measure will be signed into law. But with the state's budget already two months late and no sign of an end to the legislative paralysis in Albany, that extension may come too late.

At this point, industry executives say that uncertainty over the tax incentive program has all but wiped out New York's pilot business this year. In contrast, just two years ago, the city attracted a record 21 pilots, some of which went on to success as series.

This year's new-series drought comes as the industry is reeling from the May 13 cancellation of its long-running cash cow, Law & Order. According to the Mayor's Office of Film, Theatre and Broadcasting, the series pumped $79 million into the local economy annually. Over the course of its 20-year run, the show spent an estimated $1 billion.

What about Pennsylvania? M. Night Shyamalan’s latest film production, The Last Airbender, was recently awarded over $35 million in film tax credits from Pennsylvania over two years. The award is the largest in the history of Pennsylvania’s Film Tax Credit (FTC), breaking the record held by his previous project, The Happening, which received $12 million in tax credits. His film Lady in the Water also received a film production grant.

Pennsylvania is among the 26 of 44 states that offer transferable (or in some states refundable) tax credits to film producers. This means that tax credit awarded is more than the actual state taxes the recipient owes, they can sell the remaining credit to another business.

And in my home state of Arizona, the tax credits are a joke. A film industry tax incentive that rewards companies for filming in Arizona will expire at the end of 2010. One of the local communities, Avondale, fears that the loss tax credit could kill a $100 million television and movie studio project, called Avondale Live, and thousands of potential jobs.

The lapsing of the tax incentive also could affect plans for Gateway Studios, a $70 million production-studio complex in Mesa.

Sen. John Nelson, a Litchfield Park Republican, sponsored the bill. He worries Arizona may be on the verge of killing an entire industry in the state. New Mexico, Louisiana and Michigan are aggressively courting the industry, he said.

Not everyone is enamored of the tax credit, though. It was a fight getting the bill out of the Senate, with some legislators saying they couldn't justify giving out tax credits to the film industry while making steep cuts in education and health services. Some complained the tax credits favored one industry over others.

Why don’t film credits “create jobs”? In part, they provide incentives for economic activity that would have occurred anyway. Furthermore, a narrow tax incentive does little to improve the overall economy. Indeed, the tax breaks given to the film industry could instead have been used to lower taxes on all businesses, rewarding entrepreneurship rather than lobbying.

While film-production tax credits remain popular, as lawmakers love the chance to have movie stars show up in their districts, many states are reconsidering their benefits. Wisconsin Gov. Jim Doyle pushed for elimination of his state’s film tax credit. Iowa’s film tax credit was recently suspended, and criminal charges were filed for “stealing” tax credits when filmmakers inflated costs and took the tax credit while actually filming and hiring workers in other states.

Here is a brief list of state tax incentives. Since they change frequently, you will need to visit the various state tax websites to get current information:

Arizona – as far as I am concerned, my new home state (I used to live in New York, California, Utah and North Carolina) has blown it with their state tax incentives. The legislature is parochial and does not understand the creative needs of the entertainment industry. Regardless of what you may think about tax incentives, Arizona is a beautiful place with three distinct sceneries (Flagstaff to the North, Phoenix in the middle and Tucson to the South, and a group of very talented moviemakers who previously worked in major motion picture centers and came to Arizona for a better lifestyle.

Rather then centralizing tax incentive information, the state allows various area (Phoenix, Yuma, Sedona and others) to set up offices. I believe that this type of decentralization tells moviemakers that they have to work too hard to get accurate and current information throughout the State.

The primary goal of the Motion Picture Production Tax Incentives Program is to promote and stimulate the production of commercial motion pictures in Arizona. The program achieves this goal by providing incentives to qualified companies that produce motion pictures in Arizona and to persons who construct infrastructure projects in Arizona.

California - The California Film Commission (CFC) monitors the most tax incentives passed in May, 2010. Due to pent-up demand, the program was fully subscribed immediately for fiscal 2010. The CFC maintains a waiting list for projects that wish to apply for future fiscals.

