Lawmakers to propose changes to film tax credit program; industry leaders say they’re ready to talk smart edits

By Chelsea Brasted, | The Times-Picayune

Days ahead of Gov. Bobby Jindal revealing his proposed 2015-16 budget for a cash-strapped state, two Louisiana lawmakers are preparing bills that would make changes to the controversial motion picture tax credits.

Though numerous politicians and government watchdogs have singled out the credits as a sign of corporate welfare gone too far, and despite the fact changes to the program are a near certainty, industry leaders say they welcome a conversation on the tax credits program. Their approach, they suggest, will be one of peace, not war, with the goal of finding a compromise to keep movie studios, local film makers and taxpayers happy.

State Sen. JP Morrell, D-New Orleans, and State Rep. Julie Stokes, R-Kenner, are planning to work through the weekend, creating rough drafts of bills they plan to introduce this legislative session. The goal, Morrell said, is “comprehensive reform” of the tax credits.

As it works now, a project becomes eligible for motion picture tax credits when its budget exceeds $300,000 worth of expenditures in Louisiana. Once finished, the film receives a 30 percent tax credit for the purchase of eligible, in-state goods and services and a 35 percent credit on local labor. The credits are then refundable by the state at 85 percent or transferable.

The problem, according to Morrell, is that it’s difficult in any given year to foresee what the program will cost the state. For example, if James Cameron were to bring the next “Avatar”-esque movie to the state, that single project could cost the state more than $100 million in tax credit, which is more than one-third of what the state paid out last year.

“If one film like that came through and governors were not in place to make sure the program was in control, it could balloon completely out of control,” Morrell said. “The hope is that … only the best, most viable, highest return films are filmed here. The ROI for the program as a whole improves.”

Morrell said the bills he and Stokes are working on, which they will present to the Entertainment Industry Development Advisory Commission on March 4, generally fall into three themes:

1) Tax credit transferability: Editing how film tax credits are transferred from one party to another. As it stands now, a small industry is built around the brokers who handle the transfer of these credits. Because the state will buy them back at 85 percent, brokers often sell a movie studio’s credits at a higher rate to a business or individual looking to lower their own tax liability. Morrell noted that this aspect of the program has led to the majority of fraud issues related to it.

2) Withholding: Forcing a high-dollar actor into paying mandatory state withholding tax is also on the table for discussion. Theoretically, this would at least put money into state coffers where Louisiana can gain interest on it for several months before it might have to pay it back during tax season. As Patrick Mulhearn, the executive director of Celtic Movie Studios in Baton Rouge, explained, “You can’t assume that everybody from out of state is paying their fair share and in a timely fashion,” noting the “time and value of money.”

3) A cap on tax credits: This could potentially take one of two forms: either an overall cap on the value of credits the state awards or an eligibility requirement mandating a soft cap on above-the-line expenditures. That soft cap would require that, in order to be eligible for Louisiana’s film tax credits, the film’s budget for above-the-line costs (meaning high-dollar actors, directors, screenwriters and producers) can’t be more than 50 percent of the project’s total budget. Mulhearn called the idea for this type of soft cap — a technique that other states haven’t yet tried — a “smarter way” to ensure more money is spent in Louisiana.

“In order for the safety and future of a film tax credit program, there has to be substantial change,” Morrell said, noting that there are about “five to 10” more bills he and Stokes are working on, but the details are not set enough to discuss. “There has to be a movement by the industry, stakeholders and legislators to make the program more sustainable.”

In general, film industry leaders seem to agree with a need for change to make the continuation of the program more palatable for tax payers, especially now as the state faces a $1.6 billion shortfall in the next fiscal year.

“I don’t think anybody wants to get rid of the tax credits,” said Sherri McConnell, a New Orleans-based entertainment business consultant who formerly served as the head of Louisiana Economic Development’s Office of Entertainment Industry Development. “The question is, how do we make them better? … Hopefully, we’ll come out (of session) with a smarter piece of legislation that’s more fiscally responsible for all people in the state.”

Although the tax credit program has come under fire before for its expense to the state, Liza Kelso, the executive director of the Baton Rouge Film Commission, noted that any changes this session won’t likely help next year’s budget.

“You won’t see immediate savings to the budget crisis, and that’s something I think most legislators understand,” Kelso said, noting that film projects in 2015 have already begun shooting. “Even if you cut it today, it’s not going to solve the crisis.”

Mulhearn also underscored the program’s size in comparison to the state’s tax exemptions as a whole.

“I would argue we’re not a problem, we’re a solution. … We’re so dependent on oil and gas in this state to make the budget each year, and when we have a fluctuation, it’s really painful,” he said. “The reason we really have the (entertainment industry tax credits) is because we need to diversify the state’s economy.”

More details about possible changes to the program will emerge as March 13 — the final date bills can be pre-filed for the legislative session — nears, and stakeholders are hoping to see the conversation stay on the track of tidying the program for its longterm health.

“We are all very aware of the situation at hand and want to be a teammate on that,” Kelso said. “That said, our industry is very competitive, and we are just beginning to scratch the surface of setting up solid infrastructure in Louisiana.”

Note: The anecdote about a hypothetical “Avatar”-like film used as an example by State Sen. JP Morrell has been edited to reflect more accurate budget numbers. Morrell stated the project would cost the state about $300 million, but that number actually represents the entire budget for that particular James Cameron movie.

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