As Real as It Gets

Could economic development from the film and TV industry somehow be more real and sustainable than the latest over-the-top staging of yet another hip, mixed-use lifestyle center?

Could a place like the United Kingdom — where Brexit is reality and film/TV studio construction is outpacing property supply — turn into a Fantasy Island of entertainment, where nothing is real (but the jobs) and there’s nothing to get hung about?

Judging from projects such as the proposed £135 million (US$177 million) redevelopment of a locomotive factory into a film and TV studio complex in Ashford, Kent, the answer is “Yes.” Quiet on the set, in other words, transmutes into a loud impact on the bottom line.

Site Selection over the years has documented the nomadic wanderings of film & entertainment productions and studios. But the Motion Picture Association (MPA) has never moved from the spot it inhabits in the nation’s capital, where a grand reopening of its global HQ was held in the fall. MPA Chairman and CEO Charles Rivkin will tell anyone who will listen that production incentives and tax credits for his industry — whether in the State of Georgia or the Republic of Georgia — are worth it.

“Tax credits have certainly worked for our industry in the United States,” he told an audience at a Cannes Film Festival conference last May. “On average a major motion picture contributes $225,000 every day to the local economy.”

Those local economies are benefiting. In Atlanta, Tyler Perry’s newly expanded studio empire not only has its own White House, but has already hosted a Democratic Party debate among those vying to live in the real one. The opening of the new Aztec Warriors Studios in nearby Decatur next week just adds to the growing profile of Atlanta and Georgia, despite boycott threats from the industry due to fetal heartbeat legislation signed by Georgia Gov. Brian Kemp last year but currently on hold after a federal judge’s ruling in the fall blocked it from going into effect.

Near North and Farther North

Whether that law eventually goes into effect or not, one region looking to steal back some of Georgia’s mojo is Chicago — where the whole film incentives story really started in 2008 with the passage of the Illinois Film Production Tax Credit Act after former Mayor Richard M. Daley a few years earlier had publicly lamented that the hit film musical “Chicago” wasn’t filmed in Chicago, but on a soundstage in Toronto.

"Chicago was a production hub for years before the production incentives," explains Vans Stevenson, senior vice president for state government affairs at the MPA. "The publicity surrounding those pronouncements by Mayor Daley got policymakers and governments around the country looking at location production and tax incentives as a way to spur jobs and economic development. For the first couple of years, we were just providing information to states in particular about how to compete with Canada."

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"By extending this tax credit system through at least 2026, we’re guaranteeing that good-paying union jobs in the film industry aren’t going away anytime soon."

— Illinois Governor JB Pritzker, August 2019

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Among the city’s industrial-to-make-believe success stories is Cinespace (whose founder Alex Pissios’ dramatic story was expertly chronicled in the cover story of Chicago magazine’s December 2019 issue by J.R. Jones). Eight years into its existence, the expanding complex near Douglas Park has 31 soundstages, with another three just opened in Little Village nearby. Among the development’s film and TV credits is the rock-solid family of producer Dick Wolf-produced dramas such as “Chicago Fire,” as well as film projects such as Spike Lee’s “Chi-Raq.”

Ironically, Cinespace’s roots hark to Canada, where Pissios’ uncle Nick Mirkopoulos founded Cinespace in the late 1980s and today it is run by his sons. The studio now operates more than 2 million sq. ft. of space in Toronto and Chicago, last year signing Netflix to a large lease at the company’s new digs on marine terminal land owned by PortsToronto. Netflix, which at the same time signed with Pinewood Studios in Toronto, in 2017 pledged to invest C$500 million in Canada over five years.

According to a release, the City of Toronto did not offer Netflix any tax breaks or other incentives. But the province of Ontario offers a film and TV production services tax credit of 21.5% to foreign-controlled corporations (stipulating that Ontario labor is at least 25% of the qualifying production expenditures claimed) that can be combined with Canada’s federal tax credit of 16% to eligible film or video productions.

