No More Gran Torinos for States Losing $3.5 Billion in Revenues

Michigan taxpayers foot the bill for the most generous movie subsidies in the U.S. Since 2008, the state has allotted $282 million to lure the filming of Hilary Swank’s “Conviction,”Clint Eastwood’s “Gran Torino,” George Clooney’s “Up In The Air” and more than 120 other productions.

Now the governor-elect, RepublicanRick Snyder, wants to curb the largesse. A state agency found the price of the program -- which covers as much as 42 percent of local expenses -- exceeds the economic activity generated. Jobs created in 2009 cost the state about $193,000 each, the agency estimated.

Incentives for Hollywood have been scaled back in Wisconsin, capped in Rhode Island, suspended in New Jersey, Iowa and Kansas and scheduled to expire in Arizona. While states continue to expand and introduce subsidies, programs around the country face allegations of corruption, doubts about job-creating power and, most of all, questions about affordability.

“We are starting to stem the tide of state government pandering to the film industry,” said Bill Ahern, policy director for the Washington-based Tax Foundation, which advocates lower taxes.

In the last five years, $3.5 billion in tax credits, rebates and other financial assistance have gone to makers of films, television shows and commercials, according to a calculation by the foundation. In the next fiscal year, states will face $72 billion in budget deficits, the National Conference of State Legislatures estimates.

Banking Movie Credits

The subsidies began in Louisiana in 1992 and today are offered by 42 states. A shakeout will halve the number in the next decade as lawmakers conclude they can’t sustain funding, according to Larry Brownell, head of the Association of Film Commissioners International in Redondo Beach, California, which represents every state with incentives except Massachusetts.

The breaks are worthwhile, creating spending that would otherwise go to Hollywood, according to Vans Stevenson, senior vice president of state legislative affairs at the Motion Picture Association of America Inc. in Washington.

Most programs reimburse for a percentage of money spent in the state. Among the beneficiaries are Viacom Inc.’s Paramount Pictures and Time Warner Inc.’s Warner Bros.

Calling the incentives credits is misleading because they go beyond tax abatement, and beyond the film industry, said Robert Tannenwald, a formerBoston Federal Reserve Bank vice president who studies the subsidies as a senior fellow at the nonprofit Center on Budget and Policy Priorities in Washington.

Spending $1.5 Billion

In most states, unused credits can be returned for cash or sold to other businesses. A Connecticut nonprofit’s freedom-of- information demand forced the state to identify companies that bought movie credits and used them to lower their tax bills. The list, made public last year, included Bank of America, Wachovia Bank, Hershey Co., Comcast Inc., Provident Life & Casualty Insurance Co. and Colonial Life & Accident Insurance Co.

That’s “outrageous,” Tannenwald said. “People are being hoodwinked. There’s no reason for a government to finance a financial institution in such a circuitous way.”

In a report last week, Tannenwald wrote that incentives in 43 states cost $1.5 billion in 2009. “They don’t come close to paying for themselves,” he said.

Michigan illustrates the point, he said. It’s headed for a $1.5 billion deficit next fiscal year, according to government estimates, while its budget for film credits is $125 million.

“With that kind of money, we could have a citrus industry in the Upper Peninsula,” said Michigan State University economics professor Charles Ballard.

Tony Shalhoub’s Ads

New Jersey Governor Chris Christie, a Republican, suspended incentives covering 20 percent of costs on July 1 as part of his austerity push, sending producers of NBC’s “Law & Order SVU” to New York. In Arizona, lawmakers didn’t extend the 30-percent credit running out at the end of next month. Kansas shelved its credit, also for 30 percent of costs, for 2009 and 2010. Rhode Island two years ago capped its program at $15 million annually.

Wisconsin last year slashed the amount the state can give out in any year to $500,000 from an unlimited sum, spurring Green Bay native Tony Shalhoub of TV’s “Monk” to make pro- subsidy ads. Iowa’s program covered up to 50 percent of costs until it was put on hold after an investigation by Attorney General Tom Miller led to charges in February against two movie producers and a former film office head.

The producers padded their expenses with $900 shovels and $225 brooms and the ex-director failed to verify the eligibility of applicants for incentives, prosecutors said. Trials are set to begin in December. The probe was expanded last month after state Auditor David Vauldt said up to $32 million -- or 80 percent -- of credits had been issued improperly.

‘An Economic Stimulus’

In Louisiana in May, a promoter pleaded guilty to wire fraud in a scheme to sell $1.9 million in bogus credits to New Orleans Saints quarterback Drew Brees and other players.

Still, Louisiana isn’t retreating from movie subsidies. California, worried about business leaking from the Los Angeles area, began offering credits last year. New York recently continued its program for five years, and Florida and Virginia enacted new enticements.

“Even if you look over this past year, in a significant economic downturn for the states in terms of revenue, these credits have been sustained because I think the states are recognizing that they are an economic stimulus,” said Stevenson of the Motion Picture Association.

