Hooked on Hollywood dreams: As they angle for movie deals, states escalate the price of bait
From The Mecklenberg TimesBy Sam Boykin
Hollywood studio executives made Gov. Beverly Perdue an offer she couldn’t refuse.
Upon returning from her visit to Los Angeles last month, she said film executives told her North Carolina wasn’t doing enough to win their business.
Although the General Assembly, with Perdue’s vehement urging, increased the state’s tax credit for film and television production companies from 15 percent to 25 percent, she is now proclaiming that, to stay competitive, North Carolina must also eliminate limits on certain incentives that sweeten the state’s offer.
North Carolina is caught up in an escalating incentives war as states try to one-up each other to entice Hollywood to sprinkle some of its magic dust within their borders.
“The film tax credit is like a race to the bottom for taxpayers,” said North Carolina state Sen. Edward Goodall, R-Weddington, one of 18 senators who voted against the bill to expand the film credit.
The General Assembly passed the bill last August, and it took effect in January.
“We’re giving movie producers $25 for every $100 they spend on a film whether they make money or not,” Goodall said. “And we’re racing other states to (increase) the tax credit. Where does it stop? The argument is, the higher the credit, the more moviemakers will come to the state. Using that logic, why not apply that to every business sector there is? Why single out the movie industry?”
There’s no denying that a community can profit when a movie or TV production company shows up.
The cast and crew spend heavily on hotels, rental cars, restaurants, equipment rentals, and local vendors. And being a co-star can bolster a city’s image and profile.
But the debate still rages over whether such productions create any long-term economic benefits to justify the giveaways.
And if North Carolina does continue to sweeten its incentive package, what happens when Virginia, South Carolina or Georgia turn around and do the same?
“The governor has said multiple times that she would love to see all states call a truce, to put away their arms, in regard to incentives,” said Perdue spokeswoman Chrissy Pearson. “But because every other state attracts and woos businesses using incentives, in order for North Carolina to remain competitive, she feels we must have that as one of the tools in our toolbox.”
Greg LeRoy doesn’t agree. He is the executive director of Good Jobs First, a Washington, D.C.-based national policy-resource center that promotes corporate and government accountability in economic development.
LeRoy said the escalating economic war among states to attract film companies is a “sum-zero race” that benefits film and TV companies at the expense of state and local budgets already struggling to pay for such necessities as schools and health care.
“It’s a classic case,” he said, “of the unholy intersection of Hollywood and politics.”
“The nature of film production is transitory,” LeRoy said. “They come in for six or eight weeks and then they’re gone. The question is: What’s left? Where’s the permanent residual benefit to the state economy to offset the temporary nature of the productions?”
North Carolina’s film-incentives package states that film and TV production companies must spend at least $250,000 to receive a refundable tax credit of up to 25 percent on in-state spending for goods, services and labor. There is also a $1 million limit per person on the amount a production can get back from wages, and a per-project limit of $7.5 million, the maximum amount a company can receive, regardless of how much is spent.
When Perdue and 20 North Carolina Commerce Department officials traveled to Los Angeles in mid-March for a three-day visit with film-studio executives, she came back insisting that the state had to eliminate the caps.
Hollywood, Perdue said, considers North Carolina’s caps stingy, so big budget movies go to such states as Georgia, Massachusetts, Michigan and New Mexico, which don’t have caps and offer more generous incentive packages.
“One of the reasons the governor takes trips to Hollywood is to talk directly to the people involved,” Pearson, the Perdue spokeswoman, said. “What she heard is that it would be very difficult for North Carolina to compete for the large, big-budget movies without some changes taking place. And certainly eliminating the incentive limits was one of the biggest concerns she heard about.”
As far as which film executives Perdue met with, her people aren’t saying. Department of Commerce spokesperson Kathy Neal said all economic development information is confidential. “We don’t want our competitors to know who we’re talking to,” Neal said. “This goes for all of our economic development plans.”
Neal did say the state budgeted $11,000 for the three-day trip, but added that the exact cost hasn’t been tallied yet.