Qualified taxpayers are allowed a credit against income and/or sales and use taxes, based on qualified expenditures, for taxable years beginning on or after January 1, 2011. Credits applied to income tax liability are not refundable. Only tax credits issued to an "independent film" may be transferred or sold to an unrelated party. Other qualified taxpayers may carryover tax credits for 5 years and transfer tax credits to an affiliate.

Feature Films ($1 million minimum - $75 million maximum production budget) are eligible for a 20% tax credit. An "independent film" ($1 million - $10 million budget that is produced by a company that is not publicly traded are eligible for a 25% tax credit more than 75% of production days or total production budget) are in California.

Louisiana – Louisiana has been in the forefront of attracting movie makers to their state. In 2006 they created strong tax incentives in order to offset the devastating effects of Hurricane Katrina. To this day, they still talk about their motives for creating the incentives.

As of the beginning of 2006, Louisiana passed a newly amended transferable investment tax credit of 25% on qualified expenditures grants taxpayers domiciled in Louisiana against state income tax if their total base investment is greater than three-hundred thousand dollars ($300,000).

Fundamentally, the Louisiana government gives a transferable tax credit to production companies for shooting in the state. The credit is salable to taxpayers, which predominantly include Louisiana-based companies that can use the credit on their own expenditures. Research indicates that taxpayers often are able to buy the credit at a discount.

Massachusetts - The state of Massachusetts has a film production tax credit (FPTC) equal to 25% of in-state production costs (not including payroll expenses used to claim the payroll credit) if 50% of the total expenses or production time are spent in state. The tax credit requires a $50,000 in state spending minimum in order to qualify for the entire incentive.

Michigan - In early 2009, Michigan Gov. Jennifer Granholm announced the development of a new $54 million movie production facility to be built in Pontiac as part of an ambitious and costly plan to build a film business amid the ashes of the auto industry.

The studio -- to be built in a shuttered General Motors facility -- is expected to create about 3,600 new jobs, marking one of the most audacious attempts by a state to attract new industries by offering generous tax incentives.

Michigan began offering tax incentives several years ago to lure film makers away from Hollywood. But since then, competition has increased from New Mexico, Louisiana, Rhode Island and Georgia, who offer skilled workers with production and post-production facilities.

That has forced states like Michigan to try to find ways to sweeten the pot to maintain momentum in its efforts to build up an industry from scratch. The state isn't contributing cash to the facility's construction. But it is offering $15 million in film-related tax credits, plus as much as $101 million in state tax credits over 12 years, if hiring goals are met.

Michigan's efforts to lure film production have shown mixed results so far, despite such aggressive incentives as a law signed last year that offers cash refunds of 40% or more to productions that spend more than $50,000 in state. Hollywood studios have moved some individual productions to the state, such as the Clint Eastwood hit "Gran Torino," which Warner Bros. shifted to the Detroit area from Minnesota to take advantage of the rebates.

Meanwhile, California, the traditional epicenter of the U.S. film industry, has declined to enact tax incentives, a contentious issue that has come before the state legislature numerous times. It's unlikely that California, in the midst of a budget crisis, will this year pass a bill to compete with places like Michigan or New Mexico.

"People in Sacramento tend to view the industry as being specifically a Los Angeles thing, but it's scattered across the state, and the industry touches a lot of people statewide," says Jack Kyser, chief economist at the Los Angeles County Economic Development Corp.

Los Angeles itself saw local feature-film production days drop roughly 15% in 2008, according to FilmLA Inc., the non-profit agency that coordinates filming permits in the city. Last year saw the lowest number of feature-film production days since at least 1993, when the agency began tracking the information.

There’s a lot of news right now about a purported 3,500 new movie industry jobs that could be on the way to metro Detroit. The jobs are attributed to the state government’s generous film incentive program. The program is the state’s marquee response to a prolonged economic malaise, in which the state has lost more than a half million jobs since the year 2000.

When movies are filmed in Michigan, the studios have to pay Michigan business taxes. Under this program though, state government will give filmmakers a refund check for up to 42 percent of the money they spend in Michigan. That means a movie company that spends $10 million in Michigan could get a check for more than $4 million. That’s even after the film companies pay their own taxes.