States need to compete for Hollywood’s business with foreign countries as well as each other, according to Joseph Chianese, marketing vice president for Entertainment Partners of Burbank, California, which sells moviemaking-support services. Twenty-two countries offer some form of incentives, up from 18 in 2009 and 13 in 2008, he said.

Popular in Poll

In Michigan, governor-elect Snyder, former president of computer-maker Gateway Inc., said in a statement he wants to “phase down” the state program “but in a fashion that would support businesses that have made commitments to our emerging film industry.” A pre-election poll of voters by EPIC/MRA showed 58 percent favored subsidies; 33 percent were opposed.

State Senator Nancy Cassis, a foe of credits, said the program lacks transparency. Cassis, a Republican, said she has been unable to get details from the Michigan Film Office of a probe into a land deal for a proposed studio in Grand Rapids known as Hangar42. The office’s director, Carrie Jones, said state guidelines prohibit her from releasing the information.

One of the investors in Hangar42, Joseph Peters, 46, was charged in August with attempted fraud in applying for a 25 percent infrastructure credit. Peters deliberately overvalued the property by a factor of four, according to a statement by Attorney GeneralMike Cox. Peters’s lawyer, Chip Chamberlain, declined to comment.

‘Absolutely Ridiculous’

Michigan’s program also includes job-training credits, loans and other subsidies negotiated through the Michigan Economic Growth Authority. While Alaska’s reimbursement can cover as much as 44 percent of production costs, it applies under limited conditions, making that state’s total package less valuable than Michigan’s.

“When we voted on this proposal, people didn’t know how generous it was,” Cassis said. The measure’s author, former state Representative Andy Meisner, called that assertion “absolutely ridiculous.”

Meisner himself described the program inaccurately in a Sept. 30 op-ed piece in the Oakland Press. “While we forgo 42 percent of tax revenues, we are getting 58 percent of tax revenues that would not otherwise be produced,” wrote Meisner, a Democrat who is now Oakland County treasurer. Reminded that the state gives back up to 42 percent of costs, not taxes, Meisner said, “I made a mistake.”

‘Measure The Ripple’

In 2009, Michigan’s inducements created just 355 full-time job, defined as those lasting at least 250 days, according to a September report by the nonpartisan Senate Fiscal Agency. In the two-plus years of the program’s existence, the return in tax revenues has been a little more than 10 cents on a dollar spent, according to the report’s author, economist David Zin.

The Michigan Film Office in its annual 2009 report said job creation totaled 3,867, without classifying the positions by days worked. Jones said Zin’s report failed to take into account the multiplier effect, the total amount of money going into the economy as crews patronize restaurants, hotels and dry cleaners.

“It’s like throwing a rock into a pond,” the film office director said. “They’re measuring the splash. I’m trying to measure the ripple.”

Even accounting for a multiplier effect, Zin said, Michigan comes up short. He said the expected gain of $80 million in economic activity from the subsidies this fiscal year would be less than the $125 million the state is projected to spend. Hollywood producers take a good deal of the reimbursement money they get from Michigan back home with them, Zin said.

‘A New Buzz’

Filmmaker and Flint native Michael Moore is trying to reverse that trend, he said in an interview. He said he is using the $1 million in a rebate from 2009’s “Capitalism: A Love Story” to restore aging movie theaters in Michigan.

The subsidy program is important in part because the state “is so far down in the toilet” economically, Moore said.

What helps make incentives popular, economist Zin said, “is this big feel-good effect when Hollywood comes to town.” The on-location making of ABC’s “Detroit 1-8-7,” starring Michael Imperioli, has energized the Motor City, according to business owners. New customers show up daily for chili dogs at American Coney Island, which has been featured in the cop drama, said Grace Keros, the third-generation owner.

“It’s given the city a new buzz,” Keros said of the show.

Last year, director Tony Goldwyn filmed “Conviction” in Detroit, Dearborn, Ypsilanti and other economically depressed cities, working with a crew of 300.

‘Hollywood Fat Cats’

“Critics say, why should we give incentives to the Hollywood fat cats?” Goldwyn said in an interview. “But this isn’t about the people who make the bigger money. This is about the people who are living month-to-month, the people you never see on the marquee.”

The state covered $3.9 million of the $10.8 million spent on “Conviction” in Michigan, according to producer Andrew Sugerman. Released in October and distributed by News Corp.’s Fox Searchlight Pictures, the movie has so far recorded $6.2 million in ticket sales, according to the research website Box Office Mojo.

While Goldwyn was filming in 2009, lawmakers were under pressure to close a $1.6-billion budget deficit for the 2010 fiscal year. They eventually cut $210 million from the higher education system, among other moves, leaving the $100 million for moviemakers untouched.

Jones, the Michigan Film Office director, said she saw proof a movie industry was establishing itself in the 200,000 square foot Raleigh Michigan Studios in Pontiac and two new sound stages in Detroit.

“It’s soon to judge the success of the credits,” she said. “We need a little more time for the industry to take root before we talk about changing the incentives.”

To contact the reporter on this story: Tom Moroney in Boston at tmorrone@bloomberg.net

To contact the editor responsible for this story: Gary Putka in Boston at gputka@bloomberg.net

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