Wednesday, March 25, 2009

How the Commerce Department is Killing the Film Tax Credits

There's an epic irony in the fact that "Public Enemies," a movie about a folk hero who tapped into the populist sentiment of the Depression era by robbing banks, is now posed to be the target of that same populist rage here in Wisconsin. I assume the producers weren't planning on this happening when they decided to film in the state, but since the film, which is still months from even being released, has become a pivotal player of sorts in the debate over the film tax credits it's probably worthwhile to take a closer look at the plot of this drama.

Gov. Doyle is nothing if not an extremely shrewd politician. Reasonable people can argue over his skills as a leader, but there is little doubt he is in possession of an adroit political mind. Doyle sent out a trial balloon about repealing (or altering) the tax credits a little over a month ago. Since then he's stayed the hell away from the issue himself and cast someone else in the role of the bill's executioner.

Enter Zach Brandon.

Here's Brandon is in yesterday's Chicago Trib:
State Commerce Department executive assistant Zach Brandon replied on Doyle's behalf, saying the letters amounted to hype and hyperbole. The real issues are whether the state can afford the program, it's structured in a responsible way and taxpayers get a maximum value, he said.
Hype and hyperbole ... Brandon may have been speaking on background here, but reporters don't just drop poll-tested catch phrases like that into their stories without some prompting.

Brandon, who's title is really awkward, has apparently won the honor of killing the film tax credits ... or at least being the public face of Governor Doyle's desire to do so. He's been in the press a lot lately and usually as the voice of opposition when it comes to the tax credits. Here's my personal favorite, from a story that ran in a number of Gannett papers about a week before Doyle initially proposed ending the program:
MADISON — Wisconsin taxpayers contributed $450,000 toward Hollywood director Michael Mann's salary when he came to the state last year to film the big-budget Johnny Depp movie "Public Enemies."

Records obtained by The Associated Press show the state's film tax credits not only covered a quarter of Mann's $1.8 million salary, they paid for a portion of his assistants' salaries, entertainment, meals and stuntmen's living expenses.

The state's tax credits even covered about $100,000 of the cost of Depp's entourage of chauffeurs, hair stylists and assistants, said Zach Brandon, executive assistant at the Wisconsin Commerce Department.

My favorite part of those three grafs is the word "acquired," as if the records just fell out of the sky and, my, what a coincidence! There just happens to be this appointed official from the Commerce Department right here ready and authorized to comment on the matter. And, wouldn't you know it, but it happens to be the same guy who was hating on the credits two months earlier and will turn out to be the consistent voice of opposition to the credits in just about every succeeding article on the issue that will run in the state for the next month! What marvelous fortune!

In case anyone didn't pick up on the subtext above, I'm insinuating that Commerce gave the report to the AP to foment populist sentiment against the tax credits. Only insinuating, mind you. Not outright saying. To outright say anything, I would need evidence, which I don't have.

Far be it for me to ascribe any nefarious motives to Brandon -- who is pretty clearly taking one for the team here by being the barer of bad news to the public -- but the fact that the Wisconsin "Commerce Department executive assistant" is the point man on this issue means the tax credits as we know them today are as good as dead. The credits have bipartisan support and are pretty popular (at least anecdotaly, I don't think there's been any polling on the issue). Even if Mark Pocan is able to revive them, they are as good as buried under the ink of Doyle's veto pen. Sure, Doyle may actually be the guy who does the killing, but there's no reason he has to be the face of the execution. So he gives that job to a guy with a really long title to further distance himself from the act.

And that sucks for so many reasons.

The first is that the credits are not losing the state any money. Regardless of how the numbers are spun there's just no way of saying this program is in the red. The lowest numbers that have come out on the economic impact of "Public Enemies" are, not surprisingly, from the Commerce Department. They estimate that the film created $5 million in economic activity while being made here in Wisconsin and received $4.6 million in tax credits. Lets look at those numbers for just a moment. Here's the AP summarizing the law:
Under the film incentives law, a production company qualifies for a tax credit of 25 percent of the wages paid to employees to produce a film, video, electronic game, broadcast advertisement, or television program in the state. Credits for sales tax, construction, wardrobes, clothing and visual effects also are included in the law.
So by that measure, $4.6 million is actually 25% of the total the film company spent here in Wisconsin, which means that company spent an additional $13.8 million on production-related costs here in Wisconsin that they did not receive a tax credit for. What this $5 million dollar figure represents has never fully been explained by any press accounts. The law says production companies get 25% back, not 94% back. If the Commerce Department did end up reimbursing the film almost 1:1, then it's a massive fail on their part.

