Jack Lessenberry Commentary: Film Tax Credits
Well, we are heading into the holiday weekend, and if the weather holds up, many of us will be barbecuing or going out on the water. But some of us will be going to the movies.
And your odds of seeing a major motion picture made in Michigan are a lot smaller than they were a few years ago.
That’s because the film incentive established by the Granholm Administration ended when Rick Snyder became governor and Republicans took over both houses of the legislature.
The governor doesn’t believe special exemptions and tax credit deals are good policy, and you can see logic in that. But there is always an exemption that proved the rule, and the film industry credit was one of those.
Frankly, I can’t tell you whether the generous breaks we granted the film industry were a net economic plus or minus for Michigan. I have seen studies that came to opposite conclusions.
My guess is that it probably cost the state a little more than it gained financially in the short run, but had the potential to be a huge economic plus in the not-very-long run. But analyzing this from a purely financial perspective misses something.
I’ve been in this state a long time, and I can’t ever remember anything that got people as excited. They went to see films being made, and volunteered as extras. People got an extraordinary kick out of seeing Clint Eastwood on the street or Jack Nicholson in a restaurant. When a film was released that was shot partly in your neighborhood, you went to see it regardless. This was a big deal.
Well, what was an open-ended tax credit was slashed to $25 million in incentives under the new governor. Hollywood promptly pulled up stakes and left, in the process hurting a lot of Michigan businesses who serviced the film industry.
Now, there is vague recognition in the legislature that we’ve lost something. The state senate wanted to boost the amount available for the film industry to $100 million; eventually, they compromised at $50 million. Some people were excited about this yesterday, and spoke as though this meant that the filmmakers will be back.
But I’ve got news for them: They won’t be. Oh, a few more independent small films may be made here. But don’t expect Meryl Streep to show up, or another Gran Torino to be made.
And here’s why. Republicans should remember an important principle they knew when they reformed the corporate tax structure. Businesses like lower taxes. But they really value stability. They have to know their fixed costs, and be able to expect they’ll remain consistent. You can’t do business in a place where you constantly worry the legislature may pull the rug out from under you.
If we are serious about bringing the film industry back, we need to restore some kind of open-ended tax break and guarantee it would stay in place for a decade. Then, they might think we meant business. If there’s anything this state needs, it is an exciting new industry that gives young people some incentive to stay here.
Even if the film industry itself turned out to be a long-term loss leader, my guess is that restoring its credits would be well worth it.
Jack Lessenberry is Michigan Radio’s Political Analyst. Views expressed by Jack Lessenberry are his own and do not necessarily reflect those of Michigan Radio, its management or the station licensee, the University of Michigan.
The more you profit from the status quo, the less inclined you may be to make the moves necessary to thrive in the future.
This was the puzzle facing Steve Jobs when his company consciously introduced the iPhone knowing that it would cannibalize his cash cow, the iPod, but knowing that if Apple didn’t cannibalize the iPod then everyone else would have done so because it was inevitable that mp3 players would eventually merge with that device formerly known as the mobile phone.
Radio is likewise constrained by a model that rewards broadcast licensees with agency dollars but invites radio’s competitors to compete for everything else and even for the growing fraction of agency dollars transferred out of advertising and into marketing.
He who lives by the ratings shall die by the ratings, but more and more of radio’s competitors don’t play by the ratings at all.
This is leading us to make some bad decisions. It leads to questions like these:
Should you delay or get rid of your podcasts?
Should you dump out of streaming altogether?
Should you care about consumers of your content who don’t live in your backyard?
Why are you even ON the World Wide Web?
What does it mean for radio to cater to consumers in an era when THEY, not WE, are in control.
see video here
The entertainment industry is mobile, technologically clean, and capital and labor-intensive, making it an attractive business to many communities. Film production incentives by federal governments, various states and other local jurisdictions are enacted to encourage economic growth, build infrastructure and promote job creation. Aside from sales tax exemptions/refunds and hotel tax relief, cash rebates, tax credits, up-front and backend funding are the types of production incentives used to lure motion picture and television production companies to a specific country or state. Although incentive programs can change with ebb and flow of political tides, many are at an all-time high.
To determine which state has the best incentives for a production depends on the answers to a number of questions relevant to the specifics of a particular project.
Is there a cap on the amount of eligible salary for each individual? Are non-resident wages included, or does the state only allow the salary of residents to qualify? Is there a sufficiently large and qualified crew base, or will crew need to be brought in, adding per diem, transportation and housing costs to the budget – costs, which may or may not be considered qualified costs for a particular state’s incentive.
