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Louisiana’s film industry tax incentives pros and cons 

The film industry is growing but is it costing the state too much?

click to enlarge New Orleans Film Society Executive Director Jolene Pinder (front) says Hollywood South is the No. 1 hub for film production.

Photo by Cheryl Gerber

New Orleans Film Society Executive Director Jolene Pinder (front) says Hollywood South is the No. 1 hub for film production.

This is the first in a two-part series. Part 2 will appear in next week's Gambit.

At the opening night of the New Orleans Film Festival in October, merriment prevailed inside the Civic Theatre in downtown New Orleans. On hand for the U.S. premiere of the locally-shot Black and White, local actors, producers, technicians and cinephiles celebrated another entry in the annals of "Hollywood South," the industry built since former Gov. Mike Foster signed the state's film tax incentive program into law in 2002. As New Orleans Film Society Executive Director Jolene Pinder introduced the film, she noted a statistic borne out by the crews populating city streets, plantation houses and sleepy bayous from here to Shreveport.

  Hollywood South is "the No. 1 hub for film production," Pinder said. The crowd went wild.

  In 2012, according to a study prepared for the state-run pro-business group Louisiana Economic Development, film and television production generated more than $1 billion in sales at businesses in Louisiana, along with $718 million in household earnings from 14,000 jobs.

click to enlarge The film Black and White, shot locally, premiered at the New Orleans Film Festival in October.
  • The film Black and White, shot locally, premiered at the New Orleans Film Festival in October.

  As in silver screen fairy tales, however, the rags-to-riches narrative of Hollywood South bears only partial resemblance to a more complicated reality. In order to win the competition for "runaway productions" — the industry term for films and television series fleeing the high costs of Hollywood — Louisiana's tax incentives have transformed from an inducement into a necessity. To eliminate, reduce or cap the credits would risk a precipitous decline in local production, but offering a permanent tax break of more than 30 percent to one of the world's most lucrative creative businesses is questionable at a time when Louisiana's budget crises are forcing deep cuts elsewhere.

  Though analysts, public officials and industry figures may disagree as to the budgetary and overall economic consequences of the tax incentives, most agree the continued success of Louisiana film and television production depends on the credits themselves — for better and, perhaps, for worse.

  State legislatures across the country are debating the value of similar programs, asking if an industry so heavily subsidized by taxpayer monies can be considered "independent" and "self-supporting" — particularly if tax incentives, which originally were intended to "sunset" once the industry was established, become extended into perpetuity.

In the 1990s, when films and television series such as The Big Easy, JFK, Orleans and Primary Colors set up production locally, observers predicted boom years ahead. In one local news segment, excerpted in a commemorative documentary on "The New LA Filmmakers" produced for the New Orleans Film Festival, those interviewed predicted that the year 2000 would see Louisiana rank with New York and Los Angeles as a production capital.

  "[O]ne way or the other, the demand for movies, whatever form they take, will likely still be around," the correspondent ventured. "And Louisiana has a good chance to be center screen and up close when the call for action rings out."

  By the millennium's turn, however, these dreams of grandeur proved premature. As Canada's favorable exchange rate and production incentives drew the industry away from the United States, the amount of direct spending on film and television in New Orleans declined by more than 50 percent between 1996 and 1999. The lesson was clear.

  "Hollywood has no loyalty," says Todd Lewis, a producer on Black and White and a production manager on The Fantastic Four, filmed in Baton Rouge and slated for release next year. "They're going to go wherever the best deal is."

"Ten years ago there was really no motion picture production in the state of Louisiana, Now we're talking about film as a major part of our economic DNA." Chris Stelly, executive director of Louisiana Entertainment

  In 2002, then-State Sen. Jay Dardenne (now lieutenant governor) and former State Rep. Bryant Hammett sponsored the legislation that inaugurated the current tax incentive program. In its first iteration, the law provided a sales tax exemption to productions with budgets exceeding $250,000; a 10 to 20 percent tax credit on local wages; and a 10 to 15 percent tax credit to investors. (The lower rates applied to productions with costs between $300,000 and $1 million, while the higher rates applied to productions with costs higher than $1 million.)

