Is Revenue Lost if it Can’t be Gained in the First Place?

PRE-Dendum“: Be sure to read the comments for much clarification regarding how the credits are sold by the production companies, etc. Basically, the below analysis is flawed because I made some faulty assumptions and didn’t completely understand the tax credit “market” in this case. (It’s the same idea as the historical tax credits). What is clear is that the system of buying and selling tax credits is ripe for exploitation and many loopholes need to be closed. Perhaps the solution would be to lower the overall tax burden instead of coming up with “innovative” programs like this?
So let me get this straight: in order to attract movie studios to Rhode Island, the state offers tax credits. However, a cost benefit analysis done by the state’s Department of Revenue indicates:

The state gets back 28 cents for every dollar it gives up to the production companies, according to a recently released state Department of Revenue analysis. That’s an investment return of negative 72 percent.

Ouch. Not so good, right?

“The analysis proves that subsidies for motion picture production are a bad investment of state funds and suggests that the only movie credits that are meaningful are the ones rolling at the end of the film,” said Kate Brewster, executive director of the Poverty Institute at Rhode Island College. “In these extraordinary tough fiscal times, limited state resources should be invested in proven economic development strategies like work force training.”

Hmmm. Wait a sec. Let’s back up and hone in on the fundamental number:

…the state gets back 28 cents for every dollar it gives up to the production companies…

Would those dollars that are “given up” also be dollars never gained if the production company hadn’t set up shop in Rhode Island in the first place? Aren’t there basically three possible scenarios, here?

Scenario 1 – “Dreamland”:
State of Rhode Island – Please make your movie in Rhode Island. We’re a great place!
Production Company – OK!
Theoretical “Dreamland” Result – $1 million in the State’s coffers!
Scenario 2 – “Reality (w/out tax incentives)”:
State of Rhode Island – Please make your movie in Rhode Island. We’re a great place!
Production Company – OK, but what can you do for us?
State of Rhode Island – Um. Nothing.
Production Company – Forget it, we’ll go somewhere else.
Real Result – $0 in the State’s coffers.
Scenario 3 – “Current Reality”
State of Rhode Island – Please make your movie in Rhode Island. We’re a great place!
Production Company – OK, but what can you do for us?
State of Rhode Island – We have tax credits targeted for your industry, but act now before we hit the cap!
Current Result – $280,000 in the State’s coffers (via direct taxes).

In other words, isn’t the premise surrounding a loss of direct revenue completely flawed because it assumes the production companies would make movies here without a tax credit? How else to explain this sort of economic thought?

…limited state resources should be invested in proven economic development strategies like work force training…

So what limited resources are being invested, exactly? How do you count a potential revenue source as an actual resource if the reason for said revenue being generated is never created in the first place? Put another way, does this mean we can theoretically tax a movie studio who doesn’t set up shop in the state and put those proceeds towards “work force training”? Is this how it works….
Production Company: We’d like to make a movie in Rhode Island, do you offer tax incentives?
State: Nope.
Production Company: But we simply won’t do business in Rhode Island if you don’t offer any tax incentives. Other states do it.
State: Look, we can’t. We used to, but under that old system we would have lost $.72 on every tax credit dollar.
Production Company: How’s that work? If we don’t come in, you get nothing at all.
State: No, you don’t get it. We figure we’ll make about $1 million off of you in direct tax revenue if you set up shop here without us offering a tax credit.
Production Company: No, YOU don’t get it. Without incentive, we’re not coming at all. Isn’t $280,000 better than nothing?
State:Like we said, we used to do that, but then we’d be losing a potential $720,000 in resources. That’s $720,000 that we could be investing in job training instead of you!
Production Company: Wha….?
State: (Pause) Tell you what, instead of making your movie here, just give us $1 million.
Production Company: Slaps head.
So, am I missing something? (Really, let me know). Anyway, there is one very important caveat:

The cost-benefit analysis focuses only on direct economic benefit to the state — namely increased tax receipts — while ignoring the indirect benefits and impact on the economies of cities and towns. The report is also based on general projections and doesn’t look at the details of the production costs of each project. (A separate “micro analysis” is expected later in the year.)

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15 years ago

If the state did a good job in limited what counted as qualified expenses, you would be right. From what I understand though, the rules are lax enough that there is no guarantee that the money being spent is actually being spent here. The law limits expenses that are “directly attributable to activity within the state,” a loophole big enough to allow just about anything. There is nothing, for instance, barring a company from hiring a Massachusetts catering company and charging 25% of the cost to RI, as the food was eaten here. In fact, that’s exactly what happens.