What type of production qualifies for the incentive? Again, depending on the state, a feature film or television series may qualify while non-traditional programming like a talk show or sporting event may not.
What are qualified production expenditures? To name a few, these expenses may include: set construction, wardrobe, makeup, photography and sound synchronization, lighting, editing, lab services, facilities and equipment rental, vehicle leases, food and lodging, special and visual effects, and other direct costs of producing the project in accordance with normally accepted industry practices.
What type of incentive – a rebate/grant or a tax credit – is offered? Rebate and grant programs are similar. After program requirements are met, both rebates and grants return cash payments to the eligible production companies. No income tax return is required.
Tax credit programs provide the production company with several different types of tax credits: refundable/nonrefundable, and/or, transferable /nontransferable. In jurisdictions offering a refundable tax credit, the production company must file the appropriate tax return claiming the tax credit. A refund will be issued if the production tax credit exceeds the company’s tax liability. With a nonrefundable tax credit, the production company must either apply the credit against its existing tax liability in that state, or transfer/sell/assign the credit to a taxpayer that does have a tax liability in the state. If a project is unable to use a nonrefundable credit, it is imperative to allow for the discounted value of the credit in the budget as well as the cost to transfer the nonrefundable credit.
To make the best financial decision for any production, it is important to stay current with production incentives. A new incentive program may offer a more beneficial incentive to attract business to a state, while last year’s top program may have added a cap or sunset clause to their program.
Some of Michigan’s generous film incentives are facing proposals to be pared back by the new governor and the partisan shift to the right in the state legislature. As of this writing, bills H 5844 and S 796 offer 30%, 40% and 42% tax credits that are transferable and refundable, but can’t be carried forward. Labor credits of 40% are allowed for resident below-the-line, and all above-the-line personnel regardless of residency. An additional 2% credit is allowed when filming in certain “core” communities, such as Detroit. Non-resident below-the-line labor receives a 30% credit. The crew base has grown exponentially in the last couple of years with both aggressive training programs and migration of film workers to the state. A screen credit and CPA audit are required of program participants. The minimum spend is $50,000.
Because of the proposed $25 million cap, the film office only has $14.4million in tax credits left to distribute in the current fiscal year. Only a handful of tax credits have been approved for 2011. Incentive applications, such as the one for season two of Detroit 1-8-7, are currently under review, pending new legislation, but any decision is premature as ABC has not yet announced if they will be renewing the program for a second season. Under the Michigan Film Office’s new policy, the approvals require review by the Michigan Economic Development Corporate Committee. In order to stretch the fund, MFO seems to be approving low-to-medium budget projects. Higher cost projects like the $58 million sequel to Mr. and Mrs. Smith, while not rejected, chose to take the project elsewhere prior to receiving a decision. All 38 of the projects that would like to film in Michigan would cost nearly $124 million, substantially above the cap amount. Since the incentives took effect several years ago, approximately $648 million dollars have been invested in Michigan’s economy by film, digital media and television projects. In an attempt to convince the Michigan legislature not to downsize the economic-boosting industry of the past three years, film industry lobbying efforts are heating up, so check with the film office for the latest news.
Washington DC passed bill #B 583 that made into law rebates of 42% of qualifying direct production expenditures subject to D.C. tax and 21% of expenditures that are not subject to D.C. tax. The 30% rebate of qualified personnel expenditures applies to resident above-the-line and below-the-line compensation. 50% of qualified job training expenditures and 25% of the base infrastructure investment are also rebated. The minimum spend is $250,000 with no cap, and funding is determined on a case-by-case basis, subject to the availability of funds. There is no sunset, but an annual review by Dec. 31 of each year determines program funding for the fiscal year concluding Sept. 30. No screen credit or CPA audit are required. Before production commences an application must be submitted. Response time varies.
New York State passed bills #S 6060, #S 7798 and # A 9710 that offer a 30% refundable tax credit for each below-the-line resident and nonresident with no minimum spend amount or per project cap. The state has a generous annual cap of $420 million. A robust crew and talent base, plus extensive production and post facilities keep New York a top filming location. There is a screen credit required but no CPA audit. The sunset date is December 2014. New York City, enacted bill #S 6060 that gives an additional 5% refundable tax credit to each below-the-line resident and nonresident, also with no per project cap or minimum spend amount, but an annual cap of $30 million. Again like the state incentive, a screen credit is required but no CPA audit. The sunset date is December 2011.
