Proposed film tax credit reform needs more robustness

The film industry has scrambled successfully to keep from drying up its mother milk from Louisiana taxpayers, if the suggested “fixes” to the Motion Picture Investor Tax Credit contained in proposed bills by a pair of timid legislators serves as an indicator.

In separate bill drafts, state Sen. J.P. Morrell and state Rep. Julie Stokes propose reforms of the state’s film subsidy, which through the life of the program to 2012 had cost the state $800 million more in taxpayer dollars than it brought in and which at the current rate of project approval will have topped $1 billion by the end of last year. Neither adequately address the hemorrhaging of taxpayer dollars.

Morrell’s bill closely tracks the industry’s preferences, which don’t align well with taxpayers’, with an increased emphasis on preventing improper or fraudulent subsidization, limitations of expenditures that qualify, and (the one major item not acceded to by the industry) a $300 million annual cap that, if not entirely used, could roll over. Stokes’ would allow transferability of credits just once (in effect, eliminating brokerage and leaving it all in the hands of the state) but raise the state’s buyback from 85 percent to 90 percent, institute better procedures to capture tax revenue that could be generated from the industry (an industry request), and make administrative changes that clarify the process and place more of that cost in the hands of that industry.

In total, these marginally rein in potential spending and do little to convert the mindset of the program from project-based to infrastructure-based. Presently, the credits encourage locust-like behavior from the industry: it swarms where there are abundant resources, consumes them as long as taxpayers cough them up, but, when they stop cooperating this way, abandons the state and goes wherever the next batch of hot money might be to scoop up. This occurs because the credits are doled out film by film and much of the benefit transfers outside of the state, with the ability to sell credits and get most of that back in cash. Keep in mind as well that the $300 million total output for a year never has been hit, and by denying some expenses and passing other costs onto the industry, it might be so high that it never gets there and thus becomes meaningless.

A serious attempt at reform would have several features. First, as recommended elsewhere, this would have the cap combine with an auction form of credits, where bidding would occur with the state selecting projects on the basis of identifiable tax revenue return, which might include items such as in-state spending, in-state hiring, and proportion of Louisiana investors). As part of this, the actual reimbursement rate (30 percent as of now) could be subject to bargaining.

Second, it would shift the emphasis from projects to human capital and assets. The program could be reformulated so that the maximum credit is awarded to physical infrastructure spending and for other spending starts smaller but increases over time if a production company compiles a record of making films or shooting television series to reach that maximum (Morrell’s intended bill has a bonus feature for five years or more of production). This creates incentive for an indigenous industry that compels inclusion of the higher-salaried production jobs, which all too often now are imported in and then expensed to taxpayers through the credits.

Third, the buyback level remains too high. By lowering it, perhaps to 50 percent, this encourages more investment in the state and more spending, because it creates greater incentive to incur Louisiana tax liability and thus economic activity. It also would make it more cost effective for studios to seek out Louisiana investors, who could take the entire 100 percent of the credit, thereby leaving more money and economic activity in the state.

Finally, the credits need to sunset, slowly, but eventually to a reasonable level, if to have them all. The entire original idea behind these was as an incubator to create the industry that could sustain itself without taxpayer handouts, and policy should reflect that. Perhaps over a decade they could slim down to something like a maximum of 10 percent, with mandatory review to see whether at this level the state’s tax revenues actually were larger as a result of the program than its expenses. If so, it stays; if not, it automatically sunsets.

These are the kinds of robust reforms necessary to fix the cost-ineffective program. What has been offered caters too much to the industry getting a near-free ride (some efforts make more back in tax credits than they do at the box office or in broadcasting, which testifies to the generosity of the credits and/or quality of the production) and not enough to the taxpayer subsidizing them. Morrell and Stokes need to revisit these attempts, shielding their eyes from the bright lights of Hollywood and keeping them focused on the taxpayer and the citizenry that cries for funding of far more important needs that making movies.