In a year of flops for Hollywood, 2011’s “Green Lantern” was a memorable bomb, barely making back its $200 million production budget at the box office.
Happily for Warner Brothers, the studio didn’t have to put up all of the money.
Louisiana taxpayers promised $35 million through a generous subsidy program that covers 30 percent of a film’s local costs. And if state cost-benefit analyses are to be believed, the state recouped only about $8 million of its investment.
By way of comparison, Louisiana sank more into “Green Lantern” than it is putting into the University of New Orleans this year.
Louisiana’s film tax incentive program is one of the state’s most popular and fastest-growing giveaways, and thanks to its industry-friendly provisions, the Pelican State has eclipsed Hollywood as the feature film production capital of the nation.
But it’s also one of the state’s least effective incentive programs, according to economists. Every two years, the state produces an analysis that shows it to be a massive money-loser, and Gov. Bobby Jindal’s Economic Development chief says the state could get a much better bang for its buck elsewhere. But thanks to the glamour of the motion-picture business, hardly anyone pays attention.
The proliferation of big-budget productions like “Green Lantern” — and new chapters in the “Terminator,” “Jurassic Park” and “Fantastic Four” franchises shot in Louisiana this year — is one reason the program’s cost has been steadily trending upward.
But it’s not just blockbusters: Small films, movies of the week, as well as reality TV programs like “Duck Dynasty,” scripted series like “NCIS: New Orleans” and high-end television ads are all being shot here.
Last year, 107 such projects qualified for help from Louisiana taxpayers, at an upfront cost to the state budget of about $250 million. Stephen Moret, Jindal’s secretary of Economic Development, says he thinks that figure could double within a few years.
The program, the richest of its kind in the country, covers between 30 and 35 percent of in-state production costs, including eight-figure actor salaries, as long as a film’s local costs top $300,000. The subsidy is so large that it completely changes the economics of filmmaking. And its size has probably contributed to the program’s history of corruption as well, tempting some dishonest film producers into padding their expenses so they can recoup more money.
It’s not just Hollywood that has embraced Louisiana’s tax credit. Locals seem to love it, too — in part, perhaps, because it brings movie stars to town and puts the state on the big screen, not to mention in the national consciousness.
But the program’s popularity among residents may also owe to a fundamental misunderstanding. Because the subsidy is called a “tax credit,” it’s often understood as something that simply reduces a filmmaker’s tax burden. In fact, Louisiana is cutting checks to Hollywood — big ones.
Film productions don’t have any corporate tax liability because they are set up as limited liability companies that simply make payments to actors, crew and vendors. Profits from a film are taxable, but they go to the film’s investors, who are usually based elsewhere.
As a result, most productions sell their tax credits to someone who owes taxes, which is legal under state law, usually getting about 90 cents for each $1 worth of tax credit. Buyers, many of them wealthy movers and shakers, get 100 cents on the dollar from the state, creating a group of influential middlemen who benefit from the program.
A filmmaker who doesn’t want to deal with all that can simply return his credits to the state for a check worth 85 percent of the credits the film received. In that scenario, the credits are never applied against anyone’s taxes. But that simply makes more obvious something that observers of the program have long known.
“It’s never, ever been about the tax liability of the moviemaker,” said Robert Travis Scott, president of the good-government Public Affairs Research Council and a critic of the program.
“It’s got nothing to do with tax,” said Greg Albrecht, chief economist for the Legislative Fiscal Office. “We’re just using the tax-filing process and the Department of Revenue as the paying agent for a spending program. That’s what we’re doing.”
A film capital
If success was measured by activity, Louisiana’s film program would take home an Academy Award for best subsidy.
Of the 107 projects shot here last year, 49 were feature films — more than were filmed in any other state, including California. Eighteen of them were major studio productions, also tops in the country.
Louisiana was a pioneer in the incentives game, unveiling its program in 2003 by following the lead of places like Canada, particularly British Columbia, that had managed to snare a sizable share of the market from Hollywood through similar inducements beginning in 1997.
No one would argue that Louisiana’s popularity is attributable to anything other than the incentive program. In the first full year of the film program, 14 features big enough to qualify for the credit were shot here; that number has since multiplied sevenfold.
There’s a tangible film presence here now — the predominant industry union now has 1,400 members in Louisiana, a tenfold increase since the program began. Thousands of other local people are employed in jobs that service the film business, many working out of large brick-and-mortar film facilities that were built with substantial taxpayer aid. By some estimates, the industry employs 15,000, almost as many as the seafood industry, long a mainstay of the state economy.
But the smashing success comes with a steep price tag.
