New Mexico’s “Model Film Incentive” Program

New Mexico’s “Model Film Incentive” Program


New Mexico’s “Model Film Incentive” Program: Refundable Credits or Film Loans?

When people refer to New Mexico as having a “model film incentive program”, much of this reputation stemmed from policy requirements under the no-interest film loan program, which Gov. Susana Martinez ended last year.  Under that program, New Mexico’s State Investment Council (SIC) offered no-interest loans to film and television projects of up to $15 million for each loan.  The loan program required 85% of principal photography to take place in New Mexico and required 60% of total below-the-line wages go to New Mexico residents.  And, should the project become profitable, New Mexico could get a negotiated cut of the earnings (for example, on “Book of Eli”, NM gets 7.5% of profits after break-even point).

Since the no-interest film loan program no longer exists, it’s more accurate to say New Mexico HAD a “model program”.  What the state has now, however, is a film incentive that lacks any of the model program ingredients mentioned above.

The refundable cash credit program does NOT require most (or any) of the principal photography to take place in New Mexico and does NOT require any portion of the wages (much less 60% required by the loan) be paid to New Mexicans.  Sure, since only wages paid to below-the-line residents qualify for the credit, there is an incentive to hire New Mexicans.  But the cash credit also covers lodging costs and per diem costs for out-of-state crew, so there is also an incentive for an out-of-state director or producer to bring their out-of-state crew (hence the 35,000 hotel room nights booked by Albuquerque Studios in 2010).   Finally, there is ZERO requirement for profit sharing.  Rather than get a cut of “The Avengers” profits under the loan program, New Mexico elected cut Marvel a $22 million check and reduced the studio’s out of pocket cost to shoot in NM from $88 million to $66 million under the refund program.  That is the opposite of model.

Most New Mexico film backers want and support having both the loan program and the tax credit program.  When both were under assault last year, film backers cried fowl and pointed out that oil and mining industries also got favorable incentives that could and should be eliminated.  “Unfair treatment,” they claimed.  Ironically, the SIC’s film loan program, which handed out $243 million on 22 separate loans, was funded by royalties collected from mineral and mining activity in the state.  In short, the big bad oil industry actually funded New Mexico’s “model film incentive program” (i.e. the SIC film loans).  That should turn the unfair treatment claim on its head (for the record, I am opposed to oil subsidies).

Last year, the no-interest loan program was ended and the refundable film tax credits survived (albeit with a $50 million annual cap).  Perhaps it should have been the other way around: keep the loan program and kill the refundable tax credits.  Let’s compare the performance of the two programs.

Assessing Criticisms of the Film Loan Program:

An article in this week’s Las Cruces Sun-News was, in my opinion, pretty critical of the film loan program:

This enterprise may have been heady and glamorous, helping bring Denzel Washington, Jennifer Lopez and a galaxy of other stars to New Mexico. Profitable it was not.

Only one of the movies — “The Book of Eli,” starring Washington — actually turned a profit for the state. It has provided $517,017 for New Mexico and continues to produce revenue through rental fees and play on premium channels.

The other 21 movies and television series all reported the same number — zero — for the state’s share of profits. Three of those movies eventually provided modest financial returns to the state for a variety of reasons, including the threat of a lawsuit in one case.

New Mexico did not lose money on any of the movies and shows.

Every production company that received a state loan paid back the principal.

While it’s great all of the productions (thus far) paid back their loans in full, is it really fair to say “New Mexico did not lose money” on the program?  After all, projects that received the loan were also allowed to take advantage of the cash refund for in-state spending under the state’s refundable tax credit program.  Any project that got the loan AND that took advantage of the cash refund (and I am assuming all of them did), most certainly lost money for the state.

For example, a production company that got a $10 million loan and spent it in New Mexico on qualified expenditures to make a film, would also get a $2.5 million check from the state’s 25% refundable tax credit program.  The loan may be repaid in full, but the state is still out $2.5 million because of the tax credit program.

People who argue for the refundable tax credit correctly point out that, but for the cash incentive, productions would not come to the state.  However, this argument fails when it comes to project that got a loan from the state, because the program required them to shoot and spend almost entirely in New Mexico.  Loan projects had no choice but to film in New Mexico and allowing them to take advantage of the 25% cash refund was an unnecessary and wasteful handout.

