Grant standing

Independent producers have come to rely on tax breaks and subsidies to get all manner of films off the ground, but experts say that such benefits sometimes carry hidden costs.

When producer Julia Chasman began the arduous task of piecing together financing for "Driving Lessons," her £2.5 million ($4.7 million) Sony Pictures Classics comedy-drama starring Julie Walters and Rupert Grint, she knew she could count on the U.K.'s sale-and-leaseback subsidy to give her at least 13%-15% of the budget. The subsidy, she says, was the key to funding the production.

"In the beginning, it is always about chasing every fund that moves," she explains. "You find out about one place and call them up, and then someone tells you, 'I hear they don't have money,' or, 'They've spent all their money.' I did about two years of that. But we always knew we would qualify for sale-and-leaseback because 'Driving Lessons' was virtually all British, and that was an essential component."

Speak to independent producers in the U.S. and around the world, and they will tell you that subsidies, tax breaks and rebates have become critical to modern-day filmmaking, from small-scale British movies like Chasman's or larger studio vehicles like Sony's Sean Penn drama "All the King's Men." Countries from England and Hungary to South Africa offer various forms of financial help, as do some 30 U.S. states. Generally, these can knock anything from 15%-30% off the top of a budget, and in some cases, a territory's participation can lead to windfalls that exceed even that.

But are these subsidies really the Promethean gift that most producers believe them to be? While subsidies have been a huge boon for both the independent business and the states that offer them, insiders say there are significant caveats, and they caution that the current abundance of such subsidies eventually could create problems for some territories as they up the ante in order to compete against one another.

Several subsidy providers already have had second thoughts: Germany revised tax laws that were providing overly generous sums of money -- largely to movies that weren't even being produced in that country -- and the U.K. now has canceled its sale-and-leaseback along with subsidies (Sections 42 and 48) that were giving too much cash to American movies. The British government instead set up a simple rebate formula based on the amount of money a production actually spends in the U.K.

In fact, as foreign nations have begun to rein in their generous tax breaks and rebates, states across the U.S. have passed legislation designed to lure production across their borders. Presently, New Mexico offers a production tax rebate equal to 25% of a film's budget, and Louisiana has a similar program that enables qualifying productions to receive a 25% credit on investments of $300,000 or more within the state.

"What happens is, there's competition now between various states," William Morris Independent agent Philip Alberstat says. "This is what happened in Canada, which started offering subsidies years ago. There was this competitive environment, with each province trying to match the others. Now, the percentages they offer are very high, and they have all been driven up by competition. In the U.S., the same thing has happened. Puerto Rico now gives a 40% tax break, which is huge."

Of course, some states offer productions no tax breaks or incentives, and despite the best efforts of the California Film Commission, the state that is home to the entertainment industry remains behind the curve. "The legislative session ended on Aug. 31, and our bill didn't go through," CFC director Amy Lemisch says. "It actually never went to the floor for a vote. There just wasn't a consensus. We didn't have enough support."

The bill proposed a 12% refundable tax credit for feature films, commercials and movies of the week that shoot in California. A very small amount of other TV material would have been eligible, and the bill would have covered both independent and studio filmmaking, Lemisch says.

But the bill drew fire on several grounds: Critics argued that the program would have been too expensive to enact considering the state's ongoing budget crunch, and some objected to the fact that the measure treated studio and independent films equally.

"We knew we were going to have a finite amount of funds to work with each year," Lemisch says, adding that the refund would have been capped at either $75 million or $100 million. "We knew we would not be able to affect everyone, but it was a start."

She also says that anyone who believed that the cash outlay would hurt California's economy in the long run is simply misguided. "It would pay for itself," Lemisch says. "In fact, a study we did that analyzed the tax revenue generated by different types of production revealed that in every case, it would more than pay for itself. That was done in August 2005. We took actual California (state) budgets of different ranges and then broke down the number of people hired and all income taxes paid, and in each case, it paid for itself."

