Strapped States to Hollywood: Stay Home

The new prime-time ABC (DIS) television show, Detroit 1-8-7, is giving the Motor City's famous restaurant, American Coney Island, a lift. Since the crime drama's first episode aired in September, featuring two TV cops munching on the landmark eatery's chili dogs, customers have been pouring in, says Grace Keros, the third-generation owner. "It's given the city a new buzz," she says.

What's good for the restaurant, however, hasn't been so great for Michigan taxpayers. The show's producers were lured by state incentives—a mix of tax credits, job-training subsidies, low-interest loans, and other aid. A state report says such subsidies are the most generous in the U.S., and cost Michigan taxpayers more than the economic activity they generate. The 355 full-time jobs created as a result of the program last year cost the state about $193,000 each, the study found. Rick Snyder, the Republican governor-elect, wants to curb the largesse.

Since 2005 states have granted $3.5 billion in incentives to makers of films, TV shows, and commercials, according to a Tax Foundation calculation for Bloomberg Businessweek. Now, as states face a total of $72 billion in budget deficits in their coming fiscal years, according to the National Conference of State Legislatures, some are concluding Hollywood gets a lot more than it gives.

Kansas and New Jersey have suspended their tax credits. Rhode Island has capped subsidies at $15 million annually, and Wisconsin's are set at a measly $500,000 a year. Arizona's program is set to expire on Dec. 31. Larry Brownell, head of the Association of Film Commissioners International, which represents 41 of the 42 states offering credits, predicts half the states will shelve their programs within a decade.

Michigan's Largesse

The film credits, which cover everything from housing, labor, and food to rental equipment and set construction, can be lucrative. Michigan's cover as much as 42 percent of a production's local costs. Such incentives have helped attract Hilary Swank's Conviction, Clint Eastwood's Gran Torino, George Clooney's Up in the Air, and 100-plus other films to Michigan.

After Wisconsin lawmakers slashed the state's tax credits, Green Bay native Tony Shalhoub of TV's Monk starred in ads sponsored by Wisconsin filmmakers asking legislators to reconsider. When Governor Chris Christie in New Jersey called off that state's 20-percent-of-costs rebates on July 1 in an austerity move, NBC's Law & Order: SVU moved across the river to shoot in New York.

Tax analysts say it's about time Hollywood took a back seat to more pressing needs. "We are starting to stem the tide of state government pandering to the film industry," says Bill Ahern, policy director for the Tax Foundation, which advocates lower taxes.

Tax-Credit Transfers

The credits also have aroused criticism because some states make them refundable. That means a production owing little or no state taxes still gets a check for the portion of the tax breaks it didn't need. In Michigan and 13 other states the credits are also transferable and can be sold in a secondary market to companies looking to cut their own taxes. Often the transactions are secret. A Connecticut nonprofit's Freedom of Information Act request forced the state to reveal that Bank of America (BAC), Wachovia, Hershey (HSY), Comcast (CMCSA), Provident Life & Casualty Insurance, and Colonial Life & Accident Insurance had bought credits from filmmakers to lower their tax bills. Provident, Colonial, and Bank of America confirmed that they purchased the tax credits and declined to comment further. The other three declined to comment. "Outrageous," says Robert Tannenwald, a former vice-president at the Boston Federal Reserve Bank and now a senior fellow at the Center on Budget and Policy Priorities. "There's no reason for a government to finance a financial institution in such a circuitous way."

In Louisiana (which first offered Hollywood tax breaks in 1992), a film studio owner is set to be sentenced in January after pleading guilty to wire fraud in a scheme to sell $1.9 million in bogus credits to quarterback Drew Brees and other New Orleans Saints. A subsidy scandal hit Michigan in August when an investor in a planned Grand Rapids studio was charged with attempted fraud in applying for the state's 25 percent movie infrastructure credit. Iowa suspended its tax-credit program last year after two producers were charged with fraud.

Filmmaker Michael Moore attacked film tax credits in 2008, saying large corporations like Viacom (VIA) were getting them. He now says the lures are important for Michigan because it's "so far down in the toilet" economically. A Flint native, Moore says he's using the $1 million state credit he received for last year's Capitalism: A Love Story—distributed by Viacom—to restore aging theaters around Michigan.

Still Generous

Some states are staying in the game. California began offering credits last year; New York just extended its program for five years; and Florida and Virginia recently enacted new enticements. "I think the states are recognizing that they are an economic stimulus," says Vans Stevenson, a senior vice-president of the Motion Picture Association of America.

An October poll shows Michigan voters like the movie subsidies, and it's no surprise, says economist David Zin. There's a certain thrill to having Drew Barrymore (who shot parts of her directorial debut, Whip It, in Michigan) take up residence, if only temporarily. But the total return in tax revenue has been a little more than 10¢ on each dollar spent, Zin says, adding that Michigan will probably get some $80 million in economic activity from productions—less than the $125 million the state will likely spend. "With that kind of money," Michigan State University economics professor Charles Ballard says, "we could have a citrus industry in the Upper Peninsula."

Carrie Jones, the Michigan Film Office director, says Zin's numbers don't tell the whole story and that it's too soon to judge the program's success. "We need a little more time," she says. Time may have run out.

The bottom line: States are canceling subsidies used to lure Hollywood productions, which aren't creating enough jobs to justify the cost.

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