Canada, once the movie industry’s darling destination because of incentives, lost its luster when the currency-exchange rate changed. When Canada faded, a number of states modified their tax codes to woo film companies. Today, 42 states offer incentives, including Michigan, which, in 2008, jacked up its refundable tax credit to 42 percent, the highest in the country.
“As production started coming back to the U.S., Hollywood found out how easy it was to get the states to enact these credits, and they played them against each other,” said LeRoy with Good Jobs First. “Cost-benefit analysis just seemed to fly out the window.”
For a long time, North Carolina didn’t play ball, keeping its tax credit at 15 percent, while neighboring states including Georgia and South Carolina offered a 30 percent tax credit for film projects.
Still, Charlotte landed some notable films, such as “Leatherheads,” “Talladega Nights,” and “The Patriot.” According to the Charlotte Regional Partnership, the film industry employs more than 2,500 statewide, and in 2008, the industry spent $91 million in the state.
“Our incentives do not have to be the highest, but they must be competitive,” said Beth Petty, director of the Charlotte Regional Film Commission. “Filmmaking is a business like any other. They have to look at where they can conduct business in the most cost-effective way. Incentives help that. We’re not giving the film industry money. We are taking less from them when they’re here.”
And in such an increasingly competitive environment, desirable locations, a crew base, accessibility and other amenities are no longer enough to lure new films projects. It now has become a game of keeping-up-with-the-Joneses just to try to level the playing field.
But not every state is jumping on the show business bandwagon, and some overzealous incentive packages have backfired. (See sidebar “Iowa, Connecticut have buyer’s remorse,” below.)
Pearson, Perdue’s spokeswoman, said the governor has not yet made a final decision regarding eliminating the incentives caps, but her staff is reviewing the options.
“To some extent it would be a calculated risk,” Pearson said. “But in North Carolina we’ve seen the film industry flourish, and the governor believes there’s a lot of potential there. And if tweaking the laws could bring more jobs to North Carolina, she is very willing to consider that.”
How it works
The following is a breakdown of the increased tax credit that took effect in January and is aimed at luring more film and TV productions to North Carolina:
• The incentive is a 25 percent refundable tax credit not to exceed $7.5 million.
• Eligible productions include film, television, direct-to-video/DVD features, episodic TV series, TV mini-series, theatrical, animation productions and commercials.
• Spending for goods (fuel, food, airline tickets, etc.) purchased or leased from an in-state business is eligible for the credit if purchases are made in North Carolina for an in-state production.
• Also eligible for the credit are the costs of production-related insurance, compensation and wages paid to employees and payments for per diem and fringe benefits (to the extent they are included in the recipient’s taxable wages subject to withholding).
• North Carolina must receive on-screen credit.
Iowa, Connecticut have buyers’ remorse
In 2007 Iowa adopted a program that allowed movie companies to recoup up to 50 percent of their tax payments. But amid reports of irregularities and poor record-keeping in the program, the state’s economic development director resigned, the head of the state film office was fired, and the tax-credit program was suspended. It remains suspended.
And in Connecticut, the fiscal watchdog group Connecticut Voices for Children released a report showing that the state’s film tax credits have largely been subsidizing out-of-state personnel and businesses, and that the state’s costs exceeded the credits’ economic benefits.
Subsequently, in her 2009 budget proposal, Gov. M. Jodi Rell called for capping the credits at $25 million a year.
Jeffrey R. Beckham, Rell’s undersecretary for legislative affairs, said that although the cap proposal was dropped, the General Assembly made some changes to the film credit package that made it a little less generous and more limited in terms of the state’s liability and tax expenditures.
“We put a fair amount of economic development money out there,” Beckham said, “and it just didn’t make sense to have an open-ended, unlimited commitment to one particular industry when we have so many other industries we’re also trying to support, as well as things like education and transportation.”
Connecticut’s Legislature in 2009 tightened the program by increasing from $50,000 to $100,000 the minimum investment a film company must make before it qualifies for the tax credit. The Legislature also established a sliding scale for the tax credit based on production costs. Before the change, the state granted a flat rate of 30 percent.
“Studios now have to do more actual brick and mortar investment in the state, as opposed to just coming in, filming on location and taking off,” Beckham said. “It’s favoring more permanent types of investments in the state.”
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