In recent years, as the number of productions choosing to shoot here has mushroomed, so have costs to state taxpayers. Over the past six years, Louisiana has spent more than $1 billion on film, and the amount is growing steadily each year. The growth owes in large part to 2009 legislation that made the program more flexible and generous as other states, following Louisiana’s lead, began offering competing incentives.
While roughly 40 states, including California, now offer some kind of incentive, $1 of every $6 given away to the domestic film industry comes from Louisiana taxpayers.
The cost of the state’s program has doubled in size since the rules were liberalized, and Moret says he believes it could soon double again. It’s not a prospect he relishes.
“That would mean a net reduction in the state general fund of roughly $200 million,” he said. “And that’s going to directly impact health care and higher education. So nobody wants that to happen.”
Paying for impermanence
A succession of state-funded studies have shown the program — like those elsewhere in the U.S. — doesn’t come close to paying for itself. Simply put, Louisiana may not be able to afford more growth.
The most recent cost-benefit analysis of the program, by economist Loren Scott, found that in 2012, the state put $218 million into film production and recouped only $50 million of that through taxes, or about 23 cents for every dollar spent. The previous study found an even lower return, of perhaps 17 cents on the dollar. National analyses have come to similar conclusions.
And the studies suggest that the real returns may be even more dismal. Scott noted that more than a quarter of the Hollywood spending that Louisiana subsidizes goes to “talent” — writers, actors, directors, producers. Those people “in most cases do not live in Louisiana,” Scott wrote, and thus presumably don’t spend much of their money here or contribute much to the tax base. If the benefit of such “above the line” spending is removed — an assumption Scott thinks is fair — the state’s paltry return on its investment would shrink by an additional one-fourth.
Louisiana also covers 30 percent of other costs with a questionable return. For instance, if a filmmaker can’t buy a needed item in Louisiana — say, a vintage car — he can buy it through a “procurement company” based here, which in turn buys the item wherever it can be located, taking a fee for the service. The cost of the item, plus the markup, then qualifies for tax credits.
But the biggest problem may not be that the film program is extraordinarily generous compared with other government giveaways. It’s that there is no end in sight. With many incentive packages, state taxpayers help a company build a physical presence in Louisiana, which, while often expensive, gives the firm a reason to stay here even after the incentive winds down.
With film, “you’re constantly trying to refill the bucket, to try to keep the activity going,” Moret says. “It’s a huge incentive in perpetuity. It never goes away. You’re kind of incentivizing the same jobs over and over again.”
While the cost to the state on a per-job basis for film jobs — $12,000, according to the state’s most recent study — is far less than the state puts up for many industrial projects, the flip side is that the jobs are temporary, often lasting only a few months. In fact, one Louisianian might account for several of those subsidized jobs in one year.
Scott, of PAR, says that’s the film program’s fatal flaw.
“The only way the movie tax credit program works is you have to keep paying them that incentive every year,” he said. “I think one of the movie promoters gave the best argument against this program when he said, ‘If you change or eliminate this program, we’ll all go to Georgia tomorrow.’ That, to me, speaks volumes.”
Boosters say studies flawed
Film boosters say the skeptics continually underestimate the positive effects the industry has on Louisiana, many of which, they concede, are hard to measure.
For starters, they say, the claim that the state only gets back 23 cents on every dollar it spends is wildly misleading, failing to take into consideration the money the program puts into local tax coffers — especially in and around New Orleans and Baton Rouge, where the lion’s share of filming takes place.
The last study by Loren Scott, the economist, estimated that of the $218 million the state put into film in 2012, perhaps $31 million came back to local governments. Were that added to the return on the state’s investment, the program would get back about 37 cents in taxes on every dollar spent — still a woeful return, detractors point out.
“I’m not sure we’re really looking at the full picture,” said state Rep. Walt Leger, D-New Orleans, a proponent of the film program. “The reality is that there’s a tremendous benefit that accrues to local governments. I’m not sure it’s being adequately measured.”
A bigger gripe of film proponents: None of the analyses performed so far adequately considers the massive ripple effects that moving Hollywood productions here has on the state’s economy.
There are untold spinoff jobs created by the industry that are essentially uncounted, they say. Many of these can be seen by visiting the large studios that have sprung up in New Orleans, Baton Rouge and Shreveport — themselves recipients of considerable Louisiana largesse, through a now-defunct program that covered 40 percent of the cost of film-related infrastructure. Among the tenants: trucking companies, tent companies, caterers, sound editors, and even law and accounting firms that specialize in film tax credits.
