JUMP CUT
A REVIEW OF CONTEMPORARY MEDIA

copyright 2010, Jump Cut: A Review of Contemporary Media
Jump Cut, No. 52, summer 2010

Hollywood handouts: tax credits in the age of economic crisis

By Vicki Mayer and Tanya Goldman

In 1985, Thomas Guback called film tax credits “welfare for the wealthy.”[1] [open endnotes in new window] Twenty-five years later, one wonders how Hollywood is fairing in the age of financial meltdowns and bailouts.  From all accounts, we could say pretty well.  There are systemic cracks that threaten to bring Main Street down on Studio City, but, unlike the TARP, film tax credits have operated to shield their function as a form of welfare for one of the most-profitable industries in the United States.

Here, we take a look at the historical reasons how film tax credits, which provide incentives to audio-visual companies to produce film and video outside of California, have managed to escape the ire of authorities and citizens alike in recent years.  We take Louisiana as our example as the state’s aggressive fiscal policy has helped it become one of the most popular domestic film production hubs in the United States.  Louisiana’s noted success has inspired many other states to model their own policies on these policies. Through a shell game of trading away taxes while promoting a production labor economy, the state of Louisiana quickly rose to become one of the most popular sites for domestic film production in the U.S., after longstanding industry centers California and New York.  It remains, though, one of the poorest states in the union, even as it becomes Hollywood’s premiere remote back-lot.  If Louisiana is any indicator, then the system of tax credits is like every other bloated financial system in the U.S., moving capital between elites while workers live with exaggerated job insecurity, declining market value, and uncertain futures that make up the rest of the workforce.

Hollywood and Louisiana’s love affair

Filmmaking has a long history in Louisiana, in part because the state in general, and New Orleans in particular, has long been part of the filmic imagination.  From the story of the naïf caught in service to a bordello (The Red Kimono, 1925), to the rebellious New Orleans belle in Jezebel (1938) to the psychedelic setting of the Carnival for an Easy Rider (1969) acid trip, Louisiana, its creolized cultures and exotic settings have been frequent characters in Hollywood films.  The earliest films made it clear that the state was a realistic set for soul-robbing (Mephisto and the Maiden, 1909), jungle adventure (Tarzan of the Apes, 1918), and the romantic, Old South (My Old Kentucky Home, 1922).  These films attracted directors, actors, and other early film professionals to the state, some of whom would come to reside there for extended stays, and have encouraged state officials to look for policies that would institutionalize this relationship.  Of these, the 2002 Louisiana Motion Picture Incentive Act was a turning point in that it turned intangibles, ideas for film projects, into tangible and tradable assets through a tax credit market.

Film producers have taken advantage of sections of the state’s general tax code to claim refunds for film productions since the 1950s.  Yet the first explicitly codified incentive package for film production datesd to the 1990s, when officials looked to Canadian runaway production as both an inspiration and a potential threat in luring Hollywood productions away from the U.S.. These incentives allowed for producers to deduct their tax liabilities and create a governmental apparatus to pander to needs of producers (i.e. helping with permits and scouting locations).  These measures failed to attract large projects and legislators allowed them to lapse in 2000, citing minimal economic impact.  However, the faith in the potential of film production did not disappear.  In late 2001, legislators created a special advisory committee in the state’s economic development department to advise on how to expand the domestic film industry.  Called the Louisiana Film and Video Commission, the committee advocated for the provisions that became codified in the 2002 Louisiana Motion Picture Incentive Act, as well as a host of marketing and PR programs to attract investment. 

Under the new economic model, the state would front the costs of production through tax credits that could be later traded as cash.  Hollywood majors typically receive the financing by first forming a partnership with a state-based, limited liability corporation (LLC) to demonstrate their local roots and submit a preliminary budget to a state office.  Producers promising to spend at least $300,000 today can receive up to 30 percent of their total investment and 5 percent of their labor payroll costs back in the form of tax credits.[2] Relatedly, investors associated with state-certified programs to build and develop a production infrastructure can receive a 40% tax break.  These credits can then become cash when producers sell the credits via a complex brokering system for a percentage of their value.  For example, a producer might sell $1,000 worth of tax credits for $800 cash to a wealthy Louisiana resident or company looking to reduce their tax burden.  Although the state stipulates these credits cannot be used until the production wraps, in fact the producer gets an immediate injection of cash before the first take.  Tax credits can also be used to leverage further loan financing.  The broker and local LLC take a cut, and the tax-credit buyer essentially gets a break to use that year, save for a rainy day, or resell to another buyer.  The state also offers to buy back unused credits at 72% of their face value, ensuring that the producer faces low investment risks.  The variable rate of tax credit sales has created a kind of futures market for the asset, giving the credit a tangible value quite separate from the creative idea that spurred its existence. 

