Archive for the ‘Film Industry’ Category

North Carolina Puts the Brakes on Subsidy Spending but Moves Ahead on Privatization

August 25, 2014

North Carolina State Capitol. Image by Abbylabar (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons

North Carolina State Capitol. Image by Abbylabar (Own work) [CC-BY-SA-3.0 (http://creativecommons.org/licenses/by-sa/3.0)%5D, via Wikimedia Commons

For the past decade, North Carolina has spent heavily on subsidies, abandoning its previous economic stinginess. In an encouraging new reversal, the Tar Heel State is returning to its old ways. In a just completed short session, the state legislature took two important steps to limit giveaways: it ended one of the country’s biggest film tax credit programs and it defeated a proposal by Gov. Pat McCrory and Secretary of Commerce Sharon Decker to create a deal-closing slush fund. The defeat of the fund also meant the rejection of an expansion of several existing subsidy programs and a special deal for a paper mill.

Not everything coming out of the session was positive. Lawmakers moved ahead with an ill-conceived plan to privatize job recruitment functions of the state’s Commerce Department. The plan was approved despite warnings of problems with similar quasi-public agencies across the country and despite revelations by the N.C. Policy Watch that the Partnership’s CEO lacks experience in economic development and led his company into bankruptcy.

It was the second attempt by the Governor and Commerce Secretary to pass this bill. During the previous legislative session, a similar proposal failed when an amendment that would lift the state moratorium on hydraulic fracturing was added to the bill (the North Carolina chapter in our Creating Scandals Instead of Jobs study has more details on that plan).

The elimination of the film tax credit does not mean that movie producers are being denied all assistance. Replacing the tax credit, which last year cost the state $61 million, is a grant program that is limited to $10 million a year and caps the subsidy amount available to a production at $5 million. Michigan, Iowa and most recently Florida decided that subsidizing movie productions is not a wise investment of public money and eliminated their film subsidy programs entirely.

During the last week of the session, the Governor and the Secretary of Commerce also pushed a package of economic development bills. One of the proposals would have created a special $20 million subsidy fund to lure big projects. However, lawmakers on both sides of the political spectrum were uncomfortable with this “walking-around” money. Some Representatives voted against the bill because they were afraid that the lack of oversight would weaken the state’s control over subsidies (North Carolina has been one of the better states in attaching clawbacks to subsidy deals and disclosing information on the deals).

It was not the first time Gov. McCrory and Secretary Decker tried to create a slush fund. A similar proposal failed the previous legislative session, along with the Commerce privatization bill.

The failed economic development package also killed provisions that would have expanded the Job Development Investment Grant (JDIG) program, one of the most widely used subsidy programs in North Carolina funded by workers’ personal income tax withholdings. The lawmakers also rejected $12 million for Evergreen Packaging’s paper mill in Haywood County. The company is required by the Environmental Protection Agency to replace its old coal-fired boilers. The public financial support would pay for almost one-fourth of the replacement costs.

Gov. McCrory might be calling the legislature for a special session on subsidies before the year ends. Hopefully, lawmakers will stick to their decision to limit the state’s subsidy giveaways.  

Rhode Island Considers Defaulting on Bonds for Notorious 38 Studios Deal

May 22, 2014

The aftermath of Rhode Island’s biggest economic development scandal isn’t over yet. In 2010 the state’s privatized economic development agency loaned 38 Studios—a video game company founded by former major league pitcher Curt Schilling—some $75 million in subsidies which the state borrowed to provide. The firm soon failed, apparently leaving taxpayers with an obligation that has risen to $89 million (with interest), including a $12.3 million payment due next year.

Those payments are now in question. Rhode Island’s House Speaker Nicholas Mattiello has scheduled meetings with Moody’s and Standard & Poor’s to discuss the consequences of failing to pay. While these bonds are not backed by the full faith and credit of Rhode Island, a previous consultant to the state made dire warnings about failure to pay, claiming that the move would degrade Rhode Island to junk bond status.

