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North Carolina’s film production tax credits are slated to sunset at year’s end. State economists estimate that the incentives lose between 54 and 81 cents per dollar of credit given. Those credits are quite lucrative for the film production industry, but for the state they represent a net loss.

North Carolina’s program isn’t unique in that respect. Other states found similar losses on their film incentives programs. In 2009, 44 states (and Puerto Rico and the District of Columbia) had film incentives programs. Now over one-fourth of U.S. states (and D.C.) have ended, suspended, or never gotten started on film incentives.

Last year this newsletter identified several reasons to let the film incentives sunset as scheduled. They included:

  1. The refundability provision that the industry finds so important is also likely unconstitutional. It is an open-ended draw on the state Treasury without appropriation by the General Assembly.
  2. Film incentives don’t work like other incentives. Unlike with other incentives programs, we give money directly to production companies as opposed to requiring they create specific numbers of jobs and meet other long-term target promises to the state in order to "earn" the tax credits over the years.
  3. Film incentives don’t work, like other incentives. Economic incentives programs in general tend to be net money losers.
  4. We’re engaged in a race to the bottom. The strongest emotional tug in favor of extending the state’s film incentives continues to be that the industry will move to another state with a better incentives package. That’s what got North Carolina’s incentives sweetened in 2010, it’s being repeated in other states year in and out (the ones who haven’t gotten off this crazy train, that is), and it’s why film production companies benefit from North Carolina’s incentives even if they don’t film here.
  5. North Carolina’s corporate income tax rate has been cut, while the amenities N.C. offers filmmakers (beyond the incentives) are still in place. The governor and legislature have used empirically based policies to make a good state even better for business. Is it still not enough? Does that make special favoritism OK?

As of this writing, two proposals are before the General Assembly to address the film production tax credits. One would tweak them, and the other — the governor’s proposal — would overhaul them. But would they engage the reasons for sunset?

House Bill 1142 wouldn’t. It would change the minimum threshold of expenses to qualify for the tax credits, from $250,000 to $300,000. This difference would have saved the state just $71,624 last year — and that assumes that the producers of "Adrenaline the Movie" couldn’t have come up with another $14,000 in qualifying expenses.)

The more subtle but pernicious change offered by H.B. 1142 would be the removal of the credits’ sunset. Removing the prospect of sunset from film incentives would change the lobbying effort over them. Focus would go from ensuring the tax credits remain on the books for the next few years to seeing how much sweeter these permanent incentives can get. In other words, no longer would the film industry threaten to take productions out of the state if the incentives aren’t kept in place; they would threaten to leave town if the incentives aren’t sweetened.

If you doubt that assessment, just look at how "House of Cards" played Maryland this year. Or consider how professional sports franchises (cough, cough, Carolina Panthers, cough) routinely play their host cities for bigger, better stadiums. A permanent film incentive wouldn’t silence the rent-seekers, Clarice; it would just change how they bleat.

McCrory’s proposed overhaul

Gov. Pat McCrory’s budget proposal included a significant rethinking of the state’s incentives structure for film productions. His proposal would allow the current program to sunset, and he would replace it with the following:

  • The minimum threshold for qualifying expenses would increase from $250,000 to one million dollars ($1,000,000)
  • The cap on money paid from the state to the production company would fall from $20 million to $6 million
  • Qualifying productions would no longer include talk shows
  • The state would no longer offer a 25 percent rebate on qualifying expenses but would replace that with several different tax credits:
    • 5.3 percent on direct and indirect wages
    • 4.0 percent on payments to out-of-state businesses
    • 5.0 percent on payments to in-state businesses
    • Corporate income tax, sales and use taxes (excluding local sales and use taxes, where and if applicable), and motor fuels excise taxes
  • The host counties could opt to forgo local sales and use taxes, allowing the state to retain them so the production company could count them among its qualifying expenditures
  • The host counties could allow a refund of occupancy taxes paid for a production company’s sales-related qualifying expenditures
  • The state would offer a 20 percent tax credit on a production company’s investment in constructing, converting, or equipping a production or postproduction facility in North Carolina, provided that investment was at least two million dollars ($2,000,000) in a production facility or one million dollars ($1,000,000) in a postproduction facility, not counting land costs for either
  • Unused tax credits could be carried forward for up to nine years
  • This package of proposals would sunset on January 1, 2018

The governor’s proposal was to refocus the incentives, which he did not want to end, on bringing in "long-term, sustainable investments." Spokesman Josh Ellis said the governor’s plan would be more cost-effective than the current program and "encourage long-term capital investments versus short-term projects with short-term returns."

Ellis also said the plan would cost the state about $10 million versus the over $61 million estimated for 2013.

Those are the ideas and the rationale behind them; would they answer the reasons to let film incentives come to an end?

  1. Both would still require a refundability provision, meaning that these plans would also likely violate the state’s constitution. Industry representatives have made it quite clear, however, that ending those direct payments would gut the incentives.
  2. The governor’s program is aimed at incentivizing some long-term investment and productive capital, which would make it more similar to other economic incentives in that respect.
  3. These couldn’t change the nature of government economic incentives programs, however. North Carolina should therefore expect to continue losing money choosing film production as a "winner" industry in politics — at the expense of "loser" tax-paying individuals and existing corporations whose job creation and retention efforts are habitually disrespected and taken for granted. A significant reduction in money lost would offer some consolation, at least.
  4. We would remain engaged in the race to the bottom — though North Carolina would likely cease being one of the pace setters in such a race.
  5. They would still regard North Carolina’s amenities and stronger foundation for business and industry in general as insufficient for this industry in particular.

McCrory’s plan would only partly address just one of those five reasons for letting the film incentives sunset. The plan obviously was well considered, and the greater focus on inducing long-term investment while cutting the overall state expenditure is to be appreciated.

Nevertheless, it is still a great amount of effort at salvaging — and making even knottier — a net money-losing idea that requires repeatedly breaking state law. Several other states have wised up and opted out altogether.

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