Illinois has enacted bills H 2482 and S 1981 that give a 30% qualifying local spend and 15% resident wage tax credit for employment of residents in geographic areas of high poverty or high unemployment. An experienced crew and talent base as well as access to facilities and services, primarily in the Chicago area, add to the appeal of filming in Illinois. On March 30, the Illinois Senate passed a bill, SB 398 that replaced the five-year sunset proposed by the House with a 10-year sunset. The change is expected to be passed by the House and signed into law by the Governor. This action preserves the current tax credit program until 2021 and benefits television series in production. The credit is not refundable, but is transferable and can be carried forward five years. A minimum local spend is $50,000 for projects less than 30 minutes and $100,000 for productions over 30 minutes. A screen credit and CPA audit is required. Application should be submitted five days before filming with a response in about 1-2 weeks.
Louisiana passed a similar bill # 478 that gives a 30% base of qualifying local spend including the payroll for residents and non-residents and a 5% wage tax credit of resident payroll up to $1,000,000. The credits are refundable, transferable and can be carried forward 10 years, with a minimum local spend of over $300,000. A screen credit and CPA audit are also required. Jefferson Parish in Louisiana passed bill #110061, that gives a 3% rebate on a minimum spend of $150,000 (with a per project cap of $100,000, and an annual cap of $1.5 million). It also requires a screen credit and CPA audit. Louisiana is a right-to-work state with a crew base that is 8-9 deep statewide.
Alaska enacted bill S 230 that gives a 30% base tax credit with an additional 10% on resident wages, plus a 2% credit for expenditures in rural areas and a 2% seasonal credit for expenditures between Oct. 1-March 30, for a total credit of up to 44%. Tax credits are not refundable, but are transferable and can be carried forward three years. They require a minimum spend of $100,000 in a 24-month (36-month) period with no per project cap. The aggregate tax credit is $100 million, which sunsets July 1, 2013 or when the funding cap is reached. Like so many others, Alaska requires a screen credit and CPA audit. Companies should submit incentive applications before production commences. Expect a response in 2-4 weeks.
California has bill #AB 15 until June 30, 2014 that gives a 20% tax credit for a feature film with a total budget between $1M and $75M; a MOW or miniseries with a budget of at least $500,000; a new series licensed for original distribution on basic cable with a minimum TV season budget of $1 million. A 25% tax credit is available to television series, without regard to length, that relocate to California or “independent films.” To be considered an independent film certain criteria must be met: the qualified expenditure budget of a production must not exceed $10 million; the production cannot be owned by a publicly-traded company or a publicly-traded company does not own more than 25% of the producing company. Both below-the-line resident and nonresident labor is qualified. The tax credit is not refundable but is transferable for Independent projects and can be carried forward five years. Non-Independent projects may utilize the tax credits against their state tax liability or sales and use taxes; it can be utilized by an affiliated company. There is no per project cap, but the annual cap is $100 million. All program projects require both a screen credit and a CPA audit. Despite a lower percentage incentive, major benefits of filming in California are the deep crew base and available support infrastructure. Applications are accepted on June 1 for the start of the next fiscal year’s funding July 1. Pending credit availability, applications are accepted year round, however with the amount of filming normally done in California, it is best to apply early since the incentive is administered on a first-come, first-served basis. Principal photography must begin no less than 30 days after the date the application is submitted, but no later than 180 days after the date of approval (credit allocation letter date). If filming in San Francisco, California bill #162-09 gives additional refundable rebate of 1.5% on wages and all city costs. The per project cap is $600,000 and the annual cap is $1.8 million with no minimum spend amount. Currently available until June 30, 2012, legislation has been introduced to extend the credit until July 1, 2019. There is a screen credit required but no CPA audit.
One of the most appealing aspects of Washington State’s incentive program is that it is a cash rebate as opposed to a tax credit. The unappealing aspect of the program is that it is scheduled to sunset June 20, 2011, if the legislation is not renewed. The Washington State legislature enacted bill SB 6558 in 2006 which created the incentive program and the 30% rebate. There is no per project cap but the annual cap for the program is $3.5 million. There is a minimum spend of $500,000 for features, $300,000 for television series and $150,000 for commercials. Only resident labor is qualified. There is a three-deep crew base statewide and a crew directory is available online atwww.WashingtonProductionIndex.com. Prior to the start of principal photography, the production company must apply for and receive a Funding Letter of Intent and enter into a contract with Washington Filmworks (WF). Principal photography must begin within 120 days after receiving the Letter. Funding is based on the economic opportunity for Washington communities and businesses. Each production that receives WF assistance is required to complete a survey within 60 days after the completion of principal photography. There is a screen credit required but no CPA audit. Enhancements to the Washington Motion Picture Competitiveness Program were introduced through HB 1554 and SB 5539 in January 2011. The bills have been amended in committee but the legislation to maintain the program continues to be considered.