Mattiello became Speaker two months ago after the FBI raided the office of his predecessor Gordon Fox, who had played a significant role in approving the loan to 38 Studios. According to recent news reports, Fox’s lawyer moved to quash a subpoena for documents related to 38 Studios, citing his client’s Fifth Amendment right against self-incrimination. No charges have been filed pursuant to the raid.

Fox also had connections to a Providence lawyer named Michael Corso, who was involved with the 38 Studios deal.  Leaked documents show that Corso was paid $300,000 by 38 Studios to interact with state agencies and officials. Additional revelations show Corso was paid $485 an hour by 38 Studios to evaluate potential incentives for the company. Corso failed to register as a lobbyist on behalf of 38 Studios. This revelation launched an additional investigation this May by State Police into potential lobbying violations.

Corso is also a tax-credit broker. His company, Preservation Credit Fund, had a contract with 38 Studios to allow it to sell tax credits secured by the company. According to Corso’s LinkedIn page, “Preservation Credit Fund works closely with developers and advisors to maximize tax credit benefits, advise on tax credit issues and provide syndication services.” Corso has been dubbed the state’s leading film tax credit broker and has even claimed to be the primary draftsperson of Rhode Island’s Historic Preservation Tax Credit.

In another strange development, the state recently hired First Southwest, a financial adviser it is simultaneously suing for “fraud, negligence, and legal malpractice” in connection with the 38 Studios loan. According to the state’s lawsuit and reported by the Providence Journal, First Southwest was paid $120,000 to pitch the 38 Studios’ loan subsidy to the privatized economic development agency’s board of directors and bond rating agencies.  The lawsuit accuses First Southwest of withholding vital information about the deal, primarily that the company was under-capitalized, thus making the loan appear less risky than it was. The company denies these allegations. New emails made public this week reveal internal discussions amongst 38 Studios executives about downplaying the under-capitalization issue.

It is a little-known fact that states and cities sometimes cover debt obligations for failed or troubled economic development transactions (including tax increment financing districts), even though they are not technically obligated to do so. But the fear of paying usurious interest rates on future deals causes them to reluctantly pay. Good Jobs First has observed that in the Great Recession, some development agencies apparently became very lax in their deal-vetting standards, as politicians were desperate to appear aggressive on jobs.  For performance-based subsidies, at least taxpayers won’t suffer from such deals; but when public debt is floated on insufficient collateral, as in the Studio 38 deal, taxpayers stand to suffer no matter what Rhode Island officials decide to do.

It’s a Teachable Moment about celebrity entrepreneurs, tax-credit consultants, and anxious politicians.

Bay State Joins Transparency Bandwagon

August 4, 2010

MassPIRG, Common Cause Massachusetts, and One Massachusetts recently scored a major victory for spending transparency.  Two major reforms were enacted with the passage of the state’s FY2011 Budget.  The first is the creation of a checkbook-style “Google government” transparency site for the state that will allow citizens to view and monitor state spending by public and quasi-public entities.  The addition of this transparency site to Massachusetts’ contract disclosure site and its Recovery Act transparency site creates a strong foundation for enhancing spending accountability.

The second reform enacted with the state budget is the requirement that the new transparency site disclose the names of recipients of certain types of business tax credit subsidies.   Refundable tax credits (credits for which any amount exceeding the recipient’s tax liability is issued as a cash grant) and salable and transferable tax credits (credits that may be sold or transferred to other business entities when their value exceeds the original recipient’s tax liability) will be more transparent under this new law.

Among the business subsidy programs that will now be publicy disclosed in Massachusetts are brownfields tax credits, film tax credits, refundable research credits, and the controversial Economic Development Incentive Program tax credit.  The names of recipients of these credits, the value of the credits, and the date that the credits are issued must now be disclosed on the new spending transparency site.

With this reform, Massachusetts joins Missouri, New Jersey, Pennsylvania, and a host of other states already benefiting from the increased accountability company-specific disclosure brings to state economic development spending.  We look forward to more transparency and accountability reforms as Recovery Act transparency practices continue to influence state spending.

