Federal film credits are not new, but they are becoming big business in more ways than one. Approximately forty states receive federal film credits they can use to entice moviemakers to make motion pictures within their borders. The idea, of course, is to spread all that Hollywood wealth and improve the economies of these states.
Gone are the days when a studio goes looking for the beautiful beach location or peaceful green valley as an appropriate backdrop for a movie project. According to an article in the Los Angeles Times, directors can reproduce anything they need – except the money to make the film. So these days, the lure is not the natural beauty; it’s how much a state will offer in film credits.
Just ten years ago, the use of film credits amounted to about $2 million. By 2010, that figure had soared to $1.5 billion, according to the not-for-profit Tax Foundation. That may be great for the entertainment industry, but not necessarily for Hollywood or financially beleaguered California. Often, it’s the availability of film credits that makes a movie project viable. In the last fifteen years, according to the Los Angeles Times article, the number of top-grossing movies shot in California has dropped 60 percent. The moviemakers still make a profit, but they do so without using Hollywood electricians, carpenters, and other behind-the-scenes workers. Those trade workers say they are losing their ability to make a living.
Tax Credits on the Auction Block
To make the problem for Hollywood worse, fourteen states that receive film credits allow those credits to be sold. A whole new industry has risen up for film credit brokers. The cost of making a movie can be daunting, but film credits can add several weeks of shooting time and may cover up to one-third of the cost of overall production. The only drawback is – in the normal course of business – in order to get the money from the film credits, a studio must make the movie, then wait until tax time and use the credits to generate a refund.
Or, brokers can sell the credits to wealthy individuals who want to lower their state tax liabilities. The buyer pays a discounted price for a boatload of credits, the broker takes a commission, and the rest of the cash goes to the moviemakers for production. Then when the buyer files his or her state taxes, the buyer has a major credit to offset the liability – often by around 15 percent. It may sound shady, but the process is legitimate.
A more detailed example was given in the Los Angeles Times article. In short, a wealthy physician in Georgia wanted to offset his state tax bill. He purchased a voucher for film credits with a face value of $92,840 for the discounted price of 88 percent, or $81,699. That left him with a state tax credit of $11,141 to apply to his own state tax bill. The purchase price, less the broker commission, goes directly to the studio to offset production costs.
If you’re fine with your tax dollars subsidizing the film industry, this may all sound okay. For the price of a broker commission, studios get operating capital instead of borrowing funds. The credit buyers get a nice tax break – and the world gets yet another movie. Again, the only losers appear to be California entertainment industry workers. Some critics also argue the credits don’t produce long-term benefits for the communities where filming occurs.
It’s bizarre that California-based moviemakers may be helping to cannibalize the Golden State’s own entertainment industry by pursuing film credits – and trade workers – in other states. Those filmmakers say if they don’t chase those credits, they can’t make movies.
Film Credit Fraud
Say what you will about film credits, but they do spread the wealth around the country – to some extent. That was the intention. But like most areas of the economy, unscrupulous people will find a way to misdirect the money from the film industry into their own pockets.
In Polk County, Iowa, in 2012, a jury convicted former film industry mogul Dennis Brouse of “fraudulent practices” relating to the credits, plus two other charges. The charges say he improperly used tax credits from the Iowa film program. For that, he’ll spend the next ten years in prison.
According to a Roth & Co. PC tax blog about the court case, in his heyday, Brouse had programs on up to 170 public TV stations. The prosecution said at some point, he started inflating the value of the expenditures on films produced in Iowa. Based on the claims he submitted, the state awarded him transferable film credits equal to $9.2 million, for what was later found to be “pretend spending.” He then sold the credits to investors at a discount, for cash.
According to the tax blog, the Des Moines Register reported: “Brouse made $3.1 million after his expenses were paid, and he obtained the state’s ‘half-off’ credits for filmmaking – before his productions were distributed, according to Iowa’s Department of Revenue.”
Also involved was tax credit broker Chad Witter who got a cut of the proceeds. Witter was also prosecuted on charges related to the film credits program.
The Iowa Legislature had voted to enter the film tax credit program as an avenue of economic development for the state. But at least for a time, the only economic development was realized by Brouse and an accomplice.
What’s Wrong with this ‘Picture?’
Actor/director Ben Affleck told the Los Angeles Times he’s filming part of Live by Night in Georgia, a state that is popular for its film credit availability.
“It comes down to the fact that you have X amount of money to make your movie in a business where the margins are really thin,” he said.
Understood – but there’s a disconnect here. Affleck and his fellow actor/director, Matt Damon, both advocate and participate in using film credits to reduce taxes so they can make their movies. But both are also on record saying, because they are wealthy, their taxes should be raised.
What’s wrong with this “picture?”