Louisiana's film incentives: Welfare for the Rich and Famous
Written by  // Thursday, 14 May 2015 09:18 //

filmby Mike Malak

The most profound argument in favor of retaining Louisiana’s Motion Picture production tax incentive is the claim that, if eliminated, or modified, Tom Cruise won’t come to the State anymore. I wouldn’t either! A cap on incentives for performer salaries exceeding $1,000,000.00, per production, sounds awfully discriminatory to the Hollywood mind and a backhanded slap at the rich and famous. Not that Cruise was going to come, anyway, which he might, but not for the free money, instead, more likely, for the scenery, food, and all that jazz.

Allegations that changes to the State’s film and TV production incentives will have a draconian effect on the State’s newest industrial crown are not new, in Louisiana, or elsewhere. Other states have grappled with the same dilemma, one that pits long versus short-term goals. Proponents of keeping incentives for the entertainment industry, many of whom have vested interests in local production, compete with opponents who see elimination, or cuts to such programs, as a way to close budget shortfalls and deficits. Each side relies on its own form of the creative accounting to buttress its arguments. Charges, however, that drops in production will negatively affect tourism deter establishment other new business in this sector and diminish the States’ reputation, generally, are overblown.

The Louisiana Visitor Conversion, (LVC,) April 2014, listed the “hows,” “whys” and “whens,” of Louisiana tourism/visitation. The report appears to be thorough and well researched, though its reliance on a somewhat randomize population of respondents may make the entire enterprise a good example of fine statistical data analysis but less reliable conclusions. The scientific population used in the survey is composed of Internet users who, essentially, self-nominated themselves to be in the study. No disclaimer of a plus or minus accuracy was observed. If there, it should reflect goodly margins. The LVC doesn’t cite a nexus of tourism to motion picture production that, except for die-hard fans who cannot live without seeing the mansion from “American Horror Story, ‘Coven’” most probably doesn’t exists, at least according to the State. Credited with bringing tourism into the State, however, are food, music, and a bunch of other cool stuff, just not the movies.

A company, New Integrity Film, on besttaxbreak.net, claims that film investments with it will yield an assured return of between 50-100%. Elsewhere in their pitch that amount is lowered to between a ‘50-75% return.’ Notwithstanding the fact that it’s not, really, an investment if there’s no risk, markets and banks would all fail if Integrity’s assertions regarding profit from investment are correct since all available money would flee to the movie business. Who wants a paltry return of cents when an investor can bail out Greece if he rolls his money into pictures enough times? New Integrity, regardless of the nature of its program, or its validity, left to others’ scrutiny bases its “assurances,” a word that’s not technically a guarantee but more of synonym, starts its program off state money using a formula that reads like this: “Film Investment + State Film Incentives Rebate 25-40% + I.R.S. Section 181 Tax Break, 100% deduction [at] 35% tax bracket = 50-75% return. The math hasn’t been checked, either, but there is a flag, here, and it that the State may be part of some incentive dependent programs that take advantage of state resources with no return to the people.

Claims that show business within any state’s borders radically improves its economy, through intangible benefits such as job creation, tourism, and other activities represent a form of trickle through benefits. They, too, are subject to scrutiny for general veracity. Most proponents of production incentives attempt to enhance their arguments by multiplying the value of hard dollars by an arbitrarily pre-determined number. The result is alleged to reflect the total economic effect of production.

UCLA's Institute for Research on Labor and Employment did an analysis of a program California adopted, in 2009, since made more generous, to help curb runaway production. UCLA looked at the states, then, set aside of $100 million annually for the program.

http://www.taxpolicycenter.org/briefing-book/key-elements/economic-development/what-is.cfm. Assuming eligibility and luck at lotteries, filmmakers could receive a credit of 20% to 25% of qualified production expenses, sans actors’ compensation. The credits could be used to offset any sales or business tax liability owed to the state. The study concluded that “the California tax credit ‘is creating jobs and is likely providing an immediate economic benefit to the state,’ but found that some claims about the program's value have been exaggerated.