Congratulations to MassPIRG and its allies on their great victory for transparency.   Good Jobs First is currently in the process of updating its 50-state evaluation of state economic development subsidy disclosure practices.  We look forward to sharing our findings this fall.  In the meantime, see Naming Tax Credit Names for a list of states that disclose the value and recipients of corporate income tax credit job subsidies.

Naming Tax Credit Names

June 15, 2010

Corporate lobbyists have long blown a fog of fear, disinformation and confusion about public disclosure of corporate income tax credits.

It’s time to clear the air.

First, a definition: corporate income tax credits are dollar-for-dollar reductions in the amount of income tax a company pays to a state (or federal) government. A company can earn such credits by performing activities deemed to constitute economic development, such as making capital investments in new capacity, performing research and development, hiring new employees, and/or producing movies or commercials.

These credits are very costly; among economic development tax breaks, they are likely the fastest-growing revenue drain on state budgets over the past decade. For example, one state gives a credit of 5 percent per year for 20 years for new capital investment. That is, if a company has enough taxable income, over time, the state will pay the entire cost of a new facility in foregone corporate income taxes.

Corporate lobbyists would have us believe that letting taxpayers see which company is getting these credits, and the dollar value of the credits, would somehow violate confidentiality or poison the “business climate.”

Nothing could be further from the truth. (Of course, we also need disclosure of outcomes: were the jobs created? How well do they pay? Do they have health care?)

I offer two kinds of evidence: 1) almost every other costly economic development subsidy has been disclosed for decades; and 2) many states have been disclosing corporate income tax credits for years, and there is no evidence they suffered any “business climate” harm.

First, regarding other costly subsidies: If a company gets a property tax abatement or reduction, there’s a public record at the county tax assessor’s office. If a company gets an Industrial Revenue Bond, that’s an open record at the county development authority. If a company gets a training grant, that is visible at the Workforce Investment Board. If a company benefits from being in a Tax Increment Financing (TIF) district, copious records enter the public domain. If a company gets a discretionary or competitive grant, those files are usually very public.

So what’s the big deal about income tax credits? Remember: this is not about disclosing tax returns; this is about disclosing tax breaks.

Second, regarding states that have been disclosing corporate income tax credits (naming the company, specifying the dollar value of the credit), just take a look at this quick sampling our staff threw together in an afternoon:

Connecticut – see pages 406-407 re: urban/industrial and job creation tax credits

Florida – Qualified Target Industry Refund

Illinois – numerous tax credits and exemptions, including EDGE

Maryland – film, biotech, job creation, and research and development credits

Missouri – 20 different economic development programs, including film credits

Montana – Low Income Housing Tax Credit Program

New Jersey’s BRRAG Program

North Carolina – William S. Lee tax credits

Pennsylvania — more than 200 programs, including film and enterprise zone credits

Wisconsin — 107 programs, including film investment, film services, and dairy credits

Other states, such as Maine (since 1999) have been collecting and disclosing tax credit data, but they just haven’t put them online yet (the 21st century progresses slowly…)

The list will soon get longer. Subsidy disclosure bills are getting introduced more frequently in state legislatures, and they often call for making public the names of corporate tax-credit recipients. This year, Massachusetts enacted a law that will do so, and several other states took a step in this direction by mandating the publication of tax-expenditure budgets that show the total cost of tax credit programs.

Bottom line: the amount of company-specific tax credit data online is exploding. Anyone who claims it will violate confidentiality or hurt the business climate, well, that’s just so 20th century!

Heads up to state commerce secretaries: in the same way we have twice graded the states’ Recovery Act websites, we are coming back at you to rate how well you disclose on major subsidy programs, revisiting our State of State Disclosure report of 2007.

No calls, please; that’s all the hints you get.

More States Yell “Cut” on Film Tax Credits

October 6, 2009

show businessA decade ago, the main challenge to California’s dominance in the movie industry came from north of the border. Toronto and Vancouver lured film shoots with the cheap Canadian dollar and government subsidies.

Eventually, changes in currency rates diminished Canada’s allure, but Hollywood then found itself contending with a domestic threat: More and more states were modifying their tax codes to provide incentives for film companies.