Since the film incentive became law in April 2008, The Michigan Film Office has touted bringing Hollywood to Michigan as one remedy for the state’s economic ills. Film Office Director Janet Lockwood argued that the incentive is in the best interest of the state, saying: “The reason we’re giving incentives is not for the heads of the studios. It’s for the Michigan people who are now going to work. It’s the Michigan businesses that are going to reap the benefits.”

Montana - the State offers a tax rebate on hired Montana labor, 9% Tax rebate on qualified expenditures (rentals, food, lodging with no minimum spend or cap and no sales tax

Out-of-state equipment used exclusively in film production is exempt from property tax for 180 consecutive days.

New Mexico - offers a 25% Tax Rebate with no minimum budget requirement, no minimum spend requirement, no minimum shoot day requirement and no minimum resident hire requirement with no caps.

New York - The New York City "Made in NY" Film Production Tax Credit program provides qualifying film and television productions a fully-refundable tax credit equal to 5% of qualified production expenditures. New York State offers a separate, but similar program, which provides qualifying film and television productions a 30% credit, for a total tax credit equal to 35% of qualified production expenditures.

Eligible productions include Feature Films, Television series, pilots, movies and miniseries

For a feature film or television project to be eligible for the credit, the production must first:
1) build a set and shoot at least one day on a stage at a qualified production facility
2) complete at least 75% of the total facility related expenses at a qualified facility

Once the stage requirement is met, the costs of location work, post-production, and other work done in New York, but outside the facility are eligible if at least 75% of the location shooting days are in New York. If the production spends at least $3 million on work incurred at the qualified facility, the location threshold is waived.

Ohio – In July, 2009, Governor Ted Strickland signed into law Ohio budget bill (HB 1) including Sec. 122.85 which creates a Film Tax Credit for Ohio. The bill provides for a refundable credit against the corporation franchise or income tax for motion pictures produced in Ohio.

The tax credit is equal to 25 percent of non-wage and nonresident wage Ohio production expenditures and 35 percent of Ohio resident wage production expenditures.

Up to $5 million in credits is available per production. A total of $30 million in credits are available in the FY 2010-2011 budget.

Pennsylvania - Pennsylvania first created a film tax credit in 2004, replaced it with a film grant program in 2006, then enacted its current $75 tax credit program in 2007, in which films can receive up to 25 percent of production costs in the form of tax credit. The state’s FTC was temporarily reduced, as the 2009 state budget agreement reduced all tax credits by 33% for three years.

Out-of-Country - Of course, the most adventurous movie makers head out of the country to make their films.

The British Columbia Production Services Tax Credit (PSTC) encourages film, television and animation production in BC and is available to either international or Canadian productions produced in British Columbia. The Canadian Federal Government's Film or Video Production Services Tax Credit (PSTC) is primarily for foreign production and is 16% of Canadian labour costs.

There are four components:

1. The basic PSTC tax credit is 33% of qualified BC labour expenditures incurred after February 28, 2010.
2. The Regional tax credit is 6% of qualified BC labour expenditures of the corporation pro-rated the number of days of principal photography in BC outside of the designated Vancouver area to the total days of principal photography in BC.
3. The new Distant Location tax credit is 6% and is added to the regional tax credit for principal photography done outside of the Lower Mainland Region, north of Whistler and east of Hope, excluding the Capital Regional District.
4. Digital Animation or Visual Effects tax credit is 17.5% of BC labour expenditures directly attributable to digital animation or visual effects activities.

Movie incentives by-and-large have failed as economic policy. Movie production incentives are costly and fail to live up to their promises. Among these failures, the two most important are their failure to encourage economic growth overall and their failure to raise tax revenue.

The bottom line is that tax incentives are knee jerk reactions by state legislators enamored by Hollywood. They rush to offer tax breaks and other incentives to companies that create jobs. But states, who have examined hefty tax breaks for film and television production, conclude that they are not a good idea in a recession and that they cost states more money than they generate.

Note: The preceding material is from Jeffrey's new book, Film Finance For Beginners, which will be published in early 2011. For more information please visit Film Finance For Beginners website.