This leads to another issue, namely, the sale and transfer of tax credits earned by producers who cash tem at 85 cents on the dollar, or sell them to private investment enterprises who resell the credits. First Bank and Trust, (FBT), headquartered in New Orleans, is an active reseller that, in effect, is a brokerage house for state property. FTB reported on its web site, https://www.firstbank.com/#/home, that Bank Director Magazine, Fourth Quarter 2014, ranked FTB 12th among the top 50 proven performers with a minimum asset size of $500 million dollars. Meanwhile, back at the State, the cost to transfer, cash in, loan, sell, alienate, or some such, has been increased to $200.00. That might cover one week worth of coffee or the typing pool. Perhaps a better “fee” deal is in order pertaining to sales of this state property.

UCLA’s study was financed and commissioned by Headway Project, a think tank supporting incentives and their transferability. The report alleged that for every dollar expended on incentives the state earned $1.04, less than the 13% claimed by the Motion Picture Association of America, (MPAA). Other sources maintain that state losses of up to 7% on incentive monies. At a 4% return rate, it’s fair to ask whether or not a State program isn’t too risky. When everyone’s numbers are different they are all more likely to be wrong instead of right. Further, there is no guarantee that there will be sufficient future production volume to justify continuation of an apparatus that relies on ancillary services, people and technology that would likely relocate to follow the cameras to keep their meal tickets.

Chris Stelly of the Louisiana Film Office told the Los Angels Times blog, “We’re in a fortunate situation because we’re one of the oldest and most stable tax credits.” In 2006, comprehensive analysis of production incentives, nationally, was written by John Grand, under the supervision of Professor Susan Kalinka, while he was a law student at Louisiana State University. http://taxprof.typepad.com/taxprof_blog/files/2006-2997-1.pdf. The article, “Motion Picture Tax Incentives: There’s No Business Like Show Business,” is an essential description of the historical antecedent mechanics of how tax incentives work.

Grand writes, “The transferability of the tax credit defies logic. The individuals who benefit from purchasing tax credits are not in a special class of persons in need of
credits. The beneficiaries are a few wealthy taxpayers who are influential enough to purchase the credits.” He continues, “Also, the program allows intermediary brokers
to make a fortune. Motion picture companies can generate millions of dollars in excess credits, but they have no means of selling those credits to individual taxpayers. Instead, they sell the credits to an intermediate broker. The broker then breaks up the credit, typically into $10,000.00 blocks, and sells the blocks to individuals for roughly $8,500.00 A broker that purchases several million dollars worth of credits from a production company can earn hundreds of thousands of dollars off the transaction.”

Then, however, comes a leap of faith in an attempt to plead both sides as the analysis turns around and observes, “Brokers are not entirely parasitic: They actively encourage production companies to film in Louisiana. Brokers encourage production companies to come to Louisiana in hopes that the production companies will sell them their tax credits. Thus, brokers possibly help increase the amount of filming activity in Louisiana. Because brokers are investment bankers this means the State’s economic development sub-divisions have been subsumed by the banking sector.

The article claims that the cost of incentives result in no money for the State that, it reported, recaptures just 30 cents of every 33 cents paid out. Grand says, “ Companies would be aware of the (filming) benefits Louisiana offers regardless of whether brokers exist in the marketplace.” He observes, further, “…the profits being realized by brokers are most appropriately classified as waste.”

The accuracy of budget data, furthermore, including location spending reports, is an imprecise science. It can be very hard to determine if the spending that forms the basis of tax credits, anywhere, is correct. This is not to say that companies would deliberately seek to maximize tax credits by incorrect reporting. They may not know, themselves, until much later, what they’ve spent. Considering, however, the cost to the state of a good production audit there is likely to be none and movie companies don’t always want to state production costs early in the game lest exhibitors and markets react negatively. Dan Glickman, a Hollywood studios lobbyist for the MPAA, told the Los Angeles Times, as far back as 2009, that “film financing is getting too complicated to obtain reliable data.” This is not news, however, to any creative talent, or investor, seeking profit participation as a result of involvement in a theatrical project. Nothing has changed. http://articles.latimes.com/2009/apr/01/business/fi-cotown-mpaa1
On March 25, 2013, Ron Mason of Fox 8 ran a story based on an interview with Will French of the Louisiana Film and Entertainment Association. http://www.fox8live.com/story/21674326/film-industry. French said that “Louisiana’s growing film industry” is worried on account of a Governor Bobby Jindal’s tax plan that could limit film incentives. Mason quoted French as saying that, from a total of 200 industry workers “when we first started,” that number had grown to 14,000. French did not define “industry worker,” which category could have included, to enhance the argument against subsidy cuts, casual or part-time labor, workers from out of state and collateral service provider employees such as caterers, limo drivers, florists, and jewelers who might, from time to time, supply a production. Though many craftsmen and technicians must have relocated to Louisiana to take advantage of its current filmmaking bonanza, entertainment is a gypsy business. These days many workers are, essentially, independent contractors, or project labor and accustomed to relocating to maintain steady employment, to the extent possible. The size of Louisiana’s current business is no guarantee that the business will remain within its borders.

