News & Observer: Lights, Camera…And a $69 Million Tax Rebate for Movie Industry

By J. Andrew Curliss
Last of three parts

State leaders blamed each other in October 2011 after Continental Tire chose South Carolina for a large new factory that will employ 1,600 workers.

The biggest hang-up, according to documents and state officials, was $45 million in taxpayer money the tire company said it needed to locate in southeastern North Carolina. Lawmakers could not agree on that large payment in a lump sum, with some wanting to spread the money out into the next decade on top of other state and local incentives. The factory is now being built near Sumter, S.C.

That same month, Hollywood producers made a decision that cost North Carolina taxpayers millions and supported far fewer jobs – jobs that have already come and gone. They announced the filming of “Iron Man 3” in and around Wilmington. That production, which opens nationally Friday and is expected to be a box-office smash, employed about 800 North Carolinians for seven months last year, the Motion Picture Association of America says.

North Carolina taxpayers subsidized the production with $20 million, according to state and film industry officials.

That money was the result of language in state law, embedded in the tax code, to reward companies that produce films, commercials and TV shows in the state. It is part of a tax structure quilted with special treatment for certain businesses, industries or groups, resulting in annual loopholes that have grown by $1 billion in the past four years.

Film production companies say they are owed more than $69 million from working in North Carolina in 2012, much of which will be paid in cash refunds, according to documents and interviews. That’s significantly more than what Continental Tire wanted upfront to build a $500 million factory, although other incentives to the tiremaker would have pushed the tab to nearly $100 million.

Taxpayer spending to subsidize films is on the rise following bipartisan legislation in 2010 that made the state’s incentive program more generous to filmmakers, records show. It was part of an effort to keep North Carolina competitive with other states, including Georgia, which offers an incentive seen as among the most favorable in the nation for attracting film projects.

The incentives sought in North Carolina have increased from less than $8 million four years ago to $69.2 million last year, according to the revenue department.

An examination of the film incentive program by The News & Observer shows:

• Film subsidies are not tied to job creation. Instead, the program gives filmmakers a quarter back for every $1 they spend in the state, including wages to actors and crew members.

As a result, jobs numbers do not correlate with taxpayer aid to movies made in North Carolina. One film, “Hick,” in 2011 claimed $1.5 million from taxpayers and listed 600 people employed, including actors and extras. The makers of a different film, “Arthur Newman” starring Colin Firth, claimed $1.7 million, but the production employed one-third of the people: 200, including extras.

• There’s no limit on the amount of money that can be paid out each year. No single movie project can receive more than $20 million, but there is no other cap.

To compare, the state’s main job-creation grant program – the one that often gets credit when the governor announces that a company has been lured to the state – has been capped at $15 million in new grants each year, subject to General Assembly approval.

• The most powerful part of the film incentive program lies in a single word: “refundable.” The film incentive is officially known as a “refundable” tax credit, which allows production companies to receive checks from the state treasury, even if they owe little or no taxes.

That’s because film production companies are formed around a single project, such as a movie or commercial, and are structured to generate little actual tax liability, according to industry officials.

In the past 21 months, North Carolina has issued refunds totaling $61 million as the revenue department audits ongoing claims. The state will not release copies of the checks, saying they are taxpayer information protected by law.

The only other refundable tax measure in the state, the Earned Income Tax Credit, was written to assist the working poor. Lawmakers and Gov. Pat McCrory allowed it to expire this year.

• The film incentives are granted no matter how much money a film makes. The popular “Hunger Games” movie, for example, was filmed in North Carolina and grossed nearly $700 million worldwide, according to tracking service Box Office Mojo. The production company has asked North Carolina taxpayers for $13.7 million, new records show. Plenty of competition

The film industry says the incentive money lures lots of spending when movies and TV shows are made here, cash that cycles through the economy. In the past five years, movie companies have reported spending about $600 million on wages and goods that qualified for the film credit in North Carolina, according to the state Department of Revenue.

“Iron Man 3” spent about $110 million in the state, including $19 million in wages for North Carolinians, an average of $23,000 per job. The production spent about $41 million on goods and services with more than 700 vendors, according to the Motion Picture Association of America.

The film incentives are crucial, the industry says, in providing a steady stream of work for crew members and other workers on dozens of projects.

Various studies, funded by the film industry, state governments and think tanks, reach widely different conclusions about the special tax treatment. Some states have cut back their programs in recent years. Others are beefing them up.

