Buoyed by recent enhancements to film tax incentives, movie-making in North Carolina is in the midst of an unprecedented surge, but lawmakers’ plans to overhaul the state tax structure in 2013 place a cloud of uncertainty over the industry’s long-term prognosis.
Jason Rosin, a member of the N.C. Film Council and a business agent for the International Alliance of Theatrical Stage Employees Local 491, a trade union, said any industry that relies on the state for some sort of tax incentive should be concerned about the tax-reform effort that Republican General Assembly leaders promise to undertake in the 2013-14 session, which begins in late January.
The state, Rosin said, has consistently “shown a level of responsibility in regards to shepherding industries and done it historically in a measured and intelligent manner.”
“To drastically change that direction, it is worrisome,” he said. “In the film industry, there are thousands of families that are counting on these jobs. We’d like to see these jobs continue, and continue to grow.”
But others want lawmakers to abandon film incentives and similar targeted tax breaks in favor of lower taxes and less regulation for all businesses.
“I would like to see the incentives program ended,” said Jon Sanders of the conservative John Locke Foundation, who recently published a report critical of film incentives.
Republicans have repeatedly mentioned their plans to take on tax reform but have given few details.
In a phone interview last week, Sen. Bob Rucho, a Mecklenburg County Republican and chairman of the Senate Finance Committee spearheading the tax-modernization effort, didn’t hint as to how the film industry would fare.
“Who knows?” said Rucho when asked whether film industry advocates would be pleased when the process is complete.
All of the state’s tax programs will be looked at closely, he said. Those that create wealth, grow the state gross domestic product, or GDP, and create long-term jobs will survive the process, he said.
“I don’t believe anybody has really looked at the pros or cons or merits of any of the programs,” Rucho said. “That will take place in 2013 during committee meetings and the debate that comes from that.”
Preparing for a fight
But if lawmakers haven’t examined the issue, others have.
In his recent report – “N.C.’s Film Tax Incentives: Good Old-Fashioned Corporate Welfare” – Sanders of the John Locke Foundation wrote that the problem with film incentives is that the lower tax burden on productions results in higher taxes on “nonfavored businesses and industries.”
“Currying favor with the cool kids by paying for their low (tax) rates with high rates on others erases whatever economic gain would have accrued through more film production,” wrote Sanders, director of regulatory studies at the Raleigh-based foundation.
Among Sanders’ main arguments is that instead of trying to beat other states in the incentives game, the state should compete for all industries by cutting taxes and regulations across the board.
The report, which is available online at johnlocke.org, comes at a record-setting time for production spending in the state.
Luring a film boom
In the two years since enhanced film incentives were approved by the General Assembly, the amount of money spent on productions in the state jumped significantly, meaning the amount given back in tax credits is growing as well.
According to the N.C. Film Office, more than 35 productions plan to film in the state this year, projects expected to spend more than $300 million by year’s end and add 15,000 jobs, including more than 3,300 well-paying crew positions. In 2011, productions spent about $240 million in the state, said Aaron Syrett, director of the N.C. Film Office. In 2010, before the new incentive took effect, productions spent about $75 million.
“Two years ago North Carolina wasn’t even a top 10 filmmaking state,” Syrett said. “Right now we’re in the top three. People want to be here. They know they can get the talent here and the infrastructure, and they can make a good movie.”
Under the new incentive, among other perks, productions receive a 25 percent refundable tax credit based on their direct in-state spending on goods, services, labor and other costs, up from 15 percent before the change
The incentives legislation was expected to expire at the end of 2013, but an amendment added to a bill at the end of this year’s legislative session extended the program to the end of 2014, giving the film industry one more year under the existing package, unless tax reform alters it before then.
The General Assembly staff estimated the extra year could cost the state $60 million in tax credits.
Opponents argue that some states have recently cut back on their film incentives packages. Both sides point to conflicting studies about whether states with incentives programs return more money to state coffers than the amount spent on the tax credits.
Opponents also point to the fact that the film tax credits are “refundable.” That means if the amount of the credit that a film company receives exceeds the tax liability of the production in the state, then the state writes a check to the company for the difference.
“This is a classic example of corporate welfare,” Sanders wrote in his report. “It’s been described as choosing movie stars over teachers.”
But film industry proponents say it benefits far more than the companies that make the movies, pointing in part to jobs it creates for locals. Membership in the Local 491 – which has more than 1,000 members in North Carolina, South Carolina and the Savannah, Ga., area – has more than doubled from 425 in 2006, with most of the growth coming in the Wilmington and Charlotte areas, Rosin said. Members do work in construction, plaster, sound, wardrobe, special effects and other aspects of filmmaking.
“The state of the industry is exceptionally solid,” Rosin said. “There’s more jobs than people, so the industry’s growing.”
New faces in legislature
Those fighting on either side of the film incentives battle next year will have many newcomers in the General Assembly to woo. A recent report by the N.C. FreeEnterprise Foundation found that when the legislature convenes on Jan. 30, nearly 50 current members of the 170-member General Assembly won’t be returning to office. Others could lose election bids this fall, so the number of freshman lawmakers is likely to be higher still.
Among those not seeking re-election this year is state Rep. Danny McComas, R-New Hanover, a longtime ally of the film industry.
Rucho, the Senate Finance chairman, when asked about whether the film incentives program will be impacted next year, said he doesn’t see the need for any fuss about the issue now.
“Let’s not worry about something that doesn’t exist,” he said. “At this point, the film incentives are there. They’re scheduled to expire at the end of 2014. That’s where we are right now.”
How film incentives work
Production companies that spend at least $250,000 in the state are eligible for tax credits worth 25 percent of their “qualifying expenses” on films, TV series, commercials or other productions.
The per-project cap for credits is $20 million, but TV series aren’t subject to the cap.
Production companies also don’t have to pay the 6.9 percent corporate income tax on film tax credits they receive.
For “highly compensated individuals,” such as actors, the production can claim the tax credit only on the first $1 million of pay.
To claim a credit, production companies must notify the state in advance with information about the production.
After a production is complete and before the state issues credits, the state Department of Revenue conducts an audit of the production and the detailed paperwork it submits about its expenses.
By Patrick Gannon
(StarNews)
Patrick.Gannon@StarNewsOnline.com
Published: Sunday, August 12, 2012 at 12:30 a.m.
Last Modified: Sunday, August 12, 2012 at 11:19 a.m.
