Michigan Film-Tax Credits Show Divide Over Aid to Hollywood

(Bloomberg) — Michigan’s cash credits for filmmakers have lured George Clooney, Ben Affleck and Drew Barrymore to make movies and splash headlines in a state known for making cars.

The Republican-led Michigan House of Representatives voted this month to end the incentives, marking the first time either legislative chamber voted to kill a program that’s been challenged annually. When enacted in 2008, the uncapped rebates were the most generous among all 50 U.S. states.

“It’s a horrible investment for the taxpayers of Michigan,” said Representative Jeff Farrington, a Republican from suburban Detroit. “It’s a fallacy that it’s bringing permanent jobs. If you gave that same money to tool-and-die companies where I live, I bet you they’d have a lot more jobs.”

Michigan is joined by other states, including Massachusetts and Maryland, that are debating whether the costs of providing tax rebates to Hollywood studios outweigh the benefits of job creation. All but 13 states provide such incentives, according to Film Production Capital, a New Orleans-based firm that brokers film tax credits.

Massachusetts Governor Charlie Baker, a Republican who took office in January facing a $1.8 billion deficit, wants to eliminate the state’s nine-year-old movie incentive plan to pay for low-income tax credits. A 2014 report by the state revenue department said the program, which rebates 25 percent of production expenses, cost Massachusetts a net $356.7 million from 2006 through 2012. Of 5,532 jobs created, half went to nonresidents, the report found.

‘Poster Child’

“The poster child for a program that doesn’t work is one that costs nearly $120,000 for every job you create,” said Paul McMorrow, director of policy and communications at the agency that oversees the Massachusetts Film Office. “We’re shipping money out of state every year.”

Maryland Governor Larry Hogan, a Republican, proposes trimming money available for film rebates to $6.8 million from $7.5 million next fiscal year. According to the Department of Legislative Services, the credit failed to create self-sustaining economic growth, even after the state allocated $62.5 million in credits and grants since 2012.

Lawmakers last year wrangled over whether to increase Maryland’s credits for Netflix Inc.’s television political drama “House of Cards,” a debate that brought actor Kevin Spacey to lobby legislators at a wine bar in Annapolis, where portions of the Emmy-winning series were shot.

California, New York

Two of the biggest movie-making states, California and New York, remain staunch proponents of incentives. California is tripling to $330 million its annual funding for tax breaks, hoping to reverse the flight of production crews to other states and abroad. And last year New York Governor Andrew Cuomo, a Democrat, championed and signed into law an extension of the state’s 30 percent credit through 2019, at a cost of $2.1 billion.

Since Cuomo took office in 2011, 578 projects have applied to be part of the program, according to the Empire State Development Corp., which oversees the program. When completed, they’re expected to have generated a combined $7.8 billion in spending on everything from crew salaries to catering, the agency said in September.

“Policy makers worldwide see this as a way to create jobs and economic investment,” said Vans Stevenson, senior vice president of state government affairs for the Motion Picture Association of America, Hollywood’s lobbying arm.

In Michigan, the plan to eliminate credits faces roadblocks. Senate Majority Leader Arlan Meekhof, a Republican, said the program should be given more time so lawmakers can determine its economic value. Republican Governor Rick Snyder also supports incentives, albeit with a $50 million annual cap.

Courting Hollywood

The state began courting Hollywood with cash in 2008 as its bedrock auto industry bore the brunt of the growing recession. Under Democratic Governor Jennifer Granholm, Michigan offered refundable tax credits of as much as 42 percent of the cost of film, TV and digital-media production.

Movie crews descended on the revenue-starved state, led by Clint Eastwood’s production of “Gran Torino,” a box-office success shot in Detroit. From 2008 to 2012, the state approved $392 million in incentives for film companies that spent more than $1 billion, according to the Michigan Film Office.

Data on the economic benefits of credits in Michigan are mixed. A 2010 report by the Senate Fiscal Agency warned that they would cost the state more than it would ever recoup in tax revenue generated by a nascent film industry. For each job created by the credit, taxpayers spent from $44,560 to $193,300, depending whether direct and indirect jobs were counted.

A 2011 study by Ernst & Young reported that each dollar spent directly on filmmaking in Michigan generated $2.60 in spending throughout the state. Film productions employed 5,600 Michigan residents in 2010, the report said.

Boosting Cap

In 2011, Michigan changed the incentives from refundable tax credits to a cash rebates capped at $25 million a year. The change cast a chill, as producers chased bigger incentives in other states. In response, lawmakers and Snyder raised the cap to $50 million in 2013.

“The cap makes Hollywood very nervous,” said Janet Lockwood, who led Michigan’s film office when the incentives were enacted. “A cap of $25 million is not a lot of money when you talk about big movies.”

A new, 535,000-square-foot movie studio in Pontiac, a Detroit suburb, defaulted on a $630,000 bond payment in 2012, forcing the state pension fund to pick up the debt. After the default, the studio was unable for months to land new productions after its one big catch, the Disney prequel “Oz: The Great and Powerful.” That production, starring James Franco, received $39.8 million in credits.

The studio rebounded last year, hosting “Batman v Superman: Dawn of Justice” starring Affleck, which qualified for as much as $37.4 million in rebates.

Not Favored

The heady rush to become Hollywood of the Midwest led to a state takeover of Allen Park, a Detroit suburb that sold bonds to finance a promised new movie studio that never materialized, leaving the city holding a $31 million bag of debt.

Tinkering and annual threats to abolish the incentives repels independent producers, said John Bails, executive vice president of Film Production Capital. The company has dropped Michigan from its list of most-favored states for incentives.

Under its current plan, Michigan offers a 25 percent rebate on direct production costs, plus 10 percent rebates on post-production spending. The program is set to expire in seven years, which Senate leader Meekhof said will allow evaluation of its economic impact. Productions must hire Michigan residents.

Growing Skepticism

“Our paramount goal is to continue to attract people and retain the many talented Michigan residents who are working in an expanding industry,” said Jenell Leonard, Michigan film commissioner, in an e-mailed statement.

Her husband, Tom Leonard, was among state House Republicans who voted to abolish the rebates.

There’s growing skepticism about tax incentives to create local movie industries, said Matthew Mitchell, a senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia. He said the incentives abet a mobile, fickle business that will quickly abandon one locale for another that offers a sweeter deal.

That makes unlikely the prospects of creating a permanent, vibrant movie industry where none existed.

“With enough subsidies, you could get oranges to grow in Maine,” Mitchell said.

(A previous version of this story gave an incorrect name for the Mercatus Center.)


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