15 years ago

Rhode Island movie tax credit is 25% in a $300,000 to $5 million movie that shoots its primary scenes in state. If the credit exceeds what they owe for the year, they can use the excess in future years or sell the tax credits to someone who needs the write-off. The reporting forms required by law and the RI Film & TV office are very loose to say the least. RI Film Office The real question is in the GA haste to create a tax credit and state film office trying to lure the film industry to RI were all necessary reporting requirements and loopholes closed? The $0.72 reported lost on the dollar might be made up in part by other taxes not reported on RI tax credit forms on local purchases within the local cities and towns. Here again, the RI reporting paperwork at best leaves a lot to be desired. In contrast, Hawaii has 2 sound stages on the Island of Oahu (1 sound stage is owned and operated by the State of Hawaii) with a third 21 acre sound stage in the planning stage for construction later this year Over 27 movies, TV shows and commercials were filmed in Hawaii in 2007. As related to production of movies, films, TV shows and commercials in Hawaii, Hawaii has a 15-20% Motion Picture, Film, and Digital Media Income Tax Credit or the 100% High Technology Business Investment Tax Credit. Hawaii also has the “Royalties Tax Exemption” Amounts received by an individual or “qualified high technology business” as royalties, copyright, and trade secrets, are excluded from gross income, adjusted gross income and taxable income on the taxpayer’s Hawaii state income tax filing. Hawaii has required paperwork and written instructions to cover all possibilities. Hawaii required paperwork for 15-20% Motion… Read more »

William Felkner
15 years ago

Therein lies the problem – and the flaw with Scenario 3. If the tax credits are sold to a company that currently pays taxes in RI (CVS as an example), then giving them $10mm in tax credits to get $2.8mm from the film industry is a bad investment.
But that is not to suggest that we get rid of the program – just fix it so those deals can’t be made. Better yet, offer the same deal to everyone!

15 years ago

Under Appendix B: Acceptable Workforce Development Contributions of Hawaiian 15-20% Motion Picture, Digital Media, and Film Production Income Tax Credit requirements paperwork is the requirement to provide at least one documented, at a minimum set financial level, acceptable workforce development contribution to the people and educational resources of Hawaii in order to qualify for tax credit.
So the State of Hawaii 15-20% Motion Picture, Digital Media, and Film Production Income Tax Credit is also tied directly to workforce training.

15 years ago

Yes, you are completely missing the point.
The film company sells the credits to RI’ers who have income tax liability to the state, since the film company probably has little state tax liability. The credits are transferrable, that’s why they have value. The buys purchase the credits for less than their face value (say 85 cents on the dollar). Those credits are then used by the buyer to reduce his or her state tax liability. Buy a credit for 85 cents and reduce your tax liability by one dollar. You save 15 cents.
The production company probably has no state tax liability because it’s earnings are not reported in RI.

George Elbow
George Elbow
15 years ago

Marc, I think your analysis is flawed, as William Felkner pointed out. Your analysis would be valid if the program simply gave the Production company a tax break via a lower tax rate. Say for example, they paid 5% Sales tax instead of 7%. Then, you could argue that even though they are paying a lower rate, at least they are generating tax revenue that otherwise would not have existed. But since they are receiving Tax Credits, the analysis is different. As Mr. Felkner astutely noted, the production company may in fact generate revenue, but the cost must be measured by what is “given up” (which is the tax credit). Think of it this way: Step 1: Production Co.’s activities result in the State collecting 28 cents that it otherwise would not have collected, but for the “tax credit” incentive. Step 2: Production Co. from California typically does not pay taxes in RI, therefore, has no way of utilizing the Tax Credit incentive (i.e. they have no income tax from which they can deduct the Tax Credit). Step 3: To realize an economic benefit (i.e. an incentive) from the Tax Credit, they sell it to you. Without that Tax Credit, you would have paid $1 in taxes. However, because you now have that Tax Credit, which you purchased from the out of state Film Co., you pay $0 in taxes. Thus, without the Film Tax Credit deal, the State would have collected $1 of taxes (from you). With the Film Tax Credit, the State collected 28 cents from the Film Company’s activities and $0 from you. Thus, the State ultimately collected 72 cents LESS as a result of the Film Tax Credit. The 28 cents it generated from the Film Co. cost them $1 of Tax it otherwise would have… Read more »

15 years ago

Pragmatist and George Elbow,
Correct me if I am wrong but, the tax credits are only applied to the total “in state tax” liability the movie/TV/Corporations/Studio/etc; would pay on purchases, salaries, business operations and contracts during the in state production period.
Hawaii has an extensive list of what can be applied to tax credit. I’ve not found any list as yet in RI.

George Elbow
George Elbow
15 years ago

I’m not sure what the answer to your question is.
But I don’t think it changes the outcome of the analysis.
Marc should run this by Andrew who is usually pretty sharp when it comes the numbers.
Perhaps I am missing something, but I am pretty sure that giving away Tax Credits to an out of State entity that typically does not have a RI State Tax liability (and therefore sells those Tax Credits to someone that CAN use them) is a net loser for the state, regardless of the marginal tax revenue generated by the “incentive”.
Further to your point, however, on HI having an extensive list of allowable items and RI not appearing to have the same, does it suprise you?
A nanny-state typically doesn’t worry about the details (where the devil lives) in their rush to give away other people’s money.

15 years ago

I agree with Mr. Elbow and I’ll add that the reason this deal/scheme is so complicated is because taxes are so freaking high in the first place.
If tax rates were low and fair, then business who find Rhode Island suitable and attractive for their type of business would be here. We wouldn’t have to come up with complicated (and unfair) schemes to get them here. Maybe we wouldn’t be making movies here, but we’d be making a whole lot of other things.

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