Louisiana Film Incentive Program is Unsustainable

Louisiana Film Incentive Program is Unsustainable

from: Stop-Runaway-Production.com

I reported about the recently created tax credit panel in Louisiana now reviewing the state’s film incentive and other costly tax credit programs that have caused severe revenue shortfalls:  Lights out for “Hollywood South”? Unable to Pay Bills, Louisiana’s Film Incentive in Crosshair.   Louisiana film backers, of course, did not like what I reported  and were quick to dismiss the facts and figures from prior posts evaluating Louisiana’s incentive, including this one: The “Bang” for Louisiana’s Film Incentive Bucks….Sucks.

Using bias as a crutch to dismiss what I have written on this site has allowed many film backers to avoid having a substantive debate on the merits using things like facts.  But this tactic of alleging bias will not save them from a report published today from the Louisiana Budget Project.  Everything that follows below comes from what they have to say, not me.

The LBP, which had access to  most recent data from the Louisiana Dept. of Revenue and the state’s entertainment office that runs the program, said the film incentive has cost taxpayers “more than  $1 Billion over the past decade”:

Imagine you run a business and the government hands you a check to cover one-third of your total expenses. If you’re in the movie business in Louisiana, there is no need to use your imagination. Because that’s exactly what state government does to lure the film industry…

As the state’s investments in education, health care, infrastructure, and other critical services have faced a series of severe cuts, the subsidies paid to Hollywood continue to grow—29 percent over the most recent fiscal year. Louisiana paid $231 million in credits in 2011-12, bringing the state’s total film spending to more than $1 billion over the past decade.

The LBP readily concedes the film incentive has been remarkably successful in attracting film & TV productions to the state:

State officials insist that the movie tax credit program is a success, pointing to the increase in the number of films shot in Louisiana. And, by that measure, they are right: An estimated 118 films were produced in Louisiana in 2010, up from only one in 2002.

But according to the LBP, simply increasing the number of such projects is not “the appropriate standard of success.”  Rather, the LBP notes the appropriate measure of success is whether the $1 billion spent has led to a self-sustaining industry. Using the more appropriate standard, Louisiana’s film incentive “has failed”:

If subsidies do not lead to a self-sustaining industry, able to compete and provide permanent jobs without government help, then the state needs to invest elsewhere. By this more appropriate standard, Louisiana’s film tax credit program has failed. Rather than creating permanent, good-paying jobs, Louisiana’s program simply “rents” jobs, many of which would disappear without the subsidy.

The LBP notes the public benefit from new revenue is far outweighed by the public cost; for every dollar in revenue, the state pays out $7.29:

In 2010, film production in Louisiana generated $27 million in state tax revenues and $17.3 million in local tax revenues,according to an analysis by the BaxStarr Consulting Group. This compares to the $196.8 million the state spent on film tax credits. In other words, for every dollar of revenue the state received, the state paid $7.29. People are getting rich on this deal, and it’s not Louisiana taxpayers.

The LBP report points out that even if 100% of all production spending took place in in Louisiana, it is mathematically impossible for the state to even come close to breaking even:

But even if productions spent their entire budgets on goods and services in Louisiana, the state would not be able to recoup its losses. Instead, the state’s justification recalls that old business fable about losing money on every sale but making it up on volume. For example, suppose the state were able to collect the maximum amount of taxes from those employed with the film industry—6 percent on income taxes and 4 percent on sales taxes. The revenue would still fall far short of the 35 percent lost through subsidies.

The LBP notes Louisiana’s film incentive is one of just three programs in the nation offering tax credits that are both refundable and transferable.  In theory, transferable tax credits can benefit any Louisiana resident who pays taxes.  In practice, only the wealthiest Louisiana residents are able to take advantage of the program and the benefit flows to less than 1% of the population:

While anyone is free to reduce their state tax liability with film credits, the reality is that most of the benefits flow to a few wealthy taxpayers. Brokers generally sell credits in $10,000 units, making them almost exclusively available to higher income earners.9 Many buyers use them to lower their liability on their state income taxes. For example, a wealthy taxpayer can pay a broker $7,500 for $10,000 in state-certified tax credits that reduce their tax liability, for a net gain of $2,500.

In 2009, 2,056 individual Louisiana taxpayers claimed credits out of more than 2 million individual income tax returns processed—only one-tenth of 1 percent. Nearly two-thirds of those claiming the credit—63.1 percent—reported net incomes above $1 million, while 92.2 percent had taxable incomes above $250,000.

And if you think those wealthy individuals are using the money they saved on taxes to stimulate the local economy by spending it, think again:

“In fact,” writes Albrecht, “the purchase of credits by these residents is largely a reallocation of their savings portfolio.” In other words, wealthy taxpayers who claim credits are more likely to save and invest their additional disposable income rather than spend it in the state’s economy. This cuts down on any stimulating effect on our economy.

Just as remarkable is the growth of the number of tax credits Louisiana is now refunding directly as cash payments to productions because of the state’s buy-back, “which essentially turns the program into a grant.”  After the buy-back price was increased from 75 to 85-cents on the dollar, cash payments exploded:

While brokers typically charge a transaction fee to transfer the credits to another taxpayer, the state will buy them back for 85 cents on the dollar. Last year alone, for example, Louisiana paid $26.3 million to Warner Brothers for the film Green Lantern.

Since the state upped the buy-back program from 74 percent of face value to 85 percent, the amount directly paid to film productions rose from zero in 2008-09 to $110 million in 2011-12. The buy-back program now constitutes 48 percent of the film subsidy program.

Translation: almost half of the taxpayer money spent on Louisiana’s film incentive is for direct cash payments from the state!

The LBP report offers the following summation:

As the film credit program is currently structured, there is no limit to Louisiana’s potential revenue losses. Although film subsidies have generated new economic activity in Louisiana that would not otherwise have come, the program is not self sustaining, and the jobs created require continuing subsidies.

In the meantime, the money spent to bring film productions to Louisiana is money that is not being spent to educate children, build roads, provide health-care to the poor or any other activities that help create jobs and promote long-term economic growth.

Despite this accurate assessment, the LBP astutely recognized that calling for complete elimination of the film incentive was “impractical”:

While a case could be made for eliminating film subsidies altogether, this would be politically impractical given the strong support the program enjoys from the public and state policymakers. It also would be unfair to those who have made large infrastructure investments in Louisiana with the expectations that subsidies would continue.

Instead, the LBP was pragmatic and offered recommendations like lowering the rate on the program to slowly wind it down over several years and by setting an annual cap to contain costs (among other ideas).

Finally, Appendix C of the LBP report contained a detailed list of how much money was paid to each recipient of the film incentive over the last three fiscal years and how the production money was spent.   Clicking on each of the three pages below offers a larger view:

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