There are, however, a number of familiar absurdities in French’s justification for continuing tax credits and incentives. He points to New Mexico and Michigan that, reputedly, saw their production drop after they reduced film tax credits. To compare the level of movie and TV business in those two states with Louisiana, however, is like comparing kumquats with watermelons. It has been claimed that producers are deferring production starts in the state for six months, until the effects of a reduced tax credit can be evaluated. This doesn’t track reality because most film production schedules are based on projected release dates, and not the status of what is a fairly small amount of money the combined budget of five tent-pole pictures exceeds the entire value of FTB. Lastly, French states that improving the return on investment derived from Louisiana’s Investor Tax Credit was, we paraphrase, an aspirational goal. Presumably, this increase would come from State coffers to give more State money to producers, banks, and the rich and famous. It’s unlikely the author was referring to getting a better return for the State on its investment.

So, what is the point of continuing to subsidize a transitory business that could walk down someone else’s aisle in a 48 second minute like a fickle bride? The answer is incapable of precise determination. It is, however, fairly easy to dismantle any business without a large infrastructure and much harder to birth, nourish, and wean one off the public’s teat. The real determination on movie subsidies ought to be made on the basis of the inherent value of the business. Bullish on the movies? Keep the incentives. Nervous about a future that, probably, will disappoint, sooner or later, no matter how great the incentives, kill the tax credits. Another question is whether or not any budget deficit in Louisiana that is attributable to film tax credits is not that great, relatively speaking, at least in Hollywood terms of up to $250,000,000.00 per film.

Do incentives work” The answer is a resounding “yes” because Anytime someone gives away money there are people stacked up to take it. Does the government’s giveaway, however, favors only one class of citizens? The answer is affirmative. Production benefits, disproportionately, those in more urban areas, particularly New Orleans. By this standard, the proposition in favor of State incentives fails the test of equality. The ripple effect through the economy theory might be urged as mitigating any in situ disproportionate benefits. This argument is about as good as one for going to Vegas, relying on the possibility that “I might win.”

Because the movies are glamorous there are additional, unique, proprietary advantages built in that comes with being Hollywood. In the once and future capitol of film and TV everyone is related to, or knows, someone in the business. There are huge numbers of fabulously decadent movie star homes, neighborhoods where you can tick or treat at a house where Jennifer Love Hewitt answers the door, personally. The streets have as many stars as there are in the heavens, and even kitschy attractions like the Hollywood Murder Tour that takes in notorious sites, many showbiz related, draw the world. This is tough stuff to compete with when seeking the cinema throne. Additionally, much of the power and reach of Hollywood into the highest levels of society and government is related to Tinsel town’s deep pockets, periodically emptied for political and philanthropic causes.

Genres change, too, and that necessitates different settings for stories. Already, some shows shot in Louisiana have been cancelled, or moved out. It’s not an exodus yet but watch the sea. When it parts turn around. Vancouver was once a cat’s meow. It was attractive and had skilled labor, much of it consisting of immigrants from Hollywood. No longer. Georgia was once hot but is not. The list goes on. Spain, once reviled by Hollywood for drawing productions out of the U.S. with low costs, has been related to the silly discussion of whether Catherine Zeta Jones is Spanish or English. Even Hollywood was stopped in its tracks when people wanted to see stories set where they took place instead of on a back lot, and producers found free money. The tax credit is not worth if it’s paid for on the backs of those who benefit least for this enterprise. Diversify, re-engineer, analyze and be smart and maybe, over the long terms, Louisiana will continue to be a hub of production, but that’s another story.

Disclaimer: The author is a former advisory commissioner to the State of California Motion Picture Council, forerunner of the California State Film Commission and a long-time Marketing Director of Marketing for Daily Variety.

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