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MFIC Addresses DLS’s Questions About Film Incentives

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For the members of Maryland’s film and television production industry, the Dec. 2 hearing held at the Miller Building in Annapolis was just the latest trip down a road that’s been well traveled in recent years.

The call to action concerned a recent report from Maryland’s Department of Legislative Services (DLS) that claimed the state only receives 10 cents back on each dollar invested under the current film and television tax incentive program, which is capped at $7.5 million annually (and has been supplemented by legislation to reach $25 million for fiscal 2015). It is set to expire at the end of fiscal ’16.

While the DLS says that the software program employed for the study correctly crunched the numbers and provided accurate information, many members of the Maryland Film Industry Coalition (MFIC), as well as outside observers, are saying otherwise. They say that the real figure is around $3 per dollar invested, and that the incentives have kept thousands of workers employed in the state, as well as cash registers ringing in the area of a given shoot, most recently for the Netflix series, “House of Cards” and HBO’s “VEEP.”

It’s just the latest chapter in what’s become an annual discussion to keep the program not only running, but expansive enough to attract significant projects that can expand Maryland’s tax base.

From the State

However, DLS Director of the Office of Policy Warren Deschenaux doesn’t see it that way. He said what the report “demonstrates is that [the tax incentive package] is a very expensive program and that, in the absence of continued subsidies, the benefit evaporates.

“Compared to [Maryland’s] other economic development investments, that makes it compare poorly,” said Deschenaux. “My main observation in this case is that we’re not buying economic development, we’re renting it. Unless we continue to subsidize the industry, it’s not going to be here.”

He went on to add that the state is “paying a high percentage of the salaries of the people who work on those jobs. That’s why I say we’re renting them. Due to the interstate competitions, the price keeps going up and up,” Deschenaux said, adding, “Why is this industry favored over all of the others?”

He reiterated that the DLS study is correct and that state and local governments, combined, make back 10 cents per dollar spent (with six cents to the state and the remainder to the county hosting the production).

“That’s what our model shows, and it’s not out of line with what comparable independent researchers have indicated,” said Deschaneux, “but the film industry always finds another study that shows higher benefits.”

Taking Into Account

The MFIC may not have another study, per se, but it surely has another way of interpreting the results.

“In its report, the DLS says that the industry generates 10 cents on the dollar. We say that figure is actually $1.03 — and that doesn’t even include counting the various multipliers that make that number even bigger, like the money spent by the production on supplies or by the crew on food, housing and other day-to-day items,” said Scott Johnson, a copyright attorney with Ober|Kaler in Baltimore and chairman of the MFIC.

“In other words, the DLS did not count what’s called the indirect spend, which is a big part of why the incentives are so effective,” said Johnson. “DLS limits what it chooses to count, which is why it comes in so much lower than other economists in Maryland who have looked at production incentives. By choosing to limit its review to a narrow range of data, DLS is unable to fully assess the benefits of film production in the state. Those who look at all the numbers know better, which is why the majority of states continue to offer production incentives, year after year.”

In addition, the DLS also has decided that the incentives should change from a tax credit to a grant program. “We did offer our benefit as a grant program prior to 2011; and it was the same thing. The DLS said the grants were no good,” he said, “so the department has been consistent in its narrow view.

“The big point that I want to make,” said Johnson, “is that the policy makers should look at all of the economic and non-economic factors involved before they make a decision. The DLS report did not encompass the entire story.”

Buying Sprees

And what the entire story includes, said Daraius Irani, associate vice president, division of innovation and applied research, and executive director of the Regional Economic Studies Institute at Towson University, is considerable.

More important than the tax revenue “is that the [tax incentives] create jobs and services for many small businesses in Maryland that you wouldn’t think would benefit from them. For instance, on ‘House of Cards’ alone, there are more than 1,000 vendors, many of which are local, who benefit tremendously from the production,” said Irani.

Furthermore, “If you look at the DLS study, you will see that each production was required to submit a detailed expense sheet pertaining to how much they spent, and where they spent it, in order to get the tax credit,” he said. “The DLS did not use that data in their analysis.”

Irani said that results came from the dynamic input/output modeling tool software called REMI PI+ and that the DLS and RESI “used the same model, with slight differences. We used that data for the retail spend, which shows where the money went and to which vendor. DLS just entered the money spent and put it into one category.

“So, what we did differently,” he said, “was break down what category it was spent in, so we could capture what was spent in state and what wasn’t — and we found that about 80% of the production’s spend took place in Maryland,” he said, “but the DLS number came to about a 9% spent in Maryland.”

Irani also thinks that figure was harder for DLS to pinpoint since the state doesn’t have a formal film industry.

“For instance, Baltimore-based Budeke’s Paints and the National Lumber Co. would not be considered film industry businesses,” he said, “but National Lumber sold approximately $120,000 in goods last year to ‘House of Cards’ alone.”

Credit Line

Like Johnson, RESI felt like the DLS had more good data and did not use it.

“They didn’t attempt to understand the depth of how this works. When you look at the real data as we did, you see how much money the productions really spent here,” said Irani. “Plus, they basically said that all of these film jobs are not permanent, but no one ever says that about construction. That’s just the transient nature of both businesses.”

And, he added, if a state has tax credits, there are always a long line of producers waiting for the opportunity to use them.

Dawson Nolley, a member of the film industry who now primarily works for Prudential Homesale YWGC Realty, in Baltimore, also noted that the tax rebates “are only awarded after a thorough audit has verified every eligible penny has been spent” in Maryland. “The state only pays after the movies spend here. It’s not about us giving money to Hollywood,” he said. “It’s about us getting Hollywood money here.”

And with the incentives, that’s never too tall of a task.

“VEEP” is an HBO program and shoots interiors in Columbia, and Sig Libowitz, a Bethesda-based producer of independent films, knows that the cablenet is interested in bringing future shows here.

“The crew base that we have here and the natural sites and looks, transportation options, combined with the incentives, make Maryland a very attractive place for producers to shoot,” Libowitz said.

While those have long been among Maryland’s strengths, the stance of the Department of Business and Economic Development (which oversees the Maryland Film Office), at present, is to focus on simply keeping the incentive money the industry has. “But we want to do more than that,” Johnson said.

Given the results that the state has garnered with what is considered in industry circles a relatively small incentive fund, “We think we can be the Hollywood of the East,” he said.

But for today, Johnson and his MFIC colleagues are hoping for the best by the end of the session. “First, we need the sunset lifted,” he said. “Looking ahead, we can do much better, and we want the opportunity to do so.”