  "We were looking at ways we thought we could diversify Louisiana's economy and to bring in new business and develop an opportunity for the creation of new jobs in the state in the creative world," Dardenne told Gambit. "We've far exceeded what we could have imagined back then."

  "When it was first proposed, the state had this vision that we could create a cottage industry in Louisiana where our kids ... could go out and start to produce, direct and develop movies and [television] pilots," says Leonard Alsfeld, president and CEO of FBT Film & Entertainment, a subsidiary of First Trust Corporation that offers "turnkey" services to out-of-state production companies.

  The original legislation provided for non-transferable credits, and Hollywood producers without Louisiana state tax liability faced a choice: Persuade Louisiana taxpayers to become investors, or move elsewhere. At least one project, a remake of the 1949 boxing drama The Set-Up, foundered, and Stuart Benjamin, the producer of Ray, starring Jamie Foxx, complained in the spring of 2003 that the incentives were "a tad more than an idle gesture."

  The legislature sprang into action, approving a measure later that year to make the credits transferable, meaning producers could sell their tax credits, which many of them do — essentially converting state funds into cash, rather than paying down taxes. A 2007 revision cleared the state to purchase tax credits directly from investors at 72 percent of face value, and in 2009 the legislature increased the buy-back rate to 85 percent. Taken together, these changes made the credits more liquid, more valuable and more secure, leading to the recent explosion in film and television productions.

  In 2003, 15 productions with $79.6 million in Louisiana expenditures were granted $34.1 million in credits; in 2012, 91 productions with $717.2 million in Louisiana expenditures were granted $222.8 million in credits.

  "It was a monster change in the direction of the state," Alsfeld says. "That single decision is the reason why, last year, we had the largest number of $100 million films in the world [shot in the state of Louisiana]."

  Though state officials and industry advocates cite infrastructure development, the size and skill of the labor pool, the temperate climate, the state's varied geography and Louisiana hospitality as elements in the success story, the tax incentives are and always have been the dominant factor in the growth of Hollywood South.

  "Ten years ago there was really no motion picture production in the state of Louisiana," says Chris Stelly, executive director of Louisiana Entertainment. "Now we're talking about film as a major part of our economic DNA."

  "As long as the tax incentives are here, they will always be determinative in bringing new productions to the state," Lewis says. "The business will always be in L.A. But L.A. will never be cheaper than New Orleans. L.A. will never be cheaper than Atlanta, either."

  The state's motion picture tax credits once were intended to "sunset" gradually in 2010 and 2012 as Louisiana film and television production came into its own and became self-sustaining. That rollback was quietly revoked in 2009. Policymakers and taxpayers now are in a no-win situation: Extend the lucrative tax incentives indefinitely or watch the industry flee elsewhere.

  North Carolina is an example of the latter scenario.

  Over three decades, the Tar Heel State became a popular outpost of the film and television industry, due in large part to incentives similar to those in Louisiana. North Carolina developed an extensive film industry infrastructure and a pool of skilled labor. Producer Dino de Laurentiis even built a studio complex in the city of Wilmington, North Carolina in the 1980s, where he shot movies like King Kong Lives and Year of the Dragon.

  Beginning Jan. 1, 2015, the state where The Hunger Games and Iron Man 3 were shot is slated to replace its current incentives, of which more than $83 million were claimed in 2012. Taking its place: a temporary $10 million grant program.

  Critics of the decision contend that the state's motion picture industry now faces dire  consequences.

  "As soon as the debate came up last year, we started to get phone calls from our clients," says Johnny Griffin, director of the Wilmington Regional Film Commission. "Once you become an unattractive place to do business, your clients don't call you up and say, 'We were going to come to N.C. until you changed the incentive program.' They just go somewhere else."

  Guy Gaster, director of FilmNC, the state's film commission, offers a more sanguine view. The long history of film and television production in North Carolina, the size of the state's motion picture industry and the depth and maturity of the crew base will continue to draw new projects, Gaster says, though he acknowledges that the complexion of those projects may change.