In addition to the tax credit schema, the Hollywood majors receive further benefits throughout the production life cycle of their projects.  The Louisiana Film and Video Commission shepherds film projects from start to finish, from scouting locations and providing stock footage, to providing financing for film premieres and galas.  These in-kind services give credit recipients free laborers, goods, and publicity.  The first major film to take advantage of these perks was  Runaway Jury (2003) whose producers shot the $60 million feature entirely in Louisiana.  Another early project to benefit from Louisiana’s perks was the Oscar-winning Ray (2004), which through a since-fixed loophole was able to receive a tax break for its entire $45 million budget even though only a small amount of footage was actually shot in-state.  Subsequent legislation in 2005 tweaked such loopholes and extended tax credit programs to include music, theater, digital and recording industries, as well as personnel and infrastructure projects related to audio-visual production.  By the end of 2006, state officials estimated the Act had attracted $750 million in production expenditures, a 6000% increase over 2002’s pre-tax credit expenditures.[3] In these processes, the state has worked to rebrand itself as “Hollywood South” to suggest an economic infrastructure friendly to a host of industries related to the majors.  Beyond the speculation of economic windfalls, then-Governor Mike Foster touted the value of the new incentive strategy “culturally… to put ourselves on the map for big movie productions.”[4] What this meant was that Louisiana could pride itself on the ways it represented the Hollywood majors’ interests and, conversely, the ways Hollywood represented Louisiana through major productions.  State officials have attempted to integrate Louisiana into the global entertainment economy, which in the words of Aida Hozic, “depends precisely on the ability of places to successfully suppress their uniqueness and painlessly transfer themselves into whoever, whatever, whenever, sites.”[5]  A 2008 advertisement of the New Orleans Office of Film and Video encapsulates this dream, propagandizing the city’s malleability into “New York?  Miami?  Chicago?” Complete with images of glass skyscrapers, palm trees, and Deco-style buildings, the poster states that New Orleans can be all three with “Locations.  Resources.  Incentives.”  (See Image 5.)

The inferred mutuality between economics and culture, however, has not always encompassed similar visions.  That is, while Louisiana officials continue to promote the state as “Anywhere U.S.A.”, (Image 6) major studios more often choose Louisiana to represent the exotic in American culture. Recent films shot thanks to tax credits included Skeleton Key (2005), All the King’s Men (2006), Déjà Vu (2006), and The Curious Case of Benjamin Button (2008); all films that emphasize the exotic differences of Louisiana in relation to the rest of the country.  As H. Wayne Schuth postulated long ago, the region has long been a bit character in its own filmic representation, frequently playing the role of the binary opposite of the producers’ conception of American values.[6] As such, the Louisiana of these indigenous efforts reproduces the corrupt, mystical, and wondrous images evidence since the Silent Era. 

Louisiana and Hollywood may possess a long relationship based on film production but its intimacy has been mainly sustained through a political economy of incentives, rather than some collaborative conception of aesthetics or cultural content. 

Work-for-hire and the race to the bottom

Lt. Governor Mitch Landrieu summed up the rhetoric behind Louisiana’s film incentive legislation as, “It’s about jobs.  Period.  End of story.”[7] The connections between film production and its supposed benefits to the local labor economy are rife in the popular press and the tax credit legislation itself.  The most-recent 2005 statute claims credits will increase employment opportunities and “encourage a new education curricula in order to provide a labor force trained in all aspects of film and digital production.”[8] These objectives have been accompanied by even loftier promises in the press to create thousands of jobs, generate millions in local revenue, and even revitalize an impoverished, New Orleans neighborhood.[9] Advocates promise that local employment numbers, both those directly tied to film production and those generated through the service industries that production companies rely on, would rise in relation to the millions invested by the studios on their own production balance sheets.

Unfortunately, this has not been the case.  To illustrate, one might take a look at the $5.1 million that a documentary company, formed by an executive of the Los-Angeles based DNA Creative Media, posted in 2008 as in-state expenditures on a seven-part series about the rebuilding of a park after Hurricane Katrina.  Such a project may have generated jobs for film crews, post-production workers, and local personnel -- except that the documentary still has not been shot.  In fact, the park project is currently fallow, embroiled in a lawsuit.  The only ones who have profited in the project seem to be the company itself, which received $1.27 million in state tax credits in 2007, and the tax credit brokers, which sold the credits for nearly $427,000.[10] This deal emphasizes how tax credits operate as welfare for the wealthy, putting money into the pockets of film producers and financial brokers, while failing to bring promised employment stimulus to local markets.  

