The War Between the States (to Subsidize Hollywood), Part 3: The Revenge of Swamp Shark

I know you want to hear about Swamp Shark, but let’s stay highbrow for a minute. I promise a shocking revelation if you make it to the end.

A couple months ago I was leaving the wonderful State Theater in Traverse City after seeing Terrence Malick’s The Tree of Life. And I was thinking, yes, Malick is a national treasure, but Brad Pitt is beginning to make a decent case for that too! His filmography is full of strong performances in good and/or ambitious movies–at least from the mid-1990s on. He has been in relatively few turkeys and a number of great films. And he’s now producing ambitious movies like The Tree of Life and the upcoming Twelve Years a Slave (and some zombie apocalypse thing).  He has also done a lot of charity work and taken on post-Katrina New Orleans as a personal cause.   All told, it’s not a bad answer to the question of what to do with fame and fortune.

So far so good.  But…. let’s come back to the explosion of state subsidies for film production in the past few years, which went from $2 million in 2003 to $1.4 billion in 2010.  Increasingly, Pitt’s $20-30 million per year is paid for by tax payers from cash-strapped states–especially Louisiana. Pitt’s projects have been major beneficiaries of Louisiana’s extraordinarily generous tax credit program for film production, including the now semi-notorious $27 million credit for The Curious Case of Benjamin Button, which made over $300 million at the box office.  His upcoming film Cogan’s Trade, also enjoys the state’s 30% credit on in-state production costs and an additional 5% on in-state labor costs.  Pitt’s philanthropy is laudable, but both it and his fortune are now partly predicated on Louisianans paying his bills.  If they didn’t, Pitt’s projects would have have found some other state (or country) willing to pay up.  In the case of Benjamin Button, Louisiana beat out Maryland for the right to shovel public money at a lucrative production.  For reference, Louisiana cut $350 million from higher education in the past two years, and is anticipating further cuts in 2011.

Uncharacteristically, we can blame Canada for starting this downward spiral of bad public policy.  In the late 1990s, several provinces implemented  tax breaks to attract Hollywood productions to Canadian locales–inaugurating the now familiar practice of substituting Toronto for New York.  Louisiana’s film tax credit was one of the earliest and biggest of the US state programs, created in 2002 on the promise of making the state a third center of movie production after Los Angeles and New York.  The state has, by all accounts attracted a lot of productions–about 90 TV episodes and movies per year in the past few years, at a cost in 2010 of $139 million in subsidies.  Many other states jumped on the bandwagon, and now around 40 offer tax credits for film production, often at the 20-30% rate.

How did this come to pass?  I referred in an earlier post to the research and lobbying apparatus deployed by the studios and the MPAA–often with the assistance of state arts boards and unions.  Here’s Susan Christopherson and Ned Rightor (2010):

The debate in State Houses across the United States about whether to support subsidies to film and television producers—and by extension, media entertainment conglomerates—is typical, involving dueling studies of the return on investment and the economic impact that can be expected from such incentives. Studies done by State officials, including legislative analysts and departments of revenue, all indicate a poor return on investment. In response to these fiscal analyses, industry supporters have paid for and promoted counter-studies that justify tax subsidies on the basis that broader impacts benefiting the state economy are stimulated by the subsidies. In at least two cases—New York and New Mexico—these counterstudies were carried out by Ernst & Young, whose lobbying arm is employed by the MPAA. The MPAA and its international partner, the Motion Picture Association, actively promote tax-supported incentives across states and nations (Litvak and Litvak 2009). The MPAA has an office of state legislative affairs and a vice president whose role is to encourage subsidy programs in U.S. states.

The competitive dynamic between states makes it likely that none will come out ahead in this game.  Louisiana’s success in attracting productions is another state’s loss.  But as other states respond, high subsidies become part of the cost of maintaining the status quo.  States with established industries (New York and California) have created their own subsidies–not primarily to lure productions, but to keep them from leaving.  The studios have the upper hand in this bargaining because film and TV production–and in particular the high-end labor associated with it–is  mobile and can shop for the most lucrative location deals.  This makes the prospect of creating durable, self-sustaining new industry “clusters” less likely in the future, and reduces the power of the existing ones.  Christopherson and Rightor again:

In 2008, New York upped the state’s 10 percent
subsidy to 30 percent. It retained the requirement that
production be carried out in “approved” facilities (studios),
effectively favoring New York City, and productions within
the city continue to receive an additional 5 percent credit. By
early 2009, New York had exhausted the $515 million allocated
for its tax subsidies program (which was intended to
last until 2013). Although industry advocates are asking for
“permanent” subsidies, their cause is being hindered by the
state’s severe budget crisis. In the wake of this uncertain
subsidy environment, television producers currently taking
advantage of New York tax subsidies have been negotiating
with film offices in Toronto and Vancouver to move productions
to Canada (Morton 2009).

Unions and studio owners, supported by the MPAA and local
and state economic development officials, developed the initial
subsidy package in response to what they perceived as a
loss of the most stable and lucrative portion of industry production.

From the late 1990s to 2004, the pattern of production
(as tracked by the City of New York Mayor’s Office of
Film and Television) changed, with a downturn in the number
of location shooting days. Industry experts alleged that
while producers were still using New York as a setting for
productions, they were visiting the city only for a short time
to take “beauty shots” of recognizable landmarks, rather than
actually producing in the city.

