It seemed that just a few years ago the film and television industry was on the rise here in the Ocean State. Underdog, 27Dresses, and Showtime’s Brotherhood series were some of the more notable productions based here in Rhode Island.
The studios liked Rhode Island for a number of reasons. Locations ranged from rural settings, ocean settings, beautiful urban locations and a variety of socio-economic backgrounds from Olneyville to the gilded age mansions of Newport. All of these natural assets could be reached within no more than a forty minute drive in any direction.
Furthermore, the tax credits offered by the state to the motion picture industry were attractive and competitive. They were simple and straightforward: 25% credit on all money spent on a motion picture process in the state. RISD students could put design skills to use. Brown/Trinity Consortium actors could find gigs that paid the rent and tuition and Rhode Island’s economy benefited greatly from the economic stimulus brought by the blossoming industry. The motion picture industry brought well paying jobs and well paid individuals spread that money in many directions: the domino effect of economic prosperity. Restaurants, hotels, real estate, catering, transportation all saw a boost in revenue and volume. Sound studios and cycloramas were built.
There was talk of Rhode Island being “Hollywood East.”
Anne Mulhall of LDI Casting, Rhode Island’s premier casting office for film and television, said that once the film credit was initially instituted, business was booming.
“LDI Casting had to hire staff and we moved to an office on Federal Hill,” she said. “Two and three and four projects at a time! Big Budget Films, TV Series, Indie Films and TV Specials.”
However, in 2009 when the tax credits were capped at $15 million, studios were more than willing to take their business elsewhere; to neighboring states that offered lower minimum spending requirements and no tax credit caps. Prior to the cap, there were multiple major productions occurring at any given time. After the cap the number of film and TV projects dwindled to one or two per year, if that.
Mulhall said
… Although we had never reached that cap, never giving away more than up to maybe $12 million in a banner year (not the norm), it is my belief that the image of a cap was daunting enough for out of state productions and unless they were guaranteed that that would be receiving credit on money spent, they would rather go to another location that LOOKED like Rhode Island, so Massachusetts was the next best thing. … Plus the fact that by this point 42 other states instituted film tax credits. Competition was heavy while at the same time we started to pull out of the race.
So, Rhode Island, a state that had for once been on the forefront of an economic wave, pulled back. Workers who had moved here – union, non-union, homeowners, taxpayers – with families and well paying jobs were out of those jobs and forced to leave the industry or the state. The state that is notorious for being economically reactionary, had been proactive and found a way to foil its own initiative.
Mark Fogarty, President of the Rhode Island Film Collaborative (RIFC: a registered 501(c) 3 organization), stated that an independently commissioned, non-biased study showed that the benefits of an uncapped system far outweighed the risks.
As Fogarty put it:
…the results overwhelmingly showed that film results in money being spent and taxes being collected. The biggest problem is people do not understand the way it works and assume the government is losing out on 25 percent of taxes. The reality is all it means is the person who purchases the tax credit will pay about five percent less taxes. That is five percent in exchange for millions of dollars being spent in the state. It is really a no lose situation.
Fogarty is a native Rhode Islander and founder of EXILE Movies. He wrote and directed the upcoming independent feature film smalltown. With a budget of under $100,000, he shot the majority of the film in nearby MA due to the fact that Massachusetts requires a minimum budget of only $50,000 to qualify for the credit instead of $100,000 that RI now requires. At the time Fogarty was filming, the minimum budget for tax credit qualification in Rhode Island was $300,000. That meant that all the purchases and rentals of materials as well as 80% of on location filming was done in Massachusetts despite his preference to have shot in RI.
Some of the confusion stems from the notion that a tax credit percentage means a reduction in that amount in direct revenue to the state. For example, a 25 percent tax credit on a $1 million budget would result in a loss of t$250,000 worth of tax revenue. That may be closer to the actual case in refunded tax credits. However, Rhode Island uses transferable tax credits. This means a wealthy investor or group can purchase the credit at a reduced rate, thereby dropping their taxes about five percent. This is preferred as a benefit to the state in that the loss of tax revenue due to the the tax credit incentive is well under the total revenue brought to businesses, individuals and, subsequently, tax revenue to the state.
Of course the weight of the ongoing 38 Studios fiasco looms heavily over any decision for lawmakers to take legislative measures to encourage businesses to come to Rhode Island. However, the tax credit laws for motion pictures, while they do encompass video games as part of the “motion picture” definition, guaranteed state loans are exempt from tax credit eligibility. Therefore, 38 Studios and scenarios similar to it would not fall into the same risk category that led to the state’s current legal nightmare and potential taxpayer black hole.
The question Rhode Island must ask itself is “is it too late?” Has Rhode Island just moved on to the next economic band-aid? Casino table games, perhaps? That may be a short term boost. But we can look at other states with strong casino based economies to find out how well that has worked. New Jersey and Nevada both have some of the highest levels of unemployment in the nation. Nevada is actually number one, with over 12 percent unemployment.
Or can the state resurrect a discussion of how to revive a once budding industry, clipped off by a frightened legislature and competitively forward thinking surrounding states? The vast majority of manufacturing is gone in Rhode Island. Barring a few companies still valiantly holding on to making things for sale in this state, manufacturing jobs have left and are not coming back. The motion picture industry was an interesting and promising replacement for the loss of the manufacturing industry and the economic ramifications were similar in statewide benefits.
The interest is still there. The Rhode Island Film Collaborative has a large membership and still hosts a number of strong programs ranging from classes to networking and sponsors productions for filmmakers determined to make films, documentaries, shorts, features, animated films and other motion picture related projects. For anyone interested in meeting and discussing this or any other film based topic (here comes the shameless plug) the annual Rhode Island Film Collaborative’s Black and White Gala is on Saturday, December 8th at 6:30PM at Mixed Magic Theatre in Pawtucket’s Hope Artiste Village. It goes until very late and features food, dancing, libations and many other prizes and surprises. The gala is the collaborative’s biggest fundraiser of the year and, for a nominal twelve dollar admission fee, all are welcome.
No one can argue that Rhode Island needs an economic renaissance. No one can say that a single idea or initiative is the solution. The problems are deep and multifaceted and so must be the solutions. However, the motion picture industry was an excellent boost while it lasted and, with some discussion, could be again.
As Anne Mulhall said:
Personally, I feel that if there are concerns about how the credit negatively affects Rhode Island economy…first, look at how it has BENEFITTED Rhode Island’s economy and small businesses before making any decision and second, change the criteria by which the is credit is offered, not the credit itself. I consider film making a manufacturing industry. If this is true, we are General Motors.
I hope we get to work in our home state again.
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.
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.
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?
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.
Your piece at Naked Capitalism needs to be cross posted here and on the Projo’s Op-Ed pages, at the very least.
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?
It’s true. But, logically and artithmetically sound do not always translate as politically popular. It’s a tougher sell. But I’m all for trying.
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.