Nungesser, whose portfolio includes culture and tourism although the state’s Department of Economic Development oversees the credit, proposed to a reporter a profit-sharing arrangement for Louisiana not unlike that enjoyed by participants in movie productions. Typically, parties involved negotiate for a share of the net profits of a production. Nungesser suggests for blockbusters that the state get a cut of that action, liking it to oil wells where one strike can pay for lots of dry holes.
That could offset the huge taxpayer losses suffered on the program, which returns less than a quarter of every dollar spent to the state. At the same time, it could present a way to reverse the recent pullback of productions in Louisiana, as a consequence of reforms to the credit that eliminated its virtual open-ended status.
But it wouldn’t work much at all from taxpayers’ perspectives if any putative statute on this account used net profit as a standard. Hollywood uses creative financial arrangements and accounting procedures to minimize the apparent “profit” on any given film. Typically, a studio creates a shell corporation or other legal arrangement for every film and then it levies fees on the entity, using percentages often derived through guesswork if at all related to reality. Thus, if profit sharing occurs within the shell, the studio can find ways to suck out all the profits; under these rules, legions of high-grossing films technically never have turned a “profit” and therefore have not paid out on any points to writers, actors, and others involved with these huge hits despite contractual obligations.
Therein lies the key for this to work for Louisiana’s taxpayers: any such law must take a cut of the gross profits or revenues of a film, which usually only big names in the industry can secure. Apparently the recent legal change to put a $180 million cap on redemptions of credits has spooked the industry the most; the state could remove that early (it will sunset for fiscal year 2019) in exchange for something like taking ten points of worldwide gross profits when these hit $100 million (payable annually) and above for any film that has credits certified for it.
Using 2015 releases as an example, the state would have recouped around $263.8 million with such an arrangement – slightly more than the actual amount of credits paid out, although much of those came from previous years, and would have put the state about $70 million to the good in tax impact. The cutoff almost ensures that a film does not have to pay up unless its gross profits exceed its production costs, as almost always only efforts that gross at least a few hundred million bucks have production costs exceeding nine figures.
The state taking a cut only when a huge fatted calf wanders by would not ensure a warmer reception by producers. Nungesser perhaps did not know how accurately he summed up the industry by comparing it to wildcatting: studios often make money-losers but continue in operation by living off the few mega-hits, so anything eating into those big winners would discourage their coming to Louisiana to take advantage of the credits.
Still, this plan presents an alternative to the only rational course of action if policy-makers want to bring more benefits than costs to the state on this issue – winding down the credits, perhaps retaining them only for small, indigenous projects. If policy-makers blinded by the bright lights of Hollywood and/or cowed by the relatively small group of people who have benefitted enormously from the present program rules want to retain the program at this level in a way that actually helps the state, then they should pursue this course of action.