Even despite the legal loopholes that have plagued the program from its beginnings, state auditors have found little correlation between the money lost to tax credits and the revenues gained through production or labor expenditures.  Analyses commissioned by the Governor’s Office of Film and Video have showed that for every dollar Louisiana allocated for film producers, only 33-cents comes back to the state in tax revenue generated by actual production.  Moreover, the demands that large productions make on public services, such as sanitation, security and fire, as well as the education system at large, makes it dubious that production companies get far more than they give back to Louisiana’s work forces.[11] A recent study showed the state added only 2,200 film industry jobs in six years; a that gap has been filled largely by mobile Texas-based crews filtering into Louisiana’s borders.[12] Local labor accounts for only 20-percent of the need for big-budget film shoots.[13]

The steady growth in film production from 2002 to the present has not resulted in the windfalls that legislators predicted, but they cannot seem to stop them either.  Although originally modeled after Canadian legislation, which reduced tax credit rates over time as studios set up shop locally, Louisiana continues to expand credit programs in a race to the bottom for production work.  In the years since the Louisiana initiative, no fewer than thirty-five other states, not to mention Canadian states, have hailed their own tax credit and rebate schemes.  Although some states, such as Texas and California, use the depth of their labor crews to justify fewer tax credits, many states have simply offered unsustainable cash rebates upfront to attract productions.  Michigan is currently the most egregious example; with a 40 percent rebate for production and labor costs, officials estimate to lose $150 million in taxes in a state already suffering a $2 billion budget shortfall.[14] Louisiana has followed suit.  With little debate, lawmakers not only prevented the tax credit rate from dropping in 2010, they raised it permanently.[15] Generous digital and sound production tax credits have also remained on the books.  As the state broke filming records for the past three years, it lost $202 million in tax revenues in 2007 and 2008 alone, nearly the amount that the state cut from the education budget in 2009 due to shortfalls.[16]

Complicated accounting and effusive rhetoric have largely stemmed any public outcry about what amounts to an expensive giveaway for Hollywood in Louisiana. Press accounts have largely personalized the corruption scandals that have followed loophole and loose oversight in the systemically flawed economic model.  The largest scandal involved conspiracy between state officials granting credits and the largest beneficiary of film credits, the Louisiana Institute of Film and Technology (LIFT), resulting in three guilty sentences to date but little structural change in regulating brokering.  The story entered the annals of local graft, even though it revealed the ease with which producers could inflate their production costs to reap an estimated $10 million surplus in tax credits.[17] Conversely, press reports have failed to cast blame on the wealthy investors seeking short-cuts on their own income taxes.  The venerated Saints coaches and football players who invested nearly $2 million to shelter their own millions have become victims of an unscrupulous developer who declared bankruptcy on a failed film studio construction project.[18]  The real scandals in the system have not made headlines.

The piecemeal dismantling of indigenous film production remains most evident to local filmmakers and workers who search for the added value of the tax credit program.  Not only does the current program exclude the vast majority of independent producers — only covering productions slated for more than $300,000 — but the state has continued to outsource the public resources needed to build a local film industry.  In 2008, the legislature enacted one of most regressive statewide cable television franchises, eliminating funding for public access television production facilities in exchange for a small piece of public access bandwidth in the universe of digital cable channels.[19]  Without public facilities, aspiring producers must look to a handful of nonprofit organizations and schools that provide job training and experience.  These opportunities are scarce as well.  The New Orleans Video Access Center, for example, receives some state-funding for job training in film production, but chronically-late government reimbursements for required expenses has prevented the organization from keeping instructional staff or offering a full curriculum to local residents.  Other educational options include the University of New Orleans, which eliminated its film studies program after Hurricane Katrina in exchange for a production-only department, but a nearly $14 million shortfall over the past two years has meant tuition hikes of 5-percent a year.[20] The chase for private sector capital in film production has generated profit, not jobs, and not a sustainable local film industry. 

In its stead, the longtime love affair between the state and Hollywood has entered a phase of neoliberal governance in which Hollywood’s elite have taken the place of the state in providing for the welfare of its citizens.  After Hurricane Katrina in 2005, several film celebrities (Brad Pitt, Nicholas Cage, and Sandra Bullock among others) joined a stable of other already-established New Orleanians (John Goodman, Ellen Degeneres, Patricia Clarkson) in buying property in the flood-prone city limits.  These new residents have become spokespeople for the city, promoting film premieres locally as proof that Hollywood cares about the future recovery of New Orleans.  At least two stars (Brad Pitt and Wendell Pierce) now front nonprofits rebuilding homes in the city.  The ways private producers have taken the place of government infrastructure in the frontier of disaster recovery is a story for another place, but the efforts, and the fanfare surrounding them, have publicized the various ways Hollywood and its personnel have adopted Louisiana as not just a backlot, but more intimately, as part of its own backyard.

With Hollywood payouts accompanying state financial meltdowns, it would seem only obvious that would citizens revolt against film industry tax credits.  Yet the opacity of the economic mechanisms, combined with the intimacy of Hollywood heroes in Louisiana, seems to mitigate complaint, much less stir rebellion.  If continuing failure to rein in the excesses of Wall Street bankers despite the overwhelming publicity surrounding their bailouts is any indication, we expect a much longer, and rougher, road to ending Hollywood’s handouts.

Notes