Give the Money to the Guy with the Carpet
See now, even if one agrees with the dubious proposition that the film industry is particularly worth attracting to Rhode Island, this method of creating incentive is simply wrong:
To qualify for the tax credits, a company has to spend a minimum of $300,000 on production costs that were “directly attributable to activity within the state” on a “feature length film, video, video games, television series or commercial made in Rhode Island, in whole or in part.” …
While the tax credits are not issued until the production is complete, they are a marketable commodity from the beginning. The holder can theoretically pledge the proceeds toward payment of a loan, or wait until the end, and then sell them to people or corporations seeking to reduce their Rhode Island tax liability. Brokers here and beyond boast their expertise in this arena on the Internet.
Say a production company qualifies for $100,000 in tax credits but has no income-tax liability in Rhode Island, it can sell the credits to someone who does.
That taxpayer might pay $85,000 for the opportunity to use those credits to write off $100,000 in tax liability. The production company gets money it otherwise would not have had, and the hypothetical taxpayer in this example has saved a net $15,000 in taxes.
An analysis by the state tax department found the tax credits being purchased by relatively small numbers of people.
The $9.5 million in tax credits generated by Underdog were split among only four taxpayers. At the other end of the spectrum, the $2.6 million in tax credits generated by the feature film Evening was divided among 124 parties.
To date, the credits have been used to reduce personal income tax payments to the state by $25.2 million, and corporate income tax payments by $10.5 million, according to state tax administrator David Sullivan.
A handful of people have emerged as middlemen in the transactions, including Anthony Gudas, a former revenue agent for the state tax department.
Got that? A production company with no Rhode Island tax liability can sell its tax credits for cash money to a broker like former tax agent Gudas, who takes a cut and sells the credit again to an individual or corporation with such a large liability that the credits represent an immediate tax discount. Put another way, the tax can ultimately be credited to somebody who was already going to pay taxes, whether Rhode Island had provided the setting for the movie or not.
That’s certainly in keeping with common practice in Rhode Island. Once again, the strategy is all about government types’ granting special dispensations (handouts), rather than stepping aside to allow growth.
If we decide, through our representatives, that we want to woo Hollywooden business, we should do so via tax credits to the local companies that the studios use, thus decreasing the ultimate cost to the studios. It would be new income and therefore wouldn’t involve muddy calculations of net gain to the state.
Or better yet, we could just make Rhode Island an attractive place to do business all around.