Last August, Illinois Governor JB Pritzker extended the Illinois tax credit program, which offers a 30% tax credit for qualified production spending and labor expenditures, up to $100,000 per worker, within the state of Illinois. Applicants can receive an additional 15% tax credit on salaries paid to individuals (earning at least $1,000 in total wages) who live in economically disadvantaged areas whose unemployment rate is at least 150% of the state’s annual average. The Illinois film office reports that film production in FY 2018 totaled more than $263 million and supported 15,970 jobs, including positions attached to award-winning comedian and director Jordan Peele’s next film “Candyman,” which has begun filming in Chicago.

Duane Sharp, owner of Chicago Talent Network (and my lifelong friend from Kansas City, where we nurtured each other’s theatrical and creative ambitions), has a full list of stage and screen credits to his own name, and has worked as a Chicago talent agent for the last 25 years.

"Illinois wisely maintained the film tax incentive when it came under assault,” he says. “This allowed Chicago to build on its growing film production industry and remain competitive against other production hubs like Atlanta. Without the film tax credit extension, Chicago wouldn’t be in the discussion for Netflix and other entities considering ‘third coast’ production options."

Awards Season

Site Selection has broken down the MPA’s latest U.S. statistics in an effort to find out what’s real and what’s make-believe when it comes to entertainment production dollars (see charts).

Only three states — California, New York and Georgia — surpassed 100 film or TV productions during 2017-2018. Those three states were joined by just two others — Texas and Florida — in surpassing more than 150,000 jobs driven by the industry, with California’s 722,160 amounting to more than 200% of No. 2 New York’s total.

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"Quite frankly, a production incentive could not survive if it did not produce jobs and investment."

— Vans Stevenson, Senior Vice President for State Government Affairs, Motion Picture Association

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But the Empire State is holding its own when it comes to quality. Empire State Development (ESD) in early December noted that 22 New York-based productions had earned 46 nominations for the 77th Annual Golden Globe Awards held earlier this week. The productions generated more than $809 million in spending and created approximately 41,955 new jobs across the state. All nominated productions participated in the New York State Film Tax Credit Program, launched in 2004. To date in 2019, says ESD, 192 film and television projects have applied for the program, estimated to have generated 249,466 new hires and more than $4.7 billion in new spending.

In terms of industry jobs per capita, our analysis shows Connecticut, Colorado and Utah ranking Nos. 4, 5 and 6, proving that smaller states can carry their weight when it comes to historic settings, ideal scenery and filming conditions, qualified talent and incentives.

The MPA’s Vans Stevenson says the organization didn’t lobby for incentives in their early days, because neither the MPA nor its members could promise anything nor directly tie a project’s attraction to those incentives vs. other factors such as crew availability or supply chain and physical infrastructure. But as with film projects themselves, things can take a while to develop.

“Over time, these production incentives evolved, and the ones that were predictable and sustainable over time caused investment to evolve and develop in places like New York, Illinois, New Mexico, Louisiana, Georgia and elsewhere," he says. "What’s indicative of the longevity is the development of basically permanent cast and crew in many locations because of the repetitiveness of productions. That also gave confidence to banks and investors who decided to develop local soundstage facilities and other kinds of businesses — equipment rental, lighting, cameras, hardware stores that focus on the kinds of needs productions have. Illinois is a good example of places where existing studio space existed, but development happened on top of that." After more than a decade of the state’s production tax credits, supporting such investment, "that kind of structure gives confidence," he says.

Were it recognized as a state, the District of Columbia, with nine productions in 2017-2018, would have placed fourth in per-capita job creation. But it might be able to do more.

"A lot of second unit comes to DC, but DC doesn’t have a well-funded production incentive," Stevenson explains. "They’re looking at it, but haven’t funded it to the level where it can attract a streaming series or a major motion picture. Principal photography is unlikely to be done in DC. ‘House of Cards’ was all shot in Baltimore. ‘Wonder Woman’ was there for a week or two, but the rest was shot elsewhere. For ‘Captain America,’ a second unit for scenery was there, but downtown Cleveland made for the majority of principal photography because of the incentive in Ohio."