An oft-cited success story is that of Hollywood Trucks, a firm started by entrepreneur Andre Champagne that has become a juggernaut in Louisiana — and that has expanded into Mississippi and Georgia. (Georgia’s subsidy program is similarly generous to Louisiana’s and also has become a huge magnet for film productions.)
Champagne’s company got nearly $7 million in taxpayer assistance to build up his fleet, money he argues was well spent. He now has 400 trucks, and each of his trucks needs a driver.
But the spillover doesn’t end there. Champagne notes that his trucks and trailers need to be serviced by mechanics. And they need parts, and tires, and gas. And so on.
Then there are all the other people touched by film in uncounted ways — for instance, people who rent their homes out as film sets or lodging. A website called Key to NOLA caters to the industry with short-term, high-end rentals, some going for as much as $5,000 a month.
The ripples go out still further, the film boosters say, in sometimes incalculable ways. Would Brad Pitt have been inspired to underwrite his Make It Right green-housing project in the Lower 9th Ward if he hadn’t been drawn to the city through the film program? Would Sandra Bullock have become a vocal and generous booster of Warren Easton Charter High School?
And how many bright young people have opted to move to Louisiana, or return home, as Champagne did, because of the presence of the film industry?
More concretely, maybe, boosters say that seeing a place on the big screen can inspire lots of viewers to visit. For every “G.I. Joe II” — a picture that could have taken place anywhere — there is a “Duck Dynasty,” an “NCIS: New Orleans” or a “12 Years a Slave,” a movie or show that has a distinctive Louisiana brand.
A 2013 Florida study underwritten by the Motion Picture Association of America, the leading industry group, posited that film and TV prompted 11 percent of visitors to the state to come there. That estimate, according to the study, came from tourism “industry representatives.”
The Louisiana Film Entertainment Association, the voice of the local industry, has commissioned its own impact study, which will take such ripple effects into account. If film boosters can simply show the state gets more out of the film program than it puts in — even by $1 — that should end any controversy over the program, they say.
Will French, the president of that group, who also helps to secure financing for films, says early results from the research show that the effects of so-called “film-induced tourism” are considerable. Given that tourists visiting Louisiana spend more than $10 billion in the state each year, proving that even a small percentage of them were drawn here because of the film industry would show that the film credits pay for themselves, he said.
On the other hand
But skeptics doubt such a showing can be made — not credibly, at least.
At a recent meeting of a legislative committee tasked with recommending reforms to the state’s entertainment incentives, Albrecht, the legislative economist and a member of the committee, told his fellow panelists that he would object strongly to any study that attributes much tourism spending to the film industry.
“We’re talking about Louisiana,” Albrecht said in a later interview. “The state, believe it or not, is known all over the world. New Orleans alone gets 10 million tourists a year. I don’t think we’re having any material effect on that” through filming.
While it’s hard to know what precisely draws tourists to the state, Louisiana’s tourism industry hasn’t grown appreciably since 2003, when the film program was newly born, in terms of visitors or dollars spent, according to state figures.
Albrecht has little doubt the new study will say otherwise.
“I eagerly await the results of the study; I’m sure it will prove us all wrong,” he said. “I’m also sure it will have some fanciful assumptions.”
French promises the study, though it’s being paid for by the industry, will be rigorous.
Skepticism aside, Albrecht and others are willing to concede there are benefits from the film program that aren’t counted in their studies. But any spending, regardless of what industry does it, has a ripple effect, they say.
“My wife is a teacher, and when you pay money to her, that circulates through the economy and creates economic activity,” said Jan Moller, director of the Louisiana Budget Project and a longtime critic of the film program.
“There’s a plumber at my house right now fixing my kitchen sink who’s being paid partly with money from the school system. That’s economic activity supporting jobs. Everything does that.”
Scott, of PAR, notes that some of the “ripple” jobs that film supports are in fields that have long had plentiful employment in Louisiana without getting a boost from film, such as catering. The vast majority of high-level jobs on productions are still taken by out-of-state workers, an Advocate review of dozens of film audits found.
“We don’t need expensive tax credits to build a food industry,” he said. “To me, catering should be off the table.”
And Albrecht points out that the state’s studies have omitted costs as well as benefits. For instance, the state helps cover films’ “soft costs,” like financing and travel, that do little if anything for Louisiana. Those costs average about 4 percent of a film’s total expense, according to the most recent state study.
What that means in real terms: When Matt Dillon was coming to town to film “Bad Country,” to take one example, Louisiana taxpayers helped cover the costs of his massages, his first-class flights to and from New York, and his local gym membership. Likewise for the stars of “Twilight Saga: Breaking Dawn,” whose drivers, bodyguards, hairdressers and first-class travel were all subsidized.