"Hollywood has no loyalty. They're going to go wherever the best deal is." — Todd Lewis, producer of Black and White and a production manager on The Fantastic Four

  "It definitely takes us out of consideration for some types of films, like your larger feature films," Gaster says. "I don't think we can take a leading role with them, but we can certainly play a supporting role."

  The move to replace North Carolina's current program, which offers a 25 percent tax rebate for qualified production expenses with a cap of $20 million per project, reflects a renewed emphasis on fiscal discipline by leaders of North Carolina's Republican-controlled legislature and Republican Gov. Pat McCrory. The new law limits the state's total outlay for all productions to $10 million, with no single project to receive more than $5 million, for the first six months of 2015 — at which point elected officials are expected to debate longer-term proposals regarding what inducements, if any, the state will offer the motion picture industry going forward.

  "Worst case scenario, we end up with a severely reduced program, or an eliminated program, and the industry can't survive," Griffin says of the forthcoming legislative session. "Plain and simple."

  The scrutiny directed at the North Carolina policy, passed as a 15 percent rebate in 2005 and raised to 25 percent in 2010 in order to compete with incentive programs in Louisiana and Georgia, follows the reduction or elimination of similar initiatives in Connecticut, Kansas, Missouri and Wisconsin, among other states. In contrast, California recently passed a measure to increase funding for its motion picture tax credits from $100 million to $330 million over the next five years in an effort to stanch the loss of film and television production. According to the National Conference of State Legislatures, 39 states and Puerto Rico currently offer such incentives.

  In Louisiana, where the motion picture tax incentives are likely to be the subject of debate during fiscal legislative sessions in 2015 and 2017, officials continue to monitor developments elsewhere, according to State Sen. J.P. Morrell.

  "We're all closely watching the implosion in North Carolina," he says. "The entire film industry abandoned North Carolina overnight. North Carolina is a graveyard."

  Asked if California's new law is evidence that even the most highly developed motion picture infrastructure is no guarantee of an industry presence without a competitive incentive program, Morrell claims that it's too early to tell. He cites California's "oppressive" tax structure and "convoluted" process for obtaining credits as reasons for production to remain in Louisiana.

  "I will be more worried if lots of films and [television] shows that are scheduled here, if they all flee back to California, that will be a key red flag for the legislature," he says. "Since California has passed that incentive program, we have seen no movement in our schedule of film productions."

click to enlarge Dawn of the Planet of the Apes filming shut down streets in the CBD for weeks in spring 2013.
  • Dawn of the Planet of the Apes filming shut down streets in the CBD for weeks in spring 2013.

Ever since Canadian cities lured film and television productions away from Hollywood in the 1990s, there's been competition to bring "runaway productions" to other cities and states. Despite the cachet and jobs of Hollywood coming to town, the primary beneficiary of the interstate competition for productions is, of course, the motion picture industry itself. In 2002, five states offered a cumulative $1 million in tax incentives for film and television; by 2010, 40 states offered nearly $1.4 billion.

  Warning that business will dry up should states decide to end or limit such policies is common, and even the mention of changes is enough to rattle producers, according to Alsfeld.

  "It hurts the industry and stops progress while the debate occurs, and that's unfortunate," he says. "They play into the hands of competitive states who love to see us flog our business. ... The minute you use that word, 'cut,' 'limit,' 'cap,' they go where there's a better incentive."

"We're all closely watching the implosion in North Carolina. The entire film industry abandoned North Carolina overnight. North Carolina is a graveyard." — State Sen. J.P. Morrell

  Since Louisiana adopted its current tax incentive program in 2002, each new round of proposed changes has been accompanied by similar words of caution from industry advocates — and each time, the revised law has emerged more, not less, lucrative for Hollywood.