But there is particular support for the incentives from lawmakers near Wilmington, which has the state’s major movie studio, a collection of stage buildings northeast of downtown owned by EUE/Screen Gems Studios.

In a recent letter to leaders in the state Senate, Screen Gems Executive Vice President Bill Vassar wrote that the tax incentive for films has become so important that it keeps the entire film industry in business across North Carolina.

“(T)he absence or degradation of this credit will result in the severe reduction, if not decimation, of this important industry in our state,” wrote Vassar, who also heads the Wilmington Regional Film Commission.

In an interview and follow-up email exchange, Vassar said film projects inject new, out-of-state money into local economies.

“I have seen elected officials in Raleigh who were nonbelievers come over from the dark side once they did their homework,” he said.

But critics say the film incentives would be the star on a poster showing why North Carolina’s tax code unfairly helps decide which businesses – moviemakers and others – win and lose.

Brent Lane, director of the UNC Center for Competitive Economies, said film subsidies attract productions to the state but “are a bad idea if you’re measuring results on conventional economic development outcomes – you know, sustainable employment, high-wage employment and tax base return.”

“Film subsidies are like rented tuxedos,” Lane said. “You feel like James Bond for a weekend. But on Monday, you better have a real job. … Most times, we give an incentive to a company, and if they leave five years later, everybody is (upset) about that. You give an incentive to a film company, you know they are going to be gone in three months.”

Carl Davis, a senior policy analyst with the Institute on Taxation and Economic Policy, a nonprofit group that advocates for people with lower incomes, said film tax breaks are “of very dubious merit.”

“Frankly, it’s just not worth the cost of what they are demanding to bring them here,” he said. “They are not offering enough in return.”

In the past year, taxpayers were asked to subsidize a Dale Earnhardt Jr. commercial for Diet Mountain Dew with $331,000. The production company for “The Daily Show with Jon Stewart,” which filmed at the Democratic National Convention in Charlotte, asked for $190,000.

Film industry supporters are showing concern amid discussions of tax legislation in Raleigh.

Their worry swelled into a rally last month in downtown Wilmington, where area Republican and Democratic legislators and local officials stood before hundreds of film workers to profess their support for the incentives.

At one point, the lawmakers and workers all chanted together: “Film equals jobs! Film equals jobs!”

Job numbers vary widely
Sorting out exactly how many jobs is difficult.

Before she left office, Gov. Bev Perdue, a Democrat, issued a news release that said film productions created “nearly 20,000 job opportunities” in 2012 alone. Even the state’s film office acknowledges that is a “vague” description.

Film companies reported employing about 14,000 people in films here last year, although many of those were “extras.” The Wilmington Regional Film Commission says there are 4,000 “well paid, clean” film jobs in the state, based on data from the state’s film office.

Federal labor statistics put film jobs in a range from about 800 production jobs to as many as 4,000 when dozens of related classifications are counted, from riggers and electricians to ticket takers and fast food workers at theaters.

Patrick McHugh, a fiscal analyst for the General Assembly’s nonpartisan Fiscal Research Division, studied the impact of the film credits and issued a memo to Senate leaders in January.

His study looked at a reported $30 million in incentives given to film productions in 2011. (That figure was revised this week to $37.5 million.)

McHugh’s report acknowledged that it is “impossible” to know precisely how many jobs were created by the incentive. But, using an economic model, his study determined that the incentive likely attracted 55 to 70 new jobs – with a payroll of $2 million – to the state in 2011 “under the most plausible assumptions,” a range that film industry supporters dismiss as implausible.

His report put the total number of film jobs in the state at between 1,650 and 2,000.

Jeb Hardison had one of them. At last month’s rally, he printed a sign that said: “NC Films has kept me off unemployment for 3 years!”

Hardison, 29, of Southport said he has worked on a range of projects as either an extra or a “stand in,” someone who fills in for an actor while a scene is set up. The work pays mostly minimum wage to as much as $15 an hour, he said, and it has allowed him to live “outside of the standard molds.”

“I worked a corporate job and wasn’t happy,” he said. “Working in film has been great. The idea that they would want to do away with it just baffles the imagination.”

Other “extras” turned out at the rally, carrying signs or marking T-shirts with lists of movies and TV shows in which they took part.

