A lot has been written about state tax credit programs on this site and many others. I’ve produced and/or directed seven feature films that have used state tax credits as part of their financing structure. I feel it necessary to impart a little wisdom and clear up some misconceptions.
As a businessman, libertarian, and someone who understands economics let me flatly state that I am against excessive taxes. That’s a pretty simple and popular position. Lowering and eliminating onerous taxes would be ideal. My first choice would be to cut taxes across the board. Put more money into the hands of the private sector.
Film tax incentive programs are not the same as “corporate welfare.” They are, in fact, a sneaky conservative or libertarian style way to circumvent the excessive taxes that government loves to heap on us.
Let me explain how they work and why they are a good thing.
Let’s say my film has a $15 million dollar budget. Now, the critics would lead you to believe that the state (in my current situation, Connecticut) would simply cut me a check for $5 million out of the state treasury. Not so. Not so by a long shot.
Each state requires a full audit of every production. This audit insures two things. One, that the money was spent in the state offering the incentive. Two, that the money was actually spent. They require cancelled checks, credit card statements etc. Once your audit is done (with many expenses disqualified by the way), the state issues a certificate for your tax credits. This is simply a piece of paper. No money changes hands. Not yet.
As the owner of the company with the credit, I can either use the credit to offset my own tax liability in the state or I can sell it. If I sell it, I pass it on to other state residents who have tax liability. In this transaction, the buyer pays less than the value of the tax credit to the seller. They then use the credit to offset their tax liability.
So, what actually just happened. I spent $15 million dollars. Connecticut gave me a letter saying that I could write off $4 million in taxes. I sold that letter to someone else for $3.5 million dollars. I just made $3.5 million dollars. The guy I sold it to just saved $500,000 on his taxes.
The notion that the state of Connecticut opened up their checkbook and cut me a check for $4 million is patently false. No money changed hands between me and the state. To assume that the state is “losing” money assumes that government is entitled to our money. It assumes that we are just the temporary custodians of cash and that the government is charged with deciding how much of their money we get to keep. That entire $4 million dollars was left in the hands of private businesses. Who can spend best spend the $4 million to stimulate the economy? Me? The business owner who bought the credits? Or the State?
Isn’t this the crux of the argument between the left and right over government spending?
As for the state, let’s see how much cold hard cash they made. About 60% of the average film budget goes to payroll and talent costs. In order to qualify for the incentive, the people being paid must pay state income tax . So, in the above example the state made about $500,000 in payroll and income taxes. We also pay sales tax for the services and goods purchased in the state. That’s another $600,000. The state made about $1.1 million in tax revenue. That’s actual dollars in the current fiscal year, not potential income for the following year. Also, that doesn’t include other types of taxes that film production crews spend heavily on like hotel taxes and fuel taxes. Not to mention alcohol and cigarette taxes. Those last two alone are pretty hefty.
Let’s talk about other impacts. All of our cast and crew frequent local businesses. We eat in restaurants. We shop. In many cases we move to these other states semi-permanently, buying or renting homes and cars. We rent office space and locations. We hire people who may never have the opportunity to work in the film industry. That sounds a lot better than paying a state worker $80k a year with health-care and a fat pension in terms of stimulating the economy.
There are a couple of other misconceptions about the tax credit programs. The idea that these film productions would happen without the incentives is ludicrous. L.A. is still the spiritual home of film production, but economics have forced us elsewhere. People would not be traveling to Louisiana, Connecticut, Wisconsin etc. unless there was a good reason. Producers and studio people love control. A production 2,500 miles away is the last thing that they want.
It’s also a fallacious argument to compare entertainment jobs with other public or private sector employment. To compare the number of VFX artists added to a state to the number of ditch diggers disregards quality of life concerns as well as the future earning potential of individuals. We on the right are all about the individual. We are the dreamers and the entrepreneurs. Let’s allow the other side to fret about “living wages” and “fairness”. I’ve turned numerous Best Buy employees into camera assistants, grips, and VFX artists. I’ve given several waitresses and insurance salesmen their SAG cards and speaking lines in feature films.
Movies are cool. Period. They make things exciting. Sure the state of Wisconsin, specifically the cockroach-like bureaucrats and SEIU thugs, may think that the state lost a lot of money. My Dad, on the other hand, was really excited to meet Johnny Depp. He’d gladly sacrifice a couple more gold bricking purple shirts for that opportunity.
Of course, the programs could be run better. But what government program couldn’t? The incentive programs should be more complex. They should be skewed to favor producers who create local infrastructure and have long term plans. They should also be tweaked to benefit independent producers more than studios. We actually use the tax credits as a financing mechanism, allowing us to make films without studios or foreign pre-sales. That means better, and potentially more profitable films.
Fraud is also a problem. But again, government programs wrought with fraud should surprise no one. States need to hire more savvy industry types to monitor these programs and be resources for film producers.
The Hollywood left are a bunch of hypocrites. While they decry trickle down economics, they profit from it. But the states, at the end of the day, profit from it in multiple ways as well. We are right to point out the hypocrisy, but we shouldn’t join the left in slamming the programs.
We should also be careful about trying to dictate what films are eligible based on content. Outside of pornography, everything should be eligible regardless of how we personally feel about the subject matter. Robert Rodriguez is a hero of mine, but I find “Machete” to be more than problematic. I think he may have jumped the shark with this one. But, we shouldn’t call for the state of Texas to reject his credits.
Later this year, I will begin pre-production on a film about the American Revolution and the Founding Fathers. I think you can guess how that’s going to skew. I would hate to have a precedent started based on ideology. Something tells me that the state legislatures of Massachusetts, Connecticut, and Pennsylvania won’t be too happy about issuing credits for a highly charged, libertarian, political film.
Especially one with a release date of July 4, 2012.
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