Deal, or no deal
By Stephanie Riegel, Originally published on the Business Report.com
Monday, August 24, 2009
During the recent legislative session, the state’s movie industry pushed to increase from 25% to 30% the production tax credits that make it attractive for movie producers to bring their business here. But the Jindal administration and its supporters argued that in a tight fiscal year, the state couldn’t afford to lose the revenue that would result from the more generous program.
In an effort to get the bill passed, industry lobbyists came up with a way to soften the fiscal impact of the bill by allowing the state to buy back the tax credits at 85% instead of the 100% they were paying. That way, the state would have an opportunity to recoup some of its lost tax revenue. In effect, the bill wouldn’t cost anything. It passed.
Turns out, however, there’s no guarantee the new law will be revenue neutral. Far from it. Instead, the legislation likely will cost the state money. State Legislative Fiscal Officer Greg Albrecht says he made that clear during the legislative hearing process—but was ignored.
“I wrote down with some emphasis that the only way this would be revenue neutral was if you had 100% participation, and that’s not going to happen,” says Albrecht, meaning that every production company would have to sell their credits back to the state instead of to the many tax credit brokers who have made a lucrative business dealing in the credits over the past few years.
Not that the brokers were particularly worried about the new law to begin with. Some already pay more than 85% for tax credits. Others pre-buy them to help small or independent filmmakers finance their productions, something the state doesn’t do.
“There is still plenty of business for tax credit brokers,” says Lampton Enochs at Louisiana Production Consultants, a Shreveport-based production services company.
So what will the new provision in the legislation mean? For now, it’s too early to tell. No one has taken advantage of selling back tax credits to the state. But those who lobbied for the change say the bill was critical to the success of the state’s motion picture industry, and adding in the state buy-back provision was the only way they could get it passed.
“This business is not about tax brokers,” Enochs says. “It’s about making movies and creating jobs.”
It’s a business that’s becoming more competitive. Since Louisiana created its popular tax incentive program in the early 2000s, more than half the states in the country have adopted similar programs—and some are even more generous than Louisiana’s. Faced with increasing competition and the downturn in activity because of the recession, the state’s film industry pushed to increase the production incentive, which had been scheduled to be phased down to 15%.
The governor’s office went along with keeping the incentive at 25%, but opposed increasing it on the grounds that it would increase the bill’s $100 million fiscal note. That’s when the film industry lobby allowed the state to buy back tax credits at 85 cents on the dollar. It was a numbers game based on a lot of assumptions, but the end result was that the fiscal note stayed even at $100 million.
“When you’re talking about trying to sustain an industry and remain competitive, we had to look at what was best for the industry and we needed the 30% and that’s how we got there,” says Marquis Pierre, a lobbyist in Shreveport who worked on the measure. “It neutralizes the fiscal note.”
In theory, perhaps. But in order for the state to break even when it’s giving larger tax breaks—and potentially increasing the market for those larger tax breaks—every movie producer who comes to the state would have to sell credits back to the state instead of going to a broker, according to Albrecht. And that’s virtually impossible. Brokers have been instrumental in making the program work, and of them many have long-standing ties to different production companies.
“Even if a broker was paying less than the state, I suspect a producer would deal with the business connections they’ve got,” Albrecht says. “For a point or two, why rock that boat?”
Brokers concede they might lose some business to the state simply because of the perception that the state provides a higher, more solid foundation.
“They’re perceived to have an unlimited tax base to support a credit,” says Leonard Alsfeld, president of FBT Film and Entertainment in New Orleans. “We assume the full faith of the state is better than anyone else’s, and if they will buy credits immediately at 85% that will sound good to some people.”
In general, brokers aren’t particularly worried about the state cutting into their business. For one thing, firms like FBT Film and Entertainment, which is affiliated with First Bank and Trust, are already paying more than 85 cents on the dollar for tax credits. Alsfeld says the going rate these days is more like 86 or 87 cents, with a markup of three or four percentage points.
Then there’s the niche market some brokers have carved in pre-buying tax credits at a deeply discounted rate of between 70% and 75% of their value. It’s riskier, but it helps small or independent studios finance their productions.
“For those brokers who want to monetize the credits on the front end,” Enochs says, “there is still ample opportunity.”
So where is the logic in getting the state in on the deal?
“It was just a way to make that first year look as palatable as possible to the administration,” Albrecht says. “It was a way to confect something and sweeten the deal.”
Officials with the state’s Office of Entertainment Industries Development say the new law was something that had to happen and is a good deal for Louisiana.
“It’s really a win-win,” says Chris Stelly, the director of film and television for the OEID. “If the state buys it back, we save 15 pennies and it provides a higher, more solid foundation for the production company.”
But Alsfeld says it doesn’t make sense, and his bigger concern is not that the state will take away some of his tax credit brokerage business, but that it might not be able to ultimately sustain the level of payouts it has promised to the industry. Other states have had similar problems and had to impose caps, which Alsfeld says is the kiss of death in the movie industry.
“I am just not a fan of government in the private sector participating in a world that has been supported quite successfully by the private sector,” he says. “The jury’s out on whether this is going to work.”
This article originally published TheBusinessReport.com and is written by Stephanie Riegel. View the original source of the artilce here: http://www.businessreport.com/news/2009/aug/24/deal-or-no-deal-gvpt1/