There were also opportunity costs.  For example, had New Mexico invested the $243 on “safe investments”, the interest alone would have netted the state over $30 million (according to conservative SIC estimates).  On the other hand, who cares if the projects did not generate enough profit to share with the state?  They repaid all they borrowed and, more importantly, employed New Mexicans (as required by the program).  And two projects did generate a return for the loan program.

The $1.04 “income received” from the loan program’s two profitable films (“Book of Eli” & “Employee of the Month”) was offset by the $2.3 million New Mexico paid to California entertainment attorney Peter Dekom to “evaluate and manage” the loan program.  Even though most attorneys charge by the dreaded “billable hour”, Dekom’s contract with New Mexico paid him a whopping $350,000 a year, with no accountability for the number hours worked according to one report.  Paying $2.3 million of taxpayer money to a resident from another state probably was not the best decision.  That said, the fact that ALL of the loans had been repaid is remarkable.

In sum, the net cost of the film loan program was just over $1 million.  Had the loan projects not been able to get the cash refund from the tax credit, New Mexico would have actually made money on the tax revenue generated from their economic activity.

Comparing the Film Loan Program to the Refundable Tax Credit Program:

Here is the data from the film office, which includes projects that qualified for the refundable tax credit only and the projects that got the refundable credit AND a film loan:And here is the data from the SIC for projects that got film loans:

Comparing the benefits from the film loan program to the tax credit program is difficult.  First, the production statistics from the New Mexico Film Office for the tax credit program includes the economic impact of projects that also got loans from the state.  The $245 million in direct production spending by the loan projects from 2003-2011 represents 20.5% of the total $1.2 billion direct production spend for the same period.  Since the impacts from the two programs are blended in the NM film office statistics, direct comparison is impossible.  Second, neither the film office or the SIC (which administered the loan program) tracked employment by the number of Full Time Equivalent (FTE) jobs created.

The film office only tracks total “worker days” and the SIC did a total head count for all projects.  Both methods are problematic. The film office determines the total worker days by multiplying total number of crew members by total production days for each project.  But not all of the crew works on every single production day.  Some crew members may only work a few days or weeks on a shoot that lasts for months.  As for counting heads, since virtually the same 200 people who worked on season one of “Wildfire” (all four seasons got four separate loans) are also the ones who worked on it all four years, the actual number of jobs is 200.  A total head count, on the other hand, would be roughly 800 (200 people x 4 seasons).

Since the average BTL New Mexico crew salary is roughly $50,000, we can divide the total amount of wages paid to New Mexicans under the loan program ($65 million) by the average salary to get a ballpark estimate on how many FTE jobs the loans created, which is 1,300 FTEs.

We can also calculate a rough FTE estimate from the film office data if we assume each worker day is an accurate count of each day worked by each individual person.  The combined total of “worker days” generated by the New Mexico film tax credit was 882,716.  Given that the average, fully-employed, individual works an average of 258 days each year (accounting for weekends and holidays), this translates into 3,421 full time jobs.  Given the total cost of the approved credits ($223.9 million since 2003), the cost for each of these 3,421 jobs is over $65,000 each.  Both of the FTE estimates above are just that: estimates.  The Ernst & Young report estimated 2,200 direct production jobs were created in 2007.

And The Winner of the Model Film Incentive Contest Is….

As mentioned earlier, despite paying out $243 million on loans, the net cost for the loan program was well under $2 million.  All loans were repaid in full and some profits were realized on two films.  Compare this to the $223 million paid out as cash refunds over the same period under the tax credit program.  Unlike the loans, the tax credit refunds are not repaid.  At best, the state is able to recoup 20-40 cents in new tax revenue from production activity for each dollar it spends on the tax credit.  Even if the tax credit program recoups half of each dollar, the net cost to New Mexico was still over $110 million.    Which would you pick: net loss of $1 million for film loans or a net loss of $110 million on tax credit refunds?

If New Mexico wants a model film incentive, they need to ditch the refundable tax credits and bring back the film loan program that gave them the model program reputation in the first place.

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