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Should The State Raise The Cap On Its Film-Production Incentive?

fences_4.jpg
Sarah Schneider
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90.5 WESA
Extras wait between scenes during the filming Denzel Washington's adaptation of August Wilson's "Fences" in Pittsburgh's West End on Friday, June 3, 2016.

A bill proposed in Harrisburg would raise the cap on Pennsylvania’s tax incentive for film and TV productions to a record level. But critics caution the increase might not be the best way to generate economic activity in the state.

The tax-credit program is meant to draw film and TV projects – from commercials to big-budget features – by offering credits equal to 25% of a production’s total budget. Productions that meet additional criteria can qualify for a credit of up to 30%.

The state program is currently capped at $70 million per year. But Republican state Sen. Camera Bartolotta and some of her colleagues contend that’s too low. They say the program runs out of money within days of applications opening each year, and that productions that don’t receive the credits go shoot elsewhere, taking their spending with them.

A bill Bartolotta introduced this month would increase the cap to $125 million a year, a jump of nearly 80%.

“The potential is enormous when we welcome this industry that is wanting to invest their money in Pennsylvania,” said Bartolotta, a Republican who represents parts of Beaver, Washington and Greene counties. “We need to take advantage of it. And we need to do it now.”

“This is a way to get a huge return on investment without an initial investment by Pennsylvania,” she added.

Bartolotta’s bill has bipartisan support in the state Senate, including Western Pennsylvania Democrat Jay Costa, as well as Republicans Devlin Robinson and Patrick Stefano.

Dawn Keezer, longtime head of the Pittsburgh Film Office, which seeks to attract productions to the region, backs the bill. “We’ve essentially closed our doors for business every year when we keep limiting the film incentives that we’re able to offer on a statewide basis,” she said.

Keezer said most film and TV productions can set up almost anywhere, and incentive programs, which exist in dozens of states, are a key factor in where a given production locates.

Years ago, she said, productions considering Pittsburgh asked whether the area had a particular kind of shooting location – a riverside or 19th-century architecture. “But now the first question is … do you still have funding left in your incentives?” she said. “And this time of year, the answer’s always, ‘No. No. No.’”

Denied incentives here, she added, “They can pack up like a circus and go wherever they want.”

She said the Pittsburgh region typically hosts “between five and seven projects a year.” With a higher cap on the incentive program, she estimated the region could draw up to 15 productions.

Currently, the Pittsburgh area is hosting three large productions, Keezer said: the Netflix feature film “Archive 81,” Netflix series “The Chair” (starring Sandra Oh), and the Showtime series “Rust” (starring Jeff Daniels).

Pennsylvania’s film-production tax credit took effect in 2007. Since then, nearly $800 million in tax credits have been issued, according to a 2020 report by the state’s Department of Community & Economic Development (DCED).

Productions of all sizes have benefited, though 85% of credits went to projects with total budgets of $10 million or more, according to the DCED. In 2019-20, the biggest haul of credits was by the Netflix-produced feature “Sweet Girl,” starring Jason Momoa, which was shot in the Pittsburgh area and awarded $11.7 million in credits.

Productions awarded credits have fed “nearly $3.3 billion into the state’s economy” over the years, according to the DCED report.

However, the story of the incentive program isn’t as simple as productions being credited a portion of the taxes they pay.

The plot twist is that only certain types of taxes qualify – taxes on things like corporate net income, personal income, and insurance premiums. (Sales taxes don’t count.) And when all their qualifying taxes are added up, the vast majority of productions don’t generate enough liability to warrant the credit the state has awarded them, said Stacey Knavel, principal revenue analyst for the state government’s Independent Fiscal Office (IFO).

Instead, the production companies sell the credits to other businesses who want to reduce their own tax liabilities. The credits are sold at a slight discount, said Knavel – about 93 cents on the dollar. Some of the total value also goes as fees to brokers, Knavel said. All that means that some of the benefits actually accrue out of state.

So, the same mobility that makes film productions an attractive target for incentives also makes them unlikely to actually use those incentives themselves: Most are here for weeks, or a couple months, not long enough to generate sufficient tax liability.

Tax-credit advocates say a higher cap could lead to such an ongoing presence – production companies building soundstages here, for example. Resident companies and their local employees would pay taxes year-round.

But Knavel said that would be a heavy lift too. It’s true that the states with the most production activity also have the biggest incentive programs. But the three biggest states – California, New York, and Georgia – have programs much bigger than Pennsylvania’s. California’s is capped at $330 million a year, and New York’s at $420 million. Georgia’s program has no cap at all, and in 2019, the state awarded a staggering $876 million in such credits.

Those three states “were the first to really want to take a lead in this industry, and so any state that comes after needs to pull from those three very big states, and you need a lot of incentive to entice a business to do that,” said Knavel. Not to mention, she noted, that unlike in Pennsylvania, year-round outdoor production is possible in all of Georgia and much of California.

A 2018 Independent Fiscal Office analysis found that the film-production tax credit does benefit state coffers, generating a net of 13.1 cents for every tax-credit dollar. The ROI is largely derived from sales taxes and the personal-income tax (out-of-state residents pay Pennsylvania income tax while working here).

But Knavel cautioned that it’s possible that money might be more productively spend elsewhere – for instance, on education or infrastructure.

Indeed, a number of states have ended their film-production tax-credit programs, including West Virginia, where a state reported found minimal economic benefits. Other states have introduced or lowered the caps on their incentive programs, according to the bipartisan National Conference of State Legislatures.

A 2019 study out of the University of Southern California found that such incentives had “mostly … no statistically significant effects” on employment in states that offered them.

Steven Balsam, an accounting professor at Temple University, said he’s “not a fan” of tax incentives used to entice particular industries, in part because the incentives often seem to serve no greater policy goal.

“Somehow [film-production companies] have it set up so that they don’t owe a tax liability to the state of Pennsylvania, but the state of Pennsylvnia is still effectively giving them money, or giving them credits, which they then can sell to somebody else who could use those credits,” he said. “Yeah, that doesn’t seem right to me."

“Why the film industry versus the pharmaceutical industry?" he added. "What is the greater social goal here?”

By contrast, Balsam cited the federal Earned Income Tax Credit, which subsidizes low-income families, and the federal Lifetime Learning Credit, which helps higher-education students.

In its 2019 report, the state's Independent Fiscal Office offered recomendations for improving the tax-credit program. They included: targeting it more toward workers who live in the state; offering higher credits to ongoing television productions that relocate to the state; and making credits refundable, so that productions who don't use their credits can't resell them.