Taxes Hold 'Em

Tax incentives are great, but what happens when the well runs dry?

With at least 40 U.S. states now boasting film and TV production incentives, this should be the best of times for bargain-hungry producers. But the economic downturn has created massive budget deficits in many states, undermining the fiscal and political backbone of the programs. Now, instead of just asking, "How much are you offering?" people browsing the booths at the Locations Trade Show 2009 -- which kicks off today at the Santa Monica Civic Auditorium and runs through Saturday -- must also ask, "Is the money really there and am I going to get it in the end?"

Producer Kelli Konop almost didn't get hers for "The Baster," starring Jennifer Aniston. The feature received its initial approval for New York State's 30% tax credit this year. A few weeks later, Gov. David Paterson said New York had exhausted the $690 million allotted to the program through 2013 in a mere 10 months and, with the state facing a $13 billion deficit, he was not including additional funding in the next year's state budget.

"Several months ago, we said, 'Hey, this movie might happen, let's put in an application,' " recalls Konop, Mandate Pictures' executive vp physical production. "Thank God -- if we hadn't done that, we'd be screwed. We wouldn't be shooting here. We'd be in Toronto or what have you."

Since then, filmmakers have been granted a reprieve when the state changed its mind last month and allocated $350 million more for the production tax incentive program.

Meanwhile, New York has lost the Fox TV show "Fringe" to Vancouver and NBC Universal's syndicated "Maury" to Connecticut, which also is picking up two other NBC Uni talkers, "The Steve Wilkos Show" and "The Jerry Springer Show," from Chicago. But Connecticut Gov. M. Jodi Rell, facing her own $8 billion budget shortfall, has threatened to cap the state's 30% tax credit at $30 million.

None of this is very assuring for people looking to take multimillion-dollar gambles on a state with film and TV projects.

"If the incentive is the reason to go to a particular location, producers need certainty that that incentive is going to be there," California Film Commission director Amy Lemisch says.

In reality, any sense of certainty is illusory. The law might say the incentive will be on the books till the end of time, but the state legislature can cap it or kill it tomorrow with a single roll call vote, as New Mexico Film Office director Lisa Strout was reminded last month when she had to rally supporters to help defeat a bill that would have repealed the state's popular 25% tax rebate.

Konop says that after shooting Drew Barrymore's directorial debut "Whip It!" last summer in Michigan, "They talked about retroactively capping the rebate. I was like, 'What?!' We were going to wait and see if we might need some pickup shots or something, but now we're like, 'No, no, no.' We went ahead and applied to get our money back." Until the check is in hand, "it's funny money."

That's not the only perception problem facing Michigan's incentive program. "I'm hearing from other states that Michigan is 'slow pay' or 'no pay,' " admits Janet Lockwood, director of the Michigan Film Office. "And I say, 'Gee, we've already given the productions a certificate, so they can get the money.' It's up to them. They have to file the form."

The problem was that while Michigan's incentive went into effect in April 2008, the forms didn't become available until January. ("The treasury got hit with a new film incentive and a new business tax at the same time and had to create all kinds of forms," Lockwood says.) The first checks were scheduled to go out last month.

In part, Michigan is the victim of its own success. Its incentive is the richest in the nation, offering a 40%-42% refundable tax credit. When it was announced last year, productions flooded into the state, spending almost $66 million there, up a whopping $64 million from 2007.

"I knew there was going to be a major increase in business, but I underestimated how major," Lockwood says. "In 2008, we received 200 scripts. I don't think I got 200 scripts over the prior 16 years."

The result was costly chaos. According to several producers who shot in Michigan last year, the film commission would say a particular expense qualified for the credit, only to be contradicted later by the state Treasury Department, which is the final arbiter in such matters. A case in point: per diems. Producers were told they could declare the whole amount paid out to the crew, then the Treasury Department stepped in and told them they could only declare the portion of the per diem they could prove the crew spent in state with receipts for each expenditure.

"You need to get a box and people have to put their receipts in it," says Michael Mendelsohn, chairman and CEO of Patriot Pictures and executive producer of the Christina Ricci-starrer "All's Faire in Love," which shot in Michigan in September. "We could've done it and put a prize at the end of the day for who has the most receipts, but ... " he trails off. "It didn't kill us. We got about 80% of what we thought we would get (overall). We're fine."

Eventually, Konop and producers of other Michigan-shot films banded together and drafted a letter to the film commission asking for clarification on the credit's rules and regulations.

"We said, 'Please answer us once with the real answers, so we can count on them,' " Konop recalls. "Then they kind of smartened up and made a list of FAQs and everybody was very clear on what to do."

Lemisch is doing her best to make sure that Michigan's mistakes won't be repeated in California, which recently enacted an incentive program featuring a 20%-25% tax credit. Although she had been receiving a flood of inquiries since it was announced in February, a month later she was unable to say when her office would begin taking applications, other than it would be after the start of the new fiscal year on July 1. In the meantime, Lemisch is ironing out the rules and regulations for the program, which have to be approved by California's Office of Administrative Law.

"Michigan rushed," Lemisch says. "They passed it and it was like -- bingo -- they started accepting films. I don't think they were ready. We're trying to be extremely prepared here."

Supporters argue that tax incentive programs like California's generate revenue for the state. Others argue they put out more money than they bring in. A study released in August by the Arrowhead Center at New Mexico State University said that the state's rebate was netting state government 14.5 cents for every dollar. In January, the New Mexico Film Office countered with a study by Ernst & Young that found that state and local governments bring in $1.50 for every dollar the state spends on the program.

"We figure that if this thing is even off by 50 cents -- so we break even, then what does that mean to people of New Mexico who have health insurance and a good career or the 250 businesses that are film specific here?" Strout says.

But even the most dedicated incentive states seem to realize the party can't go on forever. Louisiana is scheduled to ramp down its production tax credit from 25% to 20% in 2010, and then to 15% in 2012, though Christopher Stelly, director of film and television for the Louisiana Office of Entertainment Industry Development, cryptically predicts that the upcoming legislative session will bring changes to the incentive that are "for the better."

Where does this all leave filmmakers? Shaky incentive programs are just a symptom of the larger economic meltdown. Last year, writer-director John Hindman was set to shoot his next movie, "Christmas in July," in Manhattan, when the funding suddenly disappeared. ("It was Wall Street money," he notes.) But even with its incentive in effect last year, Hindman found New York to be too pricey for his upcoming Magnolia Pictures comedy "The Answer Man," starring Jeff Daniels, so he wound up shooting it in Philadelphia, where he was able to take advantage of Pennsylvania's 25% tax credit.

Still, Hindman is optimistic that "Christmas in July" will eventually roll in New York, incentive or not. If not, he says, "I could get away with five days of exteriors and second unit in Manhattan and do the rest in Philadelphia, where there's still an incentive."