Why economic developers should pay attention to film incentives

| Posted in analysis, competitiveness, economic development, incentives | | No Comments

The day after the election, the Motion Picture Association of America wrote a blog post on “What the New Congress Should Know about the Film and Television Industry.” Its theme is that the American film industry plays “a powerful economic role . . . in districts around the country.”

In addition to mentioning the economic impact of “Gone Girl” as a case in point, the post cites a recent article from The Economist that lauds the film industry as an American success story that offers lessons to other sectors. It’s reliance on freelancers (studios are “asset-light, flexible renters of talent”), ability to deploy “fresh creative teams” for each new project, acceptance of high failure rates, and focus on marketing are characteristics that are starting to define other industries as well.

These are good points, and, like it or not, they are probably true. Another interesting point The Economist article makes is that:

[T]he media conglomerates that own the big studios nowadays run them more professionally, and keep a closer eye on profitability. . . . Learning from Silicon Valley, Hollywood is relying more on outside financing, which means sharing the profits from hits but also protects against crippling losses when a film flops.

Tax incentives are one important source of that outside financing, but one that does not require sharing profits. The LA Times reported that studios and producers “routinely expect taxpayers to offset as much as 30% of their qualified production costs.”

30% is also the figure cited in a recent Wall Street Journal article on the global tax breaks for the film industry. Using Pinewood Shepperton PLC as an example, the article explains how Pinewood is building soundstages and production facilities in places such as Malaysia and the Dominican Republic (as well as Toronto, England, Germany and the state of Georgia) that “offer generous tax breaks and incentives for producers looking to save money.”

Here’s how it works from the perspective of the Dominican Republic, according to the Wall Street Journal article:

Pinewood has become an integral part of tax-credit programs around the world; in the case of the Dominican Republic’s program, company executives were talking to government officials about doing business there while the legislation was being drafted, said Yvette Marichal, the country’s film commissioner. Now, Pinewood manages a site owned by the local Indomina Group, a film distribution firm run by a family with investments in sugar, energy and real estate. The Indomina Group pays cash for tax credits earned by productions shot at the studio; the credits are then used on behalf of other parts of the conglomerate.

In return, the communities are hoping for sustained activity that will develop the local workforce, attract tourists, and generate local spending.

Tax credits have become integral to the industry. As the “Gone Girl” article also explains, the MPAA “is pushing more states to increase their tax incentives.” Separately, Variety reported that in late September, MPAA would be hosting a summit for US film commissioners to discuss “how to better partner to garner additional legislative and other political support for your jurisdiction’s production incentive program.” That article goes on to note:

The MPAA also promotes production activity in other states. It has retained lobbyists in states like Georgia and Louisiana, which have been successful at luring production with the promise of generous tax credits. In speaking to investors, studio executives have not been shy about pointing to the availability of incentives as a way to keep budgets under control.

Pinewood also lobbies for the tax credits as critical to both the company and the industry. Again from the Wall Street Journal:

Pinewood tells investors that the loss of tax incentives are a risk for the publicly traded company. Its strategy to mitigate that risk involves “maintaining strong relationships with key industry decision-makers…to highlight the importance of the tax-credit regime.”

The film industry and film tax credits offer a fascinating look into changing business models, evolving financial structures, and how tax incentives designed for economic development purposes can take on a life of their own.

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