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Cut! States Are Walking Back Film Tax Credits

Many states are rethinking once-popular production incentives -- a contrast from California, which is offering more to protect one of its biggest industries.

A decade ago, states were falling over themselves to woo filmmakers the world over with tax credits. There was a lot of appeal in the idea. Who wouldn't want the likes of Matthew McConaughey or Rachel McAdams strolling down Main Street and shopping at local stores while on a break from filming? As it turned out, very few. Just four states had film tax credits in 2002, but 10 years later there were more than 40.

States, however, have started to sour on the idea. When I wrote about tax credits for the filmmaking industry in 2011, there were already signs of buyer remorse. A few states were considering caps to the generosity of their incentives. Since then, the number of states with a film tax credit is down to 37 and falling. At least seven states -- Arizona, Idaho, Indiana, Iowa, Kansas, Missouri and Wisconsin -- have ended their incentive programs. If states aren't eliminating the film tax credit outright, then they're shrinking the size of the subsidy. Connecticut, for instance, suspended its incentives for film production, but maintains tax credits for other types of media. North Carolina, beginning Jan. 1, will replace its 25 percent refundable tax credit with a competitive grant program. Funding for the program will be cut from $60 million a year to $10 million.

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Other ways states are backing away from the practice is by requiring an audit or some other form of verification from production companies before they can receive a credit or by fine-tuning the credit to enhance its focus on job creation. Last January, Nevada made a tax credit available for productions that shoot at least 60 percent of the film and spend a minimum of $500,000 in the state. More than half of states with incentive programs now require a production to spend a minimum amount on goods and services in the state.

This change of heart is in part linked to a recent skid in the growth of the $120 billion motion picture industry. According to a report from California's Legislative Analyst's Office, while the industry kept pace with the nation's economy between 1997 and 2004, there has been a leveling off. Between 2004 and 2012, gross output declined by an average of 0.2 percent annually. All totaled over the 15-year period between 1997 to 2012, the motion picture industry grew at an average annual rate of 1.5 percent, while the overall economy outpaced it at an average annual rate of 2.3 percent.

Another reason for cutting back on the largesse of the credits is, of course, a growing suspicion that states aren't getting their money's worth. The Motion Picture Association of America (MPAA), the main lobbying arm for the movie industry, consistently shows a return on investment for states. A recent study of the New York State Film Production Tax Credit found that for every $1.00 of credit distributed, the state and city received a combined $2.23 in taxes. Similarly, a Florida report found that $118.7 million in tax credits yielded $140.44 million in 2011-2012, for a return of $1.18 to the dollar.

By contrast, Louisiana's state auditor reported that the state's $196.8 million in tax credits yielded only $27 million in additional taxes (about $0.14 for every dollar spent). The Massachusetts Department of Revenue found its return to be only marginally higher at $0.16 per dollar spent.

While many states are thinking of trimming their film tax credits, California is actually moving in the opposite direction. The state is tripling its program, going from $100 million worth of credits to $330 million. That may seem surprising in light of other cutbacks, but California is really just protecting its home turf. The industry there has been suffering losses, particularly when it comes to employment. The Legislative Analyst's Office found that where California still lays claim to just over half of the country's film and television production jobs, that share has been dwindling. In 2004, when only four states offered film tax credits, California's job share was 65 percent.The California Film Commission puts that loss in dollar terms: From 2010 to 2014, so-called "runaway projects" -- those productions filmed outside California -- accounted for almost $2 billion in production spending. The commission concluded that the vast majority of those projects opted to shoot in states and countries where tax credits were available.

Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.
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