Economic development officials across the country took as their motto: “There’s no business like show business.”

Now, however, with states suffering runaway costs, mediocre benefits and recurring abuses, the great film tax-incentive gold rush is losing steam. Various states are eliminating, cutting back or at least debating their film subsidies. In one state, Iowa, evidence of mismanagement in the tax credit program has created a political uproar and prompted a criminal investigation.

The first wave of film subsidies were sales-tax exemptions on the goods and services purchased by film crews while on location. But then states, led by Louisiana, began to sweeten the pot by rebating a share of in-state costs via corporate income tax credits.  States such as New Mexico even began making interest-free loans to film production companies.

As more than 40 states jumped on the film incentive bandwagon, there was growing competition for the limited number of projects taking place.  States began boosting the portion of costs they would rebate or convert into tax credits, with Michigan jacking its level up to 40 percent (or 42 percent in some cases) and Iowa later topping that with 50 percent.

Since film companies typically don’t owe any one state much income tax, states increasingly allowed producers to sell the credits to in-state businesses or wealthy individuals. Last year, Louisiana ended up paying out more than $27 million for the Brad Pitt movie “The Curious Case of Benjamin Button.”

While tax and budget watchdog groups often criticized the subsidies from the start, only recently have film incentives begun to lose their star appeal.  Here is a rundown of the main controversies:

IOWA. The state adopted film incentives in 2007 and expanded them earlier this year, allowing movie companies to recoup up to 50 percent of their costs. The projected annual cost of the program jumped to $300 million, which would make it the state’s largest economic development expense. Last month, amid reports of irregularities and poor record-keeping in the program, the state’s economic development director resigned, the head of the state film office was fired, and the tax-credit program was suspended. Now a criminal probe has been launched, and some legislators are warning that the whole program may be scrapped.

MICHIGAN. As the state grapples with the country’s highest unemployment rate, there is growing debate on the wisdom of its generous film subsidy program. Earlier this year, a state budget analyst told the state Senate Finance Committee that the incentives would never pay for themselves. Recently, Gov. Jennifer Granholm proposed scaling back the credit to help fill the state’s budget gap.

WISCONSIN. Earlier this year, Gov. Jim Doyle proposed eliminating the 25 percent refundable tax credit and replacing it with a program to encourage the creation of permanent film-industry jobs in the state. Subsequently, the state Department of Commerce issued a report arguing that the credits provided little net economic benefit for the state. The legislature capped the program at $3 million a year, and then Gov. Doyle used his veto power to lower the annual ceiling to $500,000.

CONNECTICUT. In June, the fiscal watchdog group Connecticut Voices for Children released a report showing that the state’s film tax credits have largely been subsidizing out-of-state personnel and businesses. The report thus found that the state’s costs far exceeded its economic benefits.  Subsequently, the legislature debated several methods of restricting the credit. In her latest budget proposal, Gov. M. Jodi Rell called for capping the credits at $25 million a year.

MASSACHUSETTS. In July the state Department of Revenue released a report finding that only 16 percent of the wages paid by subsidized film productions went to Massachusetts residents. It also found that of the $166 million in credits approved since 2006, $149 million were sold to third parties, “primarily insurance companies, financial institutions, and corporations.”

LOUISIANA. Unlike Iowa, where the uproar over irregularities came to light after legislators expanded the incentive program, lawmakers in Louisiana boosted the film tax credit (and made it permanent) this year despite earlier revelations that the state’s film commissioner had accepted bribes from a film producer in exchange for inflated tax credits. The official, Mark Smith, was sentenced to a two-year prison sentence in July. Now it turns out that members of the New Orleans Saints football team were victims of another film tax credit scam. So far, the scandals have not prompted calls for ending the tax credits, but they have seriously tainted the program.

Despite this parade of bad reviews, some states still have stars in their eyes. Alabama, New York, North Carolina, Ohio and Utah are among the states that have adopted or expanded film tax credits in the past 18 months. Even California finally joined the club. Yet the worsening fiscal crunch and the growing body of evidence that the incentives don’t pay off will likely cause more states to consider halting the tax credit gravy train.


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