Thu June 12, 2014
Are NC Film Incentives Worth It? Part 2: Running The Numbers
The curtain is poised to come crashing down on North Carolina’s film incentive.
Wednesday, the House Finance Committee adopted a plan which would slash the amount a production company could receive, from $20 million to five million.
The House bill is similar to one already part of the Senate budget and one proposed by Governor Pat McCrory.
It’s a major hit for a North Carolina industry that, according to the Department of Revenue, spent more than a billion dollars in the state since 2007.
But the incentive itself is expensive, and there are questions over what the state gets in return.
This week we’ve been looking at the film incentive. Today, we run the numbers to see what is at stake for the state’s economy.
There’s a term in show-biz circles that some hate and others cheer; “Runaway Production.”
When TV shows and movies leave the comforts of California to set up shop somewhere else, likely lured there by cash incentives which cut their costs and increased their chances of being profitable.
"Even though Los Angeles had the best infrastructure for film making in the world they couldn’t fight the incentives. They couldn’t fight it," says Robbie Beck, the Props Master for the CBS show "Under The Dome." Its currently shooting its second season in Wilmington.
With this latest move by the state legislature, Beck is worried the third season will be shot somewhere else. "Every year they run budgets for every other region," says Beck, "They look at what would it cost if we move to Atlanta? What would it cost if we moved to New Orleans? What would it cost if we moved to Boston?"
And the cost of staying in North Carolina? It's likely to go up significantly.
All business incentive programs work on a simple principle. The state pays something, usually tax dollars, to get something, usually jobs and tax money.
North Carolina’s film incentive program is no different.
After sweetening the deal in 2011 the state agreed to pay production companies 25 cents for every qualifying dollar they spend in state. The dramas, comedies, TV shows and summer blockbusters showed up.
But two recent reports show what the state got in return is up for debate.
The first report was by Robert Handfield, the Bank of America Distinguished Professor at North Carolina State University.
His study found in 2012 every dollar in film incentives the state paid out, it received one dollar and fifty two cents back in state and local taxes. Handfield says this comes from the taxes paid on hotel rooms on rentals, as well as payroll taxes and on other goods and services.
According to Handfield all this meant a net gain of 25.3 million tax dollars in 2012 alone.
Just a few days after the Handfield report was issued, the Fiscal Research Division published a review of his findings and it was scathing. Its summary stated Handfield's positive return was “based on a series of misunderstandings, invalid assumptions and errors in accounting.”
In fact the FRD report found, the film incentive had returned just 50 cents on the dollar, and cost North Carolina taxpayers $45 million in 2012.
We requested an interview with the authors of the FRD review and received no response. A copy of its findings can be found here.
Here’s one example of where they found fault. Handfield reported the state paid out $60 million in incentives in 2012.
That is true, but incomplete. There is a lag in reporting since the incentive is paid out after a production wraps and an audit is completed.
Department of Revenue numbers show more than 334 million "qualifying dollars" were spent, which mean a bit more than $83 million in incentives will in all likelihood be paid out.
The research division also pointed out Handfield’s study was commissioned by a group of North Carolina film commissions and the Motion Picture Association of America.
Handfield said suggestions of bias are baseless. That he’s done similar self examinations on companies like BP and Bank of America, which footed the bill. "They rely on me to report what I find," said Handfield, "That’s why I’m hired to do those kinds of studies."
The FRD review questioned, but never directly challenged other key findings in Handfield’s report.
Like without a competitive film incentive program, the film industry in North Carolina cannot survive.
As Handfield sees it, "It’s not a matter of political rhetoric, it’s just a fact,"
This seems plausible. After all, it was incentive cash that largely got the productions to come here in the first place. And other states offer much more generous programs than the changes being proposed now in Raleigh.
And what about the amount of money spent by these productions?
Official Department of Revenue numbers show production companies spent nearly 710 million "qualifying dollars" over the last three years. The state will shell out roughly $177 million in return.
By our quick calculations that works out to just over $4 spent locally for every incentive dollar they received.
And to qualify, those dollars have to be spent on salaries, which are taxable by the state, or on in state purchases or rentals. Those too, are largely taxable.
If the productions leave, they take their money with them. "You’d be looking at a big black gaping hole in the budget," Handfield says, "I think people have to wrap their heads around that fact."
Finally, there’s the question of local production jobs.
Handfield puts the number of full time employees at just over 4,200, with an average salary of $60,000 including their benefits.
If North Carolina’s film incentive ends, or is no longer competitive, Handfield says the vast majority of those jobs would be lost. Which is why he’s posed this question to his critics, "What would be the net impact of 4,200 jobs going away on the state budget?"
Handfield says he's heard nothing but silence in response, adding "Because they don’t know."
Now some productions will continue in North Carolina. After all there were movies and TV shows filmed here before the incentive. There will be afterwards as well. But nowhere near the current level of production.
Chris Cooney is co-owner and Chief Operating Officer at EUE/Screen Gems Studios. He says a number of shows filming there have already put him on notice. "We’ve been told by the producers who have the fiduciary responsibility for those shows that they’ll be forced to move in order to make their numbers work."
And some of the crew members we talked to admitted they’re already looking at houses in Georgia. It's a state with booming film industry, generous production incentives, and a legislature with no plans to change it.