A NEW BREED of corporate tax credit is turning Massachusetts taxpayers into business investors.
We're backing Martin Scorcese's new movie "Ashecliffe," we're subsidizing the salaries of Leonardo DiCaprio and Matthew McConaughey, and we're about to start providing similar seed money for emerging life science companies. But it's all happening with little understanding of how these new tax credits work and what their true cost will be.
Traditional tax credits reduce how much tax a company has to pay on its profits. They are of little value to movie production or life science companies that often wait years before turning a profit. What these companies desperately want is to monetize their tax credits and turn them into cash. Refundable or transferable tax credits allow them to do just that. In essence, the more money a company spends on a targeted business activity the more money it gets back from the state.
The 25 percent film tax credit is a perfect example. A movie spending $20 million here would receive credits worth $5 million that could be sold to someone who owes taxes in Massachusetts or sold back to the state at 90 cents on the dollar. Either way, the production company walks away with cash that helps defray the cost of the movie.
"It's free money," said John Hadity, a former Miramax executive who now runs a New York consulting business that helps studios maximize the tax credits states are showering on them. "Credits have become the math for making films."
The numbers are adding up in Massachusetts. The Revenue Department says 88 productions were either completed or under development in 2006, 2007, and the first two months of this year. The projects are expected to generate direct spending in Massachusetts of $545 million and tax credits worth $138 million. More than a quarter of the credits were generated by payments to big-name stars and directors.
Governor Patrick's life science legislation would introduce refundable tax credits to the state's hottest industry. It would allow unprofitable life science companies to monetize their investment and research and development tax credits. Unlike the film tax credit, which has no cap, the life science legislation limits the value of all credits available under the bill to $25 million a year. Without the cap, the Revenue Department estimates the two refundable credits alone would cost the state $136 million next year.
Are we getting a good return on these tax credit investments?
Movie productions come in, hire a crew, spend a lot of money, and leave. The business is attractive because it gives a boost to the local economy without polluting the environment or requiring a lot of city services. Many industry officials also believe that having Massachusetts as the backdrop for films will help the state's tourism efforts.
But it's difficult to justify subsidies for the movie business when state lawmakers are raising taxes and cutting spending. Key grips, sound technicians, and local actors are busier than ever, but overall the number of movie production jobs in Massachusetts is minuscule. State officials say the motion-picture and video industries employ just under 5,000 people, although many positions are scattered across other job classifications.
The Revenue Department estimates it will collect $18.6 million in employee withholding taxes from the films that have come here so far, well short of the $138 million it will cost in tax credits to lure them here. Film industry officials say far more tax revenue will be generated as the movie spending ripples through the economy, but no one knows how much. The other big unknown is how long our credits will remain attractive; other states keep ratcheting up their credits to steal the business away.
Greg Albrecht, chief economist at Louisiana's Legislative Fiscal Office, analyzed that state's film tax credit in 2005 and concluded it was costing the state $50 million a year even after all the tax multiplier effects were figured in.
"Everybody loves to rub shoulders with the stars," Albrecht said. "The question is how much in the way of public resources are you willing to allocate to this activity."
Bruce Mohl is editor of CommonWealth Magazine.
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