Oklahoma has a 35% cash rebate for films and non-transferable income tax credits for construction of OK film/music facilities (10% to 25% credit). An additional 2% rebate is available for documented expenditures if a production company spends at least $20,000 for the use of music created by an Oklahoma resident and recorded in Oklahoma or for the cost of recording songs or music in Oklahoma. There is a low annual cap of $5 million, but with the minimum budget for films set at $50,000 with a local spend of over $25,000, the incentive can be appealing to indie filmmakers. Qualifying labor includes below-the-line wages paid to Oklahoma residents and salaries for resident and nonresident above-the-line personnel paid to loan out corporations or limited liability companies registered to do business in Oklahoma. No more than 25% of the total rebated amount can be compromised of qualifying above-the-line salaries. Two crews deep for smaller non-union independent films (under $10,000,000), but because Oklahoma is a right-to-work state, there are limited union crew. Applications must be submitted at least 60 calendar days, but no more than 180 days prior to the start of production and all documents must be submitted no more than 90 days after the payment of all Oklahoma expenditures. The sunset date is Dec. 31, 2014. Rebates will be paid out immediately after all requirements have been met with no fiscal year delay. Oklahoma also offers a point-of-purchase (POP) sales tax exemption for sales of tangible property or services to a production company for use in an eligible production. However, the production company is not eligible to receive both the rebate payment and an exemption from sales tax.
by Theresa Lovestodance Heurtebise on Monday, March 7, 2011 at 12:46am
Devin Scillion from WDIV in Detroit, interviewed Governor Rick Sndyer for his weekly show Flashpoint on March 6, 2011. The topic of the interview was the proposed Michigan budget. Many budget specifics were brought up; many of these specifics were not well addressed and others he simply chose to ignore. What Governor Snyder chose to sidestep was as telling as the answers he gave. Here's what I heard...
Governor Snyder stated the guiding principles of his budget were on the "tax side", encouraging job creation and taxes which are simple, fair and efficient. On the "budget side" Michigan needs to "stop spending money for the sake of spending money", show real results for real people, and thinking strategically in long terms and in the context of shared sacrifice.
On Governor Snyder's "tax side", he chose to address his support of the repeal of the Michigan Business Tax. The large Michigan corporations are already exempt from this tax and it is the small amd mid-sized business owners who have been subject to it. It is indeed a heavy burden for these small and mid-sized businesses to pay this additional tax, especially when so many are barely able to break even and are often times existing month to month. In the mean time many others have simply closed their doors; leaving consumers with fewer choices and more people unemployed or under-employed. Granted, the corporations are already at a higher tax percentage than the average citizen in Michigan, but keep one thing clearly in mind, a corporation exists for the sole purpose of creating profit.
Corporations are not interested in "job creation", unless it will create more profit. Corporations are not interested in actual service to their community, unless it creates additonal tax exempt write-offs. Corporations are interested in one thing alone and that is the bottom line. A well managed corporation will continue to profit even during the worst of times. Even during the recent collapse of "The Big Three", the auto manufactures in Michigan rode this wave not only on the back of the federal government, but most of all the automotive suppliers and their own employees. We have a businessman as our governor, who comes from corporate America, who in his own words was "hired" by the citizens of Michigan. Do not expect him to act in anyway different then he would as a CEO. It will be you and I who will pay the price for the "profitability" of our state and it will be painful. We will not hear about our state government tightening their belt through reductions in overhead, adminstration or fiscal responsibility; you and I will simply make up the difference. But where will we make up this difference?
Well, the first area Governor Snyder wants a portion of this money to come from, is a segment of the population who can least afford it. The Earned Income Credit (EIC) will be eliminated. To qualify for the EIC, you would need to fall into one of these categories:
- If you are single and earned less than $13,400
- Single with one child and earned less than $35,450. Single with 2 or more children and earned less than $40,250
- Married and earned less than $18,400. Married with one child and earned less than $40,450.Married with 2 or more children and earned less than $45,250.
I think we can all agree on something here. If you qualify for the EIC, you're poor. I am not being mean or being a "snob" of some sorts by saying that. A full time job at 40 hours per week, that generates $13,400 per year is a job which pays $6.44 per hour before taxes. No one can live on that sort of a wage. The value of the EIC to this person is $430. If we calculate this amount into their hourly wage, they will earn a $6.65 per hour before taxes. That is nearly an additional 21 cents per hour more. I am disgusted when I look at these numbers. We will punish the working poor. I cannot support this action on behalf of my state government. This is wrong!