  In 2005, when former State Rep. Hammett proposed an annual $40 million cap on the total tax credits awarded, Malcolm Petal, chief executive of Louisiana Institute of Film Technology [LIFT] Productions, warned, "Any fundamental change will put us back at the beginning with all the other states that are starting a program like this, and we will have lost a significant advantage." The revisions signed into law later that year ended up increasing the transferable investor tax credit to 25 percent on qualified spending, with no overall cap. (In 2007, an FBI and Internal Revenue Service investigation linked LIFT to a scandal involving former State Film Commissioner Mark Smith, who pleaded guilty to bribery charges; in 2009, Smith was sentenced to two years in federal prison.)

  As the gradual "sunset" of the incentives approached (the credit was slated to decline to 20 percent in 2010 and 15 percent in 2012), a number of states inaugurated or expanded competing programs, "We were in Michigan and Georgia's taillights," Baton Rouge-based producer George Kostuch said,

  In July 2009, the investor tax credit increased to 30 percent — and was made permanent. Louisiana's Hollywood South rolled on.

  Even a rather modest change laid out in Gov. Bobby Jindal's 2013 tax plan, which called for a $1 million cap on the amount of each actor's salary that productions could claim as a qualifying expenditure, led to further predictions of doom and gloom for Louisiana film production.

  "If such a cap is instituted in Louisiana, it will likely result in the bankruptcy of all the major studio facilities in the state and the loss of more than 10,000 jobs," Will French, president of the Louisiana Film & Entertainment Association [LFEA], wrote to LFEA members at the time, according to a report in The Times-Picayune. The proposed cap failed to materialize.

  "The folks who created this program for the state, who are no longer working for the state, always intended this to be a path to a sustainable industry," says Jan Moller, director of the Louisiana Budget Project, a fiscal watchdog group. "But if you listen to the industry themselves, they'll say, 'If you do anything to mess with these credits, we'll go someplace else.' An industry that can grow up in a state in the course of a decade can leave just as quickly."

Supporters of Hollywood South tax incentives say these changes have bolstered a nascent industry that promises to define Louisiana's economy for years to come.

  "It has been consistently strengthened over the years, and it has paralleled the growth of the industry," says Carroll Morton, manager of Entertainment Industry Development in Mayor Mitch Landrieu's Office of Cultural Economy. "You can't say that the two are not intertwined, because they are."

  Morrell cites Canada's video game production industry as a model for Hollywood South. That industry required two decades of analogous credits to create the infrastructure and skilled labor force necessary to succeed with reduced incentives. It would be "disastrous," Morrell says, to rein in Louisiana's motion picture tax credits before reaching that point.

  But no amount of infrastructure, experience, training, interest or glamour is enough to keep film and television production tied down; the bottom line is all.

  Southern California had been the industry's home for about 80 years, when Canada and then several U.S. states, including Louisiana, lured enough business to emerge as serious competitors. Despite a 30-year track record of successful projects, sources say North Carolina is poised to lose several productions to other states next year as the debate over its incentive package continues.

  Even Louisiana is not immune. In 2013, according to The Hollywood Reporter, Georgia surpassed Lou-isiana in total certified production expenditures, $979 million to $800 million.

  Indeed, as state legislators in Baton Rouge and across the country debate the merits of motion picture tax incentives in the face of substantial budget shortfalls, the political pressure to revise such programs continues to mount. Implementing cost-saving measures now, including overall or per-project caps on the credits and withholding tax on "above-the-line" salaries for directors and stars, reduces the risk of more drastic and damaging changes to Louisiana's incentive program in the future, according to Sherri McConnell, executive director of Louisiana Entertainment from 2007 to 2011 and principal of entertainment business consulting firm McConnell & Associates.

  "The scare tactic that industry completely dries up with any tweak in the program isn't necessarily true if we do it smartly," McConnell says. "We cannot continue down this path in the same manner that we are. There is no question that the economic impact is diminishing every year. ... The businesses that have either expanded or developed to support Hollywood production will rely on those tax credits and government subsidies in perpetuity if it stays the way it is, and that's just not a good economic development strategy."

Next week: Part 2 — When it comes to state incentives for Hollywood South, what do Louisiana taxpayers get for their money?

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