Unions were particularly active in promoting the first
wave of subsidies because they felt that the jobs being lost
in New York were the “good jobs”—those still controlled by
union contracts in bigger, more lucrative, and (in the case of
television) longer-term projects. Medium-budget (approximately $20 to $50 million) feature films and high value, scripted television series are at the core of this “good jobs” category. They were joined by the studio owners, who wanted to make sure that the subsidies emphasized facility use by their most lucrative and long-term clients—major film productions, and particularly television series. In fact, one-quarter of New York’s original $125 million in state subsidies went to television series already producing in New York studios, and particularly to NBC, owned by General Electric. In one year, subsidy claims by local producers totally consumed tax funds that were intended to promote new production in New York over four to five years (Hakim 2006).

As of 2010, New York State had budgeted for over $400 million in credits in each of the following four years.  California responded with a program in 2010 worth $100 million per year, overriding the recommendations of its Legislative Analyst’s Office.  As that office concluded:

  • One of the key issues in assessing any targeted business incentive program is: Would the activity have taken place in the absence of the incentive? If… the activity would have taken place even without the incentive, then state subsidies represent a windfall for the firm that receives the incentive…
  • Second, the program would likely create inequities in the way film companies are treated. Because claims would likely be much larger than available funding and the first-come-first-served targeting, some firms would be approved for credits while other equally qualified firms would be denied simply because they did not apply soon enough. This is an example of a “horizontal inequity,” meaning that similarly situated taxpayers would be treated differently.
  • Third, it is not clear that the film industry’s situation is unique among industries that produce for a national or international market. If production costs for the film industry are higher here than in some other locations, it is also likely to be true for the electronics, finance, chemicals, and food processing industries. The administration has not made the case that the film industry deserves special treatment because it faces unique challenges that other sectors of the economy do not experience.

For these reasons, we recommend that the Legislature reject the film tax credit proposal. It would arbitrarily favor some film producers over others, and will mostly fund productions that would have been filmed in California in any case. We agree that the state’s business climate is a crucial issue. Rather than singling out individual industries, however, the state should endeavor to create the conditions that permit all businesses to thrive.

Does Louisiana get to be Hollywood South after all of this trouble?  The answer appears to be no.  Christopherson and Rightor again:

The multiplier for Louisiana’s investment is only 1.87 (Economics Research Associates 2006), whereas in New York the multiplier for direct, indirect, and induced employment is 3.1, one of the highest of all industries in the state (Christopherson et al. 2006). New York’s high multiplier is a consequence of the depth and the breadth of its industry presence. New York City can capture a greater portion of ancillary expenditures made during the course of shooting because it has the full range of facilities and businesses that serve the industry. So, while subsidies may be credited with creating work associated with production shooting in Louisiana, most of the large expenditures for pre- and postproduction activities (financing, script preparation, editing, marketing, etc.) do not occur in Louisiana and do not generate economic activity. They instead generate economic activity in the industry’s headquarters location: Los Angeles.

And support for locally-based filmmakers has been cut as efforts to poach bigger productions have expanded. From Mayer and Goldman:

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.  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.

And as I argued in an earlier post, the real problem is that this is business as usual–a form of government by special deals carved out of the tax system, while the resulting deficits force cutbacks to public services.  Here’s how the Louisiana Budget Project describes the problem:

Louisiana will spend approximately $8 billion in state revenues next fiscal year through the state budget.  The state also will spend another $7 billion-plus through what might be called the hidden budget….

What is this hidden budget?  It’s the total of more than 440 separate pieces of legislation, each of which exempts someone or something from some form of taxation.  While the regular state budget is made up of money the state takes in and then sends back out, the hidden budget is money the state decides to forego in the first place.

And, spending through the tax code is growing.  It’s projected that revenue lost to tax expenditures from 2006 through 2011 will have increased 28 percent – to $7.1 billion from $5.6 billion.  State revenue, by contrast, is expected to decrease 3 percent.

What does newly re-elected Governor Bobby Jindal think about these tax breaks?

Gov. Bobby Jindal has ruled out tax increases as his administration looks for ways to patch a $1.5 billion budget hole anticipated for the 2011-12 budget year.  Any attempts to eliminate or suspend tax breaks that are currently on the books would be considered a tax increase, Jindal spokesman Kyle Plotkin said.

In other words, education is screwed but Hollywood pay outs are sacrosanct.  That makes the studios sound a lot like the banks!  If Swamp Shark spends its whole budget in Louisiana, it will get around $700,000 in tax credits.

So here’s my pitch for a new movie: Brad Pitt plays an out-of-town big game hunter, hired to kill the giant swamp shark that’s terrorizing the bayou.  Every day, Pitt goes out in an air boat to hunt the swamp shark, while at night he romances a local widow and performs good deeds in the community.  Every day, the death toll rises–college coeds, local drunks, etc.  In the end, the widow discovers that Pitt is the swamp shark and rallies the people of the bayou to fight back!  Wounded, the swamp shark reveals that it suffers deeply from the contradictions of the system of which it is a part.  Calling the townspeople together, it announces that it will  mend its ways: henceforth, it will spread the vegetarian gospel.  End with a soft focus shot of Swamp Shark and the townspeople on a mystical beach of infinite forgiveness, evoking Malick.  And cut.

 

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2 Responses to The War Between the States (to Subsidize Hollywood), Part 3: The Revenge of Swamp Shark

  1. Pingback: Yet more reasons why the film industry is completely screwed up | BradLeclerc.com

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