The next group of people who will help make profit for our state, are mostly retirees, because in Governor Snyder's words "These are people who have some money." The state of Michigan wants to tax the Social Security benefits our citizens receive as income. Would this also include those who recieve Social Security because of disability? Will their health insurance also be seen as income or a benefit and subject to tax as well? This was not addressed by the governor. We have so many elderly and disabled people who can barely survive; they exist on poor diets, have trouble paying for utilities and heat, and often cannot afford medications they require. Yes, Governor Snyder...These people "have some money" but barely enough to live on now. What will happen to them at this time next year? I am angry and I am beside myself. How can we do this with any sort of conscience?
Governor Snyder's logic behind these actions, according to this interview, is to relieve the potential tax burden from the young, middle-class who he feels will leave Michigan because of the tax rates. Govenor Snyder, the young people are not leaving Michigan because of our tax rate. They are leaving our state to find jobs. They are graduating from our colleges and universities and finding employment where employment exists. So far, you have not told me how you plan on creating jobs; all you have told me is how we are going to increase state revenue.
Governor Snyder stated on the "budget side" of his plan, that as a state "We need to stop spending money for the sake of spending money." Honestly, I do not know what he means by this statement. As far back as I can remember, the state coffers have never had an abundance of money. I don't think we have been foolishly spending money but maybe I'm wrong...The next point that Governor Snyder brought up were the tax credits for specific industries such as the film makers. I think this was what he was getting at with his "sake of spending money" comment.
L. Brooks Patterson is the Oakland County Executive. He is the chief elected official in one of America’s most affluent and progressive counties and he is also a Republican Party member. In Devin Scillion's words, L. Brooks Patterson is and has been, a supporter of the so-called "winners and losers"; the "winners" being the industries which have been selected for special tax credits. The film makers have been the one member in this "winners" group we have heard the most about; another is alternative energy sources. There are others as well. These types of industry were selected as "winners" so that Michigan could diversify our economic base. To me, diversity sounds like a good thing. Obviously, manufacturing alone is no longer "doing it" for our state. In the words of L. Brooks Patterson, by cancelling these tax credits, "We have pulled the chair out from underneath of them (these selected industries)."
Governor Snyder, who has stated he is not a supporter of the "winners and losers" program, says these industries should go before the Michigan Appropriations Commitee and seek special tax consideration. This would require these industries to go before the Appropriations Commitee each and every time a project is undertaken, with no assurances it would be approved. There is no stability in this situation for incoming industry; they would be at the mercy of the commitee members. To me, this plan sounds ineffective and wasteful and is in no way welcoming to new, diverse industry to our state.
Governor Snyder is focused on the $2 million in tax credits which have been already promised over the course of the next four years, claiming this as a built in budget deficit, which in all fairness it is. What is bad about this situation, is that since we are saying "No. We don't want to encourage you to do business in Michigan" and these industries go elsewhere, as we are already seeing, we have no chance of recouping the $2 million. We are assuming the $2 million debt and turning away the ability to generate revenue from these industries. This is tantamount to shooting ourselves in the foot...not just once, but twice.
Now, Governor Snyder decided it was time to get into some very specific numbers concerning the film industry in Michigan. Before he was able to do that, Mr. Scillion asked if the thousands of people who came to the Town Hall Meeting in Livonia in support of the tax credits for the film industry were heard...This question was left unanswered. As one of the thousands in attendance at that meeting, I saw people who were being directly affected by this decision to discontinue this program. I saw people on the brink of losing their jobs. I saw people who would again be joining the ranks of the unemployed in our state. I saw many talented and gifted people who would be moving away, in search of a job and this man, the man who is the governor of my state, could not or would not acknowledge their worth or existence. I am left with a very empty feeling inside. I am extremely disheartened by his ability and willingness to simply and completely abandon thousands of my neighbors. Getting back to one of Governor Snyder's points; these are "real people" who were seeing "real results" of the tax credit program. These "real people" were told their livelihood was not important; Michigan has no use for them. I am saddened, I am angry but I am not alone.
I feel almost as if I should offer an apology of sorts to you who are reading this blog. It is bigger, longer and much more involved than I thought it would be when I began typing tonight and I have not covered many other issues from this interview with Governor Snyder. I am beyond frustrated but I will not be quieted. I am not a Political Science major; I'm not an Economics major. I was born in this wonderful state and have lived here my whole life. I am a Michigander and I will not sit back and silently watch my family, friends and neighbors suffer needlessly. I have more to say, but for tonight, I must go. If this blog resonates with you, please share it. If you have comments, please feel free to speak your mind. There will be more to follow.
Thank you for your time,
Watch Governor Snyder interview with Devin Scillian on Flashpoint