Hollywood, Taxes and the “Fiscal Cliff”

1218006newThe Motion Picture Association of America’s (MPAA) campaign to enact the proposed Protect Intellectual Property Act (PIPA) and Stop Online Piracy Act (SOPA) was unsuccessful,  but the MPAA was able to reauthorize the tax code to continue the annual $435 million tax credits, under Section 317 of the “fiscal cliff” legislation.

The fiscal cliff action extended the “special expensing rules” for film and television productions that were first enacted in 2004 to compete with the industry benefits in Canada, New Zealand and the U.K., which have become competitive with Hollywood as studio and location sites. It was extended in 2008, but the deal was meant to expire in 2011. The fiscal cliff deal extends the tax incentives through 2013.

Is this a payoff to Hollywood’s lobbyists?

It appears to be more of a re-enforcement and continuation of a bi-partisan strategy to create jobs and expand industries in the face of the new global competition for employment and investment opportunities in film and video production.

In the original tax incentive legislation, the annual benefit in tax credits for U.S. companies for filming in the United States applied to productions costing less than $15 million to make ($20 million in low-income areas). The 2008 extension applied to all films with a deduction of up to $15 million (or $20 million in low-income areas). The incentive is especially generous to television series as it applies to each episode.

Tax credits for attracting film production to states have been found to be significant and effective, in research done by Ernst & Young on state-level film tax credit programs, currently in use in 37 states.

With the advent of computer generated imagery (CGI) and other postproduction techniques, film productions can be made to appear as if filmed virtually anywhere. Taxes and incentives will tend to rise higher in importance in such cases. For states, the questions are: Do tax incentives matter in bringing the film business and jobs to states that use them, and do they aid in the retention of jobs and economic activity in America when acting alone or in concert with federal incentives?

Ernst & Young suggests that the analysis should be based upon outcomes, that those outcomes should be defined according to specific economic development or employment objectives and assess the impacts on both the public and private sectors. While several film credit studies show that additional state and local taxes offset the cost of film credits, those that do not meet this test may still provide relatively high benefit-cost ratios compared with other economic development programs.

The impacts on revenues are one of the benefits, but the impacts on tourism, indirect revenues, image improvement for the locations and the development of an entertainment industry infrastructure are all other benefits to consider.

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