More jobs from tax cuts?
Critics say the money that went to film production companies in a single year could be better spent. As part of his report, the legislature’s fiscal analyst tried to answer what would happen if the film money were used differently: What if the state instead made an across-the-board reduction in business taxes equal to the reported $30 million film incentive payout in 2011?

The result was that “reducing business taxes across the board would generate more new economic activity in North Carolina than is likely generated through the Film Credit,” according to the report.

It said the film incentive “created 290 to 350 fewer jobs than would have been created through an across- the-board tax reduction of the same magnitude.”

The Job Development Investment Grant program, the state program to give cash grants to companies in exchange for permanent jobs, is credited with creating far more permanent jobs than the movie tax break. And for less money.

From 2004 through 2011, the JDIG program spent about $75 million and is responsible for 23,000 jobs, according to the state Department of Commerce.

One recent example: Linamar Corp., a manufacturer of engine parts in Asheville, announced a 250-job expansion last year. It is eligible to receive up to a total of $2.6 million over nine years.

Commerce Secretary Sharon Decker, who oversees the state’s film office and has voiced support for the tax break for movie production companies, declined an interview request.

Fracking for films
Film supporters say cutting the incentive would mean the end of filming in the state.

That’s because other states are offering incentives, from Louisiana to Georgia to South Carolina, which last month fast-tracked legislation in trying to ensure a TV series continued filming in Charleston. New Mexico had been a leading state for filming as a result of its robust tax incentive, which was similar to North Carolina’s. But cutbacks led to a downturn in filming there and now, according to news reports, the governor and lawmakers are scrambling to lure the industry back with an even larger tax incentive.

Former Rep. Danny McComas, a Wilmington Republican who helped write the current law, said he would prefer that no states offered breaks for films. But North Carolina has to compete for them, and so he worked hard to get it through.

State Rep. Susi Hamilton, a Wilmington Democrat, has embraced the industry.

“They come to town. They hire hundreds of people. They spend a bunch of money. They go away,” she said. “And the film industry goes away if this credit goes away.”

Last year, Hamilton helped broker a deal that extended the film incentives by a year, ensuring they are in place through 2014. She took flak at the time because she also broke with her party to support a controversial piece of legislation that advanced “fracking,” a method to extract natural gas from underground. Her vote on fracking garnered film incentives support from Republican leaders.

“I’d take that vote again,” she said in an interview.

At the time of the vote swapping last summer, she had moved out of her home. She acknowledged in an interview that a film worker took over her house in downtown Wilmington for three or four months last summer, covering her mortgage payments. She said the renter paid roughly “a couple grand” a month.

She likened the situation to when people who live near big golf tournaments give up their homes to visitors. She said she rented a place to live elsewhere.

At the downtown rally last month, she implored film workers to let lawmakers know how important the tax break is and that filmmaking “touches” many across the state.

‘Count on me’
The film incentive is like other special breaks in the state’s tax code: It has lobbyists who fight for it, lawmakers who protect it, and residents who say they depend on it.

Film workers were alarmed last month when several members of the House, including speaker pro tem Paul “Skip” Stam of Apex, filed a bill that would wipe out the word “refundable” from the tax law. It effectively would kill the incentive, film supporters say.

Other lawmakers jumped to assure the jittery film industry.

State Sen. Thom Goolsby, a Republican from Wilmington, stood in front of hundreds of film workers last month along the downtown riverfront. He said that he had made sure the film credit was protected during the sustained budget slashing of recent years.

“That money was the best money we spent in the budget, to keep you all employed,” Goolsby said.

His voice rising, he said Wilmington lawmakers would engage in “hell-raising” to make sure the tax incentive survives.

Goolsby’s colleague, state Sen. Bill Rabon, is a Republican playing a key role in discussion of tax legislation.

Rabon, co-chairman of the Senate Finance Committee, told the crowd that said he saw a movie being filmed outside his front door in Southport last year.

“I know first-hand what the film industry has done,” he said.

The StarNews of Wilmington reported that producers paid him for use of a boat slip he owns there; he said in an interview the payments also covered the use of his back yard.

Rabon said he was glad to have worked to keep the tax break in place through 2014 and said he will also fight to ensure it isn’t “tampered with.”

Rabon told the cheering crowd in Wilmington: “Count on me for my support.”

Staff writer Dan Kane and news researcher Brooke Cain contributed to this report.