Show Them the Money: Film Industry Incentives a Bottomless Pit

Updated June 21, 2010

But movie moguls are feted with more than a comfortable chair from North Carolina taxpayers. While the average small businessman or woman pays full freight, the Sundance Gang gets special tax breaks.

Targeting the Subsidies
As North Carolina abandoned its traditional policy of (more or less) treating taxpayers equally in the 1990s, Hollywood eagerly grabbed onto the state government’s largesse. In 1997, while other businesses continued to pay their fair share on their costs of doing business, the legislature passed a sales tax exemption for buying audiovisual master tapes used in film production.

Three years later, the legislature enacted another favor for the film industry – a 15-percent kickback of the costs associated with producing a film in the state up to a maximum of $200,000.

Of course, that wasn't enough to satisfy the hungry film industry.  Enter Raleigh’s number one fixer – then-lobbyist Don Beason, whose services were procured by the North Carolina Production Alliance for $50,000 in 2005.  Beason helped the movie producers win the blessing of the legislature for a refundable tax credit equaling 15-percent of production expenses up to a maximum of $7.5 million. Since a refundable tax credit means that the taxpayer gets money back regardless of whether or not taxes are owed, the new cap allowed movie studios to become firmly ensconced in North Carolina’s climate of corporate entitlement, pocketing over $15 million in the last three years alone.

Jobs, Jobs, Jobs?
In 2004, on the 25th anniversary of the Film Office’s establishment, the Commerce Department boasted that North Carolina ranked third in the nation in film production for the twentieth year in a row with 20,000 production related jobs.  But their numbers don't jive with those of the Employment Security Commission. According to the ESC, jobs classified as motion picture, TV & record production, and distribution (excepting theaters) total fewer than 1400 annually. Here is a sampling:

• 1990 – 163 jobs
• 1996 – 1278 jobs
• 1997 – 1350 jobs
• 2004 – 1186 jobs
• 2006 – 1024 jobs
• 2008 – 1177 jobs

Clearly the Commerce Department is using a super-sized, blockbuster multiplier of jobs in restaurants, car rental agencies, and other businesses serving transient movie crews to come up with their 20,000 figure. But experts dismiss those bonanza claims. Jennifer Weiner, a policy analyst for the New England Public Policy Center at the Federal Reserve Bank of Boston, discounts the oft-repeated argument that these tax credits “pay for themselves.” In a January 2009 report on Connecticut’s incentives programs, Weiner wrote, "Increases in economic activity spurred by the film credit generate some additional tax revenue for the state from a variety of sources. This additional revenue is likely to offset some, but not all, of the initial cost of the credit."

In New Mexico, the Arrowhead Center concluded the state receives fourteen cents for each dollar of film tax credits the industry gets. In Michigan, a Mackinac Center analysis shows that film-related jobs have been trending downward since the state enacted its film tax credit in 2006.

Other states show similar lackluster results, despite efforts by proponents to distort the data. In Pennsylvania, for example, a study commissioned by the state (but conducted by Hollywood consultants) came to the extraordinary conclusion that the credits were responsible for every single production in the state, even though the majority of filmmakers didn’t even apply for the tax credit.

Last fall, the Los Angeles Times reported that from 2007-2008, film productions spent $162.7 million in North Carolina while taxpayers shelled out $24.4 million for the program, which subsidized 16,271 jobs for the period.  According to the Times, results like these are causing many states to have second thoughts.  But Aaron Syrett, director of the NC Film Office, defends the practice.  "They're real jobs, like it or not," he said.

Nevertheless, in classic political fashion, while the state is busy inflating jobs figures in the movies, Wal-Mart, which employs 53,000 actual people in North Carolina year-round, pays much higher taxes.

Some Exceptions Apply
Last year, a brouhaha ensued when news surfaced that under current law, taxpayers had been forced to pour $387,000 into Hounddog, a film featuring child rape. As a result, in 2009, Senate Republican leader Phil Berger, an opponent of film subsidies, sponsored legislation denying funding for movies rated NC-17, meaning no children under 17 because of violent or sexual content (current law prohibits only those films deemed to be legally obscene, i.e. those with no artistic value, from getting the cash).

Show Them More Money
Movie producers, along with the taxpayer-funded NC Film Office, invested in a $60,000 economic impact study in 2009 by incentives-proponents Ernst & Young which, they hoped, would give them the ammunition they'd need to plead for more subsidies after several other states increased their incentives packages, but the study was based on the assumption that incentives are needed to attract the film industry, failing to analyze whether that basic premise is true.  Instead, the study surmised that if a 15-percent tax credit is good, then a 25-percent credit must be better.

In arguing for the increase, the film industry pointed to Disney’s recent choice of Savannah, Georgia for a new Miley Cyrus movie – a move which surprised Governor Perdue, who had planned a trip to Wilmington to announce that the film would be produced there. Seems that Georgia had upped the ante, increasing its own tax credit to 20-percent and promising to add another 10-percent if the production includes the use of Georgia’s logo.

In 2009, despite a shortfall that was causing furloughs and costing jobs across the state, lawmakers stepped up to fork over even more tax dollars to the film industry. Bills were introduced in both the House and the Senate to fatten the filmmakers’ pockets (including a measure by Wilmington Senator Julia Boseman, a beneficiary of industry campaign contributions). The final legislation, adopted in August of 2009, increased North Carolina's refundable tax credit for filmmakers from 15-percent to 25-percent of the cost of production.

Additionally, the 2009 law allowed producers to take the tax credit from North Carolina taxpayers for the first $999,999.99 of a star’s salary (highly paid actors - those with salaries in excess of $1 million, were formerly ineligible for the tax credit).

But under the 2010 proposal, that tax credit is uncapped, so at the 25-percent tax credit rate, North Carolina taxpayers could end up forking over $5 million toward the salary of an actor making $20 million.

Talk about trickle down.

It’ll Never Be Enough
A 2010 report by the Washington, DC-based Tax Foundation found that 44 states currently have programs in place which offer grants or tax credits to film productions.  Sadly, many continue to up the ante annually, despite enormous budget shortfalls across the country.

North Carolina began to flex its filmmaking muscles long before the incentives game began, and the industry grew for years without incentives. Many productions chose to come to the state because of its skilled workforce, low wages and scenic beauty. But once the “Economic War Between the States” revved up, North Carolina’s filmmaking fortunes began to decline. And while the state acknowledges that filmmaking has never been a major player in the state’s economy, lawmakers can’t seem to resist the temptation to step up to the plate and give away the taxpayers’ money anyway – even in desperate economic times.

In recent years, the North Carolina General Assembly has increased subsidies for the film industry every year, and Senate Minority Leader Phil Berger believes that no end is in sight.  “There is a constant ratcheting up of the program," he said.  "At some point, we just need to say no.” 

As for the Cyrus movie, even the state of Georgia appeared to have misgivings about the wisdom of the tax breaks. Shortly after winning the production in 2009, Jay Self, director of Tourism and Film Services for the City of Savannah said, "North Carolina will never be able to do enough for them. Neither will Georgia. ... The more you give them, the more they want."

According to Perdue's reports of her conversations with filmmakers in LA in 2010, Self is right.