Other state agencies have reached the same conclusion, which explains why, even in the face of such stiff competition, they continue to offer generous benefits to productions. Most studies indicate that the revenue a film brings to a state -- from sales tax on goods purchased by the production to ancillary spending connected to a film as agents, lawyers and friends visit the shoot and pay for hotels, restaurants and the like -- can be as much as seven times what the state gives to the production through the tax break.

"It's called a 'multiplier effect,' and it's very effective," Alberstat says.

Stroock & Stroock & Lavan attorney Schuyler Moore, for one, thinks that when it comes to federal economic policy, a far more effective approach would involve implementing a single, standard tax incentive that would apply to all 50 states.

"It is complete insanity that the states are competing with each other, if you look at it on a national level," Moore says. "There should be national legislation so that we are competing against foreign countries and not ourselves. It is stupid for Louisiana to be competing against New York instead of the U.S. competing with Canada, and the only way to do that is to have national legislation that provides a uniform subsidy for shooting in the U.S."

Although a national law was indeed passed -- the American Jobs Creation Act of 2004, Section 181 of which provides an immediate tax write-off for investors putting money into films with budgets of less than $15 million (or less than $20 million in some cases) -- Moore says, "It didn't work. It didn't preempt state laws, and it was too complex."

As attractive as an incentive might be, national or otherwise, many producers have learned the hard way that actually accessing a subsidy is not as easy as it sounds. Of the 30 states that offer subsidies, insiders say only a handful have an established and successful means of funneling cash to producers at the outset of production, when the money typically matters most.

Such states make their subsidies "assignable," meaning that producers can sell the promised tax credit to banks or other financial institutions, usually for a discounted value that is slightly less than its nominal worth. But some states have not made their subsidies assignable -- meaning that producers might have to wait as long as two years or more before actually receiving refunds -- and that can create problematic budget shortfalls.

"All (tax) credits are subject to postproduction audits, so one doesn't have a complete financial picture or a certification of the tax credit until the production is delivered to the state for review," Greenberg Traurig attorney Steven Beer says. "That lack of certainty creates problems for lending institutions that will need to insure the production."

In a place like New York, where tax laws allow the state to withhold the rebate and use it to pay off an individual producer's income tax debts, if he has any, lenders can be even more reticent to back a production. "New York does a lot of things well, but it is challenging for a financial institution to lend money against the tax credit program because it is conceivable that you will not get all your money back," Beer says.

The bankability of the rebate is one of three issues Phoenix Pictures president Arnie Messer singles out as critical for any producer looking into rebates and subsidies. "Every producer who goes to a subsidy territory has three questions: How much? How fast? And how bankable? That's what the conversations come down to," he says. "Obviously, some of the state tax credits are very difficult to bank, and those are the states that don't get used very much. Anything a state can do to make it easier to incorporate the subsidy into a movie's original financing helps the state enormously if it wants to attract filmmaking. It doesn't do you much good to get a rebate two years later if you can't bank it and use it to get your movie made."

The difficulty of accessing rebates has negatively impacted the growth of South Africa's burgeoning film industry, says Bob Darwell, who heads up the transactional entertainment, media and communications group at Sheppard Mullin Richter & Hampton.

"The benefits of tax rebates from South Africa have sometimes not come into play until after the completion of photography," he says. "Sure, there are some banks that will provide you with the cash today, at a discounted rate -- in theory. But in order for that to happen, you need the folks in South Africa to be cooperative in doing all the paperwork, and in my experience, that has been a very slow and difficult process."

That is precisely why Nu Image/Millennium Films co-chairman and CEO Avi Lerner prefers to shoot in such low-cost territories as Romania or Bulgaria, rather than in South Africa or even in North America. "To shoot in Louisiana costs about three times more than it costs in Bulgaria or Romania or even the Czech Republic," he says.

But Lerner is an exception. Most producers say the current subsidy system is not only helping to boost revenue for the states and nations that offer them, but it also is helping them cobble together the money for films that often would not otherwise get made.

"Sure, there are problems," Alberstat says. "But for now, this is creating jobs and money for the states, and it is great for the producers."