More abstractly, the studies don’t take into account what economists call the “opportunity cost” — that is, what the state lost by spending the money on film rather than something else.
“A dollar you spend on films is a dollar you’re not spending on education or health care or to repair a bridge or put cops on the street or whatever else you think we should be doing,” Moller said.
Where to now?
The fundamental question facing the film industry and the Legislature now is where film should go from here. Should certain excesses be curtailed? Should a cap be set on spending? Or should lawmakers embrace Louisiana’s status as perhaps America’s film-friendliest place and keep the cameras rolling?
Film backers in the state have resisted any cutbacks to the program, saying that Louisiana has finally built an industry, that it’s starting to grow roots and that we should leave well enough alone.
But reform ideas abound, ranging from capping the annual funding for the program to simply paring back the incentive from 30 percent. Another simple fix — and one that would be unlikely to slow the industry — would be to set the price at which the state will exchange tax credits for cash high enough to persuade everyone to take that option.
Currently, the state will issue any production company owed film tax credits a check worth 85 percent of the credits’ value. So if a film is approved for $10 million in tax credits, for instance, the Department of Revenue will instead write the production company a check for $8.5 million.
That transaction saves the state 15 percent — for if the credits were sold to a third party, the state would be on the hook for the full value when the third party cashes them in against his taxes.
Viewed another way, the size of the state’s subsidy falls from 30 percent to 25.5 percent when the state writes a check instead of issuing credits.
Proponents say the traffic in film tax credits — while lucrative for some people — is not fundamental to the film program; there’s no reason to think getting rid of the credits would cause fewer films to be made in Louisiana. Opponents of a change, among them French, who trades in the credits, say the credits have helped to build a local group of film investors, and that local credit brokers also help market Louisiana’s film program.
One reform that seems likely to sail through is a plan to begin withholding income tax from payments to actors and other highly paid film professionals — something that, remarkably, hasn’t been done to date. While anyone who earns income in Louisiana is theoretically liable for paying taxes — which amount to 6 percent for high earners — actors, directors and others typically get around the requirement by having payment sent to tax-sheltered “loanout corporations” that they control.
Like other states, Louisiana has a system for ensuring that other top earners who don’t live here, like visiting professional athletes, pay income taxes on their local earnings, and the same logic would be applied to actors. While there’s been some pushback to the proposal from producers — who may see their own costs go up as actors seek higher fees to offset the taxes — French says the industry is willing to go along.
State Sen. J.P. Morrell, D-New Orleans, who is chairing the committee looking at the state’s entertainment incentives, says one of his biggest challenges is getting the industry to realize that it could be in peril if it refuses to make real concessions.
Other industries looking to protect their own programs from potential cuts will be happy to throw film under the bus, he said.
“I’m very concerned they don’t understand the forces they’re fighting with,” said Morrell, who is generally a fan of the film program. He warns that if other groups receiving tax breaks “can have no cuts by sacrificing two or three (other credit programs) in whole or in part, they’re gonna do it. They don’t care. They will absolutely spend all the money and power they have to lobby for that.
“My goal has always been, if the industry could figure out ways to repair itself, and to make the tax credit more solvent, when the general culling comes, I would have the ability to say, ‘Film has already done its penance. The treatment has been administered, the medication has been given, film is now healthy. Move on to some of the other ones — like the antique airplanes and the gold-bullion tax credits.’ ”
Morrell isn’t alone in the view that the film program could become a victim of its own success.
“I think the film industry has a vested interest in figuring out a way to get to a more stable solution,” Moret said. “If you get to the point that the net fiscal loss from the film industry overtakes the amount the state is funding into higher education, that would not be a good outcome — not just for higher education, but for the film industry. That would put their incentive at great risk, I think.”
French acknowledges that the film industry has “circled the wagons” when the program has been under attack in the past, but he says that’s only because the ideas on the table were ill-considered.
For instance, a proposed cap on how much of an actor’s salary would be subsidized by the state was poorly researched by Moret’s office and would have driven dozens of productions away, he said. Filmmakers want the program to work for Louisiana, he said, and this year the industry will put forth a number of proposals aimed at maximizing the state’s return that could be considered in the legislative session that begins in April.
“We are going to suggest a set of improvements to the program to make it more efficient, to make sure the program is better for the state and builds a better industry,” French said. “Hopefully, we won’t be put in a bad position which puts us on the defensive going into the session.”
Follow Gordon Russell on Twitter, @gordonrussell1.