The Editing Room

Some aren’t so confident in the need for incentives, however, arguing (as many do against other economic development incentives) that the business would have come anyway, for other reasons.

The list of expenditures covered by Georgia’s film tax credit allows most items to be eligible, from tutors for minors to airfares, private jets, helmet cameras, animal trainers and FX animation. But for nannies, wrap parties and studio executive travel, the well-funded studios are on their own. (The state offers separate incentive programs for post-production and for music production.)

More than $3 billion in credits were generated from 2013- 2017, with the amount increasing each year. In 2016, more than $667 million in film tax credits were generated, with the amount growing to more than $915 million in 2017, reported an audit of the program by Georgia’s Department of Audits and Accounts that was released earlier this week. While the program was not found wanting on principle, it was found lacking in controls.

“Due to control weaknesses, companies have received credits for which they are not eligible and credits that are higher than earned,” the audit stated. “Production companies receive a tax credit up to 30% of reported in-state expenditures if they spend at least $500,000 on qualified productions. While not unusual for a state film tax credit, Georgia’s rate is higher than the income tax rate and rates for many other Georgia tax credits. Additionally, the credit is uncapped for film production companies and can be sold to other taxpayers, providing taxpayers with an even greater incentive to misstate financial information to their benefit.

“While the state has granted billions in credits, it does not have an adequate system of controls to prevent the improper granting of credits. We found issues with the credit’s administration by the Departments of Revenue (DOR) and Economic Development (GDEcD). The issues can be attributed to limited requirements and clarity in state law, inadequately designed procedures, insufficient resources, and/or agency interpretations of law that differ from our own.”

Moreover, the audit found, “despite granting more credits than any other state, Georgia requires companies to provide less documentation than any of the 31 other states with a film tax incentive. Georgia is one of only three states that does not require an audit by the state or a third party, and the other two states (Arkansas and Maine) require more expenditure documentation than Georgia.

“DOR has audited approximately 12% of tax year 2016 projects, representing nearly 50% of credits generated that year,” the 75-page document continues. “The difference in coverage is largely attributed to production companies with larger projects — not DOR — initiating most audits. For a fee set to cover its costs, DOR conducts audits at the request of production companies. These audits ensure that DOR will not challenge a credit amount at a later date, allowing the production companies to sell the credits for a higher premium. (Many production companies have little Georgia income tax liability, resulting in at least 80% of 2016 credits being transferred/sold to other taxpayers.) Companies that do not choose to be audited are unlikely to be audited.

“When audits are conducted, the procedures do not detect all ineligible expenditures. Our review of eight previously audited projects identified approximately $4 million in ineligible expenditures that had not been disallowed. These included payments to employees or contractors for work not performed in Georgia and to vendors outside the state. We also found expenditures outside the eligibility period, for items unrelated to production, and for wages above the employee salary cap.”

In response to the audit’s release, the Georgia Screen Entertainment Coalition released a statement today (January 9) noting that the film tax credit "has worked as intended and built an industry that spends nearly $3 billion per year in the state and employs tens of thousands of Georgians in high-paying jobs."

“The film tax credit is a good deal for Georgia and its taxpayers,” said Kelsey Moore, executive director of the coalition. “The state’s film industry has seen unbelievable growth since the credit was put in place, and taxpayers are now reaping the rewards of the billions of dollars the industry — and taxpayers  have invested. Reducing or eliminating the tax credit wouldn’t cause a surge in tax revenues; it would do the opposite. We’d lose an industry, we’d lose good jobs, we’d lose the huge economic impact of the productions and we’d lose the public and private sector investments we’ve made in the industry since 2008.”

Control and clawback provisions are a fundamental part of any incentive program. But even as Georgia digests this scolding and takes appropriate corrective action, the practice of offering incentives is not questioned in the audit. Not so with a study released in September by Michael Thom, associate professor at the University of Southern California’s (USC) Sol Price School of Public Policy, who leads off his findings by saying, “You may not have seen the latest movie blockbuster, but you very well may have helped pay for it.” While the number of states offering film incentives has declined from 44, investment has not.

