Monday 25 August 2014

A Race to the Bottom? Inter-State Competition and Tax Incentives in the Entertainment Industry

The competition between states in the U.S. for companies and jobs is very intense (and between countries).  In California, it is hard not to hear about how Texas and its governor Rick Perry are offering a great deal for companies to move from California to Texas.  And, he and Texas have been somewhat successful in getting companies to relocate although some argue that the success with respect to poaching jobs is a bit overblown.  One of the carrots that Texas uses to attract California companies is tax incentives.  California also uses tax incentives to keep companies (and work) in California (the incentives are offered by the state as well as local government such as cities). 

In the entertainment industry, particularly film and television, in California, it is not Texas that is the main competitor in the U.S.—it is New York.  According to a recent Milken Institute report titled, “A Hollywood Exit: What California Must Do to Remain Competitive in Entertainment—and Keep Jobs,” and authored by Kevin Klowden, Pricilla Hamilton, and Kristen Keough, California lost around 16,000 jobs between 2004 and 2012 in the film and television industry while New York gained around 10,000 jobs.  These are relatively high paying, middle class jobs.  The authors note how California and New York both have “high wages, regulation and high cost of doing business,” but California is losing jobs and New York is gaining them.  The authors point to the tax incentive systems of both states to shed light on the reasons for the difference. 

In describing the California tax credit system concerning films and television, the authors state:

The Credit Lottery: Unlike most states, which operate based on individual applications, California requires productions that wish to qualify for tax credits to apply at the beginning of June for a drawing at the end of the month. These incentives are in high demand: In 2012, 27 projects out of 322 applicants received credits through the lottery. In 2013, the state received 380 applications. Because the demand for credits far outstrips supply, the lottery serves to maintain fairness by not favoring any particular kind of production over another. Pinched for revenues and lacking the necessary staff, the state does not assess candidates for incentives based on potential economic benefits.

The main drawback of a lottery is its lack of predictability. Production companies will often submit multiple films in the drawing in the hope that one will wind up a winner while also making backup plans to shoot in another state. . . . Further, when films and television shows are locked into a set schedule, they often cannot wait for the results of the lottery, choosing instead to relocate.

The authors describe the New York tax incentives program:

New York offers a generous incentive that has attracted productions. With an annual cap of $420 million, the Empire State offers productions shot within New York City a 30 percent refundable tax credit and those shot outside the city a 35 percent refundable tax credit. . . . One of the biggest policy advantages in New York is its postproduction credit, which now matches the state’s production credit. In 2012, Governor Andrew Cuomo signed legislation that raised the postproduction credit from 10 percent to 30 percent in the New York City area and the surrounding commuter region (see appendix for details).  Additionally, the tax credit was raised to 35 percent for postproduction work completed in upstate New York.  

The governor went a step further in 2013 by extending the postproduction credit until 2019, lowering the threshold for visual effects and animation from 75 percent to 20 percent of the total special effects budget, or $3 million (lesser of two). This means that large films or animations can do a portion of postproduction visual effects in New York even if the state does not have the current capacity to do the full project.  New York is also allowing productions shot outside the state to qualify for the postproduction credit. In January of this year, the governor announced a $4.5 million grant to Daemen College and Empire Visual Effects to create 150 new postproduction and visual effects jobs in Buffalo, hoping to grow the state’s overall postproduction capacity.

To compete with New York, the authors make several recommendations.  Here are some of them.  The authors address uncertainty in the current California system by “Rais[ing] the total amount of available annual funds in the state’s filmed production credit to a level that allows for the elimination of the annual lottery. . ..”  The authors recommend “dedicat[ion of] a portion of the fund to hour long dramatic television.”  The authors propose including movies with budgets over $75 million to be “eligible for filmed production incentives.”  The authors also state that, “Digital visual effects and animation expenditures should be made explicitly eligible for filmed production incentives at the 20 percent rate.”

Assembly Bill 1839 has been passed by the Assembly and is before the California Senate.  If it is passed by the Senate, Governor Brown must still sign the bill--which he may choose not to do.  The bill adopts several of the recommendations of the Milken Institute in some form such as including movies with budgets over $75 million as eligible for incentives.  Notably, the bill quadruples “production tax incentives” (from $100 million to $400 million).  The bill and analysis can be found, here.  Now, what will other countries do to react to this bill if passed? 

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