Jonathan is:
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a native Rhode Islander

8 responses to “What Happened to Hollywood East?”

  1. David Segal

    Jonathan — There’s much more to say about the film tax credits in general, but I specifically just wanted to speak to transferable tax credits as a funding mechanism:  It’s worth deconstructing the particular form these subsidies take.  The terminology “tax credit” is construed to obfuscate the specifics of the mechanism at hand: Most people think it means that there’s a reduction in taxation on expenditures in service of the given project. 
    Far from it, and far worse, here’s how it works:  A movie films in State X, and spends $20 million therein.  If State X offers a 50% transferable tax credit for film expenditures within its borders, it forks over $10 million thereof.  In the case of a state like Rhode Island — or any state that isn’t the production company’s home base — the production company will have a accrued negligible state tax liability, so it will sell these credits to an entity that has a more substantial tax burden — usually a sizable corporation — at a rate of, perhaps, 80 cents on the dollar. 
    A broker will take a cut of perhaps a nickel on the dollar.  So the entity that the state was striving to subsidize gets only 75% of the funds the state is expending.  A full 25% or so of the subsidy is misfiring, going to middlemen and corporations with substantial tax burdens.  (The state loses $1, 75 cents to the movie shop, 5 cents to a broker, 20 cents to some corporate behemoth.)  If you want to fund something efficiently, just fork over cash.  But we would never do that, because the population would then understand that were were making massive direct payments to Hollywood and they’d never stand for that.

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  2. Barry

    It seems to me this is an example of how in effect corporations blackmail states into a situation with no net gain in employment or economic activity overall but lower corporate taxes overall and “middlemen” who contribute nothing but  transferring electronic money but don’t actually produce anything, getting a cut.  Similarly the wealthy get the states, like RI, to eliminate taxes on private airplanes, boats…
    A solution might be to get states (at least regionally) to form a compact not to play this game.  But if it continues, Rhode Island will have a hard time truly competing with the bg states that play this way.

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  3. Tom Sgouros

    The other important thing that happened to tax credits is that New York and California both instituted similar tax credits for productions there.  Essentially they caved to pressure applied to them by states like ours, and I believe that a lot of the dropoff in productions is attributable to that change more than the cap.

    The tax credits in those two states are not notably more generous than the RI credit, but here’s what’s different.  The tax credits in RI become a windfall for some rich person, who can make a 25% return on their investment in the credits if they owe enough tax.  (Purchase $1 million of credit for $800k = instant 25% return.)  The tax credits in NY and CA are a similar windfall for some rich person, but in those states the odds are dramatically higher that said rich person who benefits is the very person making the decision about where to shoot the production.  If you had to choose to shoot in RI, where tax credits would benefit your production company, or shoot in CA, where tax credits would benefit both your production company and you personally, which would you choose?

    In a framework like that, I simply don’t think RI can compete for expensive Hollywood productions, and all the justifications for the program won’t change the logic of the executives making the decisions.  I’m sure there’s a  niche somewhere in the film business that our state can usefully occupy, but I doubt it’s those high end productions.  We’ve done our job in helping pressure California to offer tax breaks on rich film executives, so why do they need us any more?

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  4. David Segal

    Yep.  I have thing on this in Naked Capitalism tomorrow – more of a response to this week’s NYT article on tax breaks in Texas, but it speaks to the RI film credits too.  Will link to it.

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    1. cailin rua

      Your piece at Naked Capitalism needs to be cross posted here and on the Projo’s Op-Ed pages, at the very least.

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  5. adrian

    David’s explanation on the transferable tax credits nailed it. The loss of revenue is actually less when the state issues a straight refund as cash.  Maybe only 1-5% cheaper….but every penny counts, right? 

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  6. adrian

    Tom’s analysis is pretty good, but I can fill in some points he missed.  Indeed, California & NY did enact incentives.  The enacted them to prevent runaway production, not cause it.  They acted in response to the other states.  If the others disarmed, so would they. 
    Also, the NY & CA are only more “generous” in terms of the amount of available credits.  CA is capped at $100 million and NY has $420 million–both annually.  The rates are actually more generous in RI.  Yes, NY has a 30% credit…but it only applies to the below the line costs.  Pay for actors, writers, directors, producers are–the above the line costs– are NOT covered in either NY or CA.  Generally, ATL costs are around 40% of the budget.  Thus, the effective rate of the CA or NY credit is 15-18% of the entire budget spend, whereas RI applies 25% on everything. 
    California is the only state where the credits operate as a pure tax break, at least for the majors.  Only the independent productions can sell their credits.  But most, over 85% of credits issued each year, go to the majors…who can ONLY use them to cover existing tax liabilities.  If they do not use them in the current year, they get a 10-year carry forward.  After that, they can’t be used. 
    Numbers on utilization of the NY program are not available.  All film credits in NY are refundable.  But we don’t know how much is refunded as cash and how much of them go to actual liabilities.  I suspect over 80% are refunded for cash.

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