The MPA’s new HQ in Washington, D.C., included an exhibit of props, costumes, and memorabilia from iconic films and television shows from each of the association’s member studios: Disney, Netflix, Paramount, Sony, Universal, and Warner Bros.

Photo by Gary Landsman courtesy of MPA

“In 2017, according to state government reports, over thirty states granted the industry a combined US$1.7 billion in corporate income tax expenditures, not including the value of other program services,” Thom reported. “About 77% was concentrated in five high-expenditure states (New York, Louisiana, Georgia, Connecticut, and Massachusetts) that represented only 58% of expenditures five years earlier. Cumulative spending in these states rival those for prominent economic development megadeals.”

The MPA went out of its way to refute Thom’s study for what it called “poor data selection, methodology problems, and its authors’ repeated dismissal of positive effects from production incentives that demonstrate a clear pattern of bias.”

“It is unfortunate that a well-respected academic institution that counts some of the greatest filmmakers, directors and actors among its alumni is promoting this fundamentally flawed research,” Vans Stevenson said in the fall, noting that a previous study by Thom published in 2016 had similar “serious flaws.” “It’s no surprise that the research was funded by the Koch Foundation, which has a long history of leading a campaign to eliminate state production incentive programs.”

Unbreakable, or Runaway Train?

In his conversation with me last month, Stevenson said incentives cutbacks usually stem from political ideology, not analysis, pointing to Michigan as a state where infrastructure was built and production was coming, but then was slowed by an administration that didn’t believe in incentives. Both opposition and support can cut across both major political parties. Stevenson

Says the programs that have demonstrated longevity have traversed both Republican and Democratic administrations in such states as New Mexico, Louisiana, New York, California, Massachusetts and Pennsylvania.

“We can demonstrate that, every place they’ve lasted, they’ve produced jobs and economic development,” Stevenson says. “Quite frankly, a production incentive could not survive if it did not produce jobs and investment. They survive based on the embrace of that kind of policy rather than pass/fail. You have to have an incentive that’s competitive and meets the economic needs of those applying, and based on production requirements.”

While not privy to the site selection matrix employed by MPA’s six member studios, Stevenson says, anecdotally, cost, convenient and creativity rule the roost.  

“With rare exceptions, right now cost is a driving factor,” he says. “Script requirements, or creativity, would be second, and then where the majority of the business lives — New York and California — would be third.”

Georgia has been surging above everyone in productions, he says, not only because of the above-the-line/below-the-line tax credit, but because “Georgia can look like itself or a million other places — urban, rural, seaside, mountains. It has a competitive credit, a plethora of soundstages, and there you have it.”

All the better to compete for the approximately 500 scripted TV or movie projects floating out there today, primarily being driven by streaming.

“Are there facilities available?” Stevenson asks. “Do I have crews? Scripted TV has come back. But all of it has increased arithmetically in all genres because there are that many more choices for consumers. Consequently there is a lot more programming out there. Our research, based on the foundation of FX research in terms of scripted programming, shows that we’ll probably see another 100 or so in the next year on top of the 500 that are out there, because half a dozen or more major streaming services are coming online,” such as Disney Max and Peacock.

The competition for those productions is global, with many locations in Europe now becoming more attractive. As Charles Rivkin told his Cannes audience last year, incentives are helping attract projects in Germany, Hungary, France, the Czech Republic, Croatia, and Malta, among others, with new programs coming online recently in Romania and Greece.

“I think it will get more intense over time,” Stevenson says. “It’s a very competitive business,” he says, where no particular formula exists that will always produce results. As with many a film, as much magic may happen with tweaks in the policy editing room as it does with fancy soundstage grand openings.

“It’s a very risky business,” he says, “and ultimately, we’re all competing for the leisure time and dollars of consumers.”