I can only assume the $5 million figure is economic activity that was created around the production from out-of-towners who took the day off to go watch a movie being made and maybe bought a soda and a hot dog from a vendor on the corner -- something like that. If that's the case, then the actual monetary contribution by the film to the state is $13.8 million + $5 million = $18.8 million. And that's before we even start adding in things like the value of publicity from the films and future production deals.

Making matters worse is how disparate the numbers from the Commerce Department seem to be with figures generated by local business bureaus. We've mentioned before here that locally, "Public Enemies" generated an estimated $4 million dollars just here in Oshkosh, which almost covers the Commerce Department's total. If the production company spent money elsewhere like they did here, then the sum economic activity for the state is going to be much greater than what Commerce is copping to.

So the numbers coming out of Commerce don't seem to be all that trustworthy. Either they've intentionally lowballed the figure for whatever reason or they were grossly incompetent in reimbursing the film. Commerce needs to explain how they arrived at there numbers or explain how the film got it's hands on $3.35 million dollars it wasn't supposed to. (Quick math interlude: 25% of $5 million in total economic impact = $1.25 million. $4.6 million in tax credits distributed - $1.25 million = $3.35 million.)

If all of these numbers make little sense to you, I'm just as lost. If there's anyone out there that can tell me what I'm missing/getting wrong, by all means set me straight in the comments. The larger issue, however, is that whatever way Commerce's numbers are manipulated, they never seem to add up correctly. Either Commerce screwed up royally by giving "Public Enemies" way too much money or they are grossly underestimating the actual financial impact of the film on the state.

But let's put aside for a moment the fact that Commerce's numbers are dodgy at best and actually use them. Here's Brandon taking out the trash in the Journal Sentinel:
Zach Brandon, executive assistant for the department, said the state calculated the economic impact of "Public Enemies" in terms of dollars that landed in the hands of local businesses. Even if taxpayers accept Film Wisconsin's figure, the program still provided "a horrible return on investment," Brandon said.
By Commerce's own reckoning, the state put up $4.6 million and got $5 million in return. That means the "horrible return on investment" Brandon is talking about is actually a net gain of $400,000 or roughly 8.7%. For one film. In the first year of the program. There are tons of small business owners who would kill to make any kind of profit their first year in business, to say nothing of almost 9% on their initial investment. Making matters worse is that Brandon is completely ignoring the potential for growth and continued returns on the state's investment from future productions.

But let's take Brandon's advice and use Film Wisconsin's figures of $7.4 million. That means the $2.8 million dollars got pumped back into the economy ... that's a 60+% profit in just a year from one single movie. That's a "horrible return"?

And that's what's so frustrating about this whole charade: Commerce's numbers are so questionable and it's arguments for augmenting the program are so objectionable that they could just as easily be turned around to advocate that the film tax credits are a huge success with limitless potential. Instead, the Governor is taking the other tack.

Why? I don't know for sure, but I have two guesses.

The first reason is bureaucratic. Of the eight films that received credits in Wisconsin last year "Public Enemies" was far and away the highest profile with the highest budget and yet it was the only film that the Commerce Department claims received a 1:1 reimbursement. Here's just a quick look at ahow a few of the smaller films fared:
The Appleton native has already completed on project under the existing tax credit program. Her $750,000 psychological thriller called "Project Solitude" is due out in the fall. The film was shot in Green Bay in December and received about $120,000 in state tax incentives, she said.
That means "Project Solitude" recouped about 16% of it's budget from the state.
"Nephilim," a science fiction thriller based on a comic book about a priest and a detective searching for fallen angels during the end of the world was to shoot for about five weeks in Milwaukee and Green Bay starting in May, she said. It was slated to get about $750,000 in tax breaks, Moses said.
We've noted earlier that "Nephilim" has a budget of about $6 million, which means it would be getting 12.5% back from the state.

So how in God's name did "Public Enemies" get back 94% of it's costs from the Commerce Department (again, this is using the Dept.'s own disputed numbers here)?

My guess is that the accountants and financiers of "Public Enemies" have done this before; in fact, they do it for a living and simply ran circles around the Commerce Department who has little experience, if any, auditing films. If a film can assemble A-list talent in front of the camera and behind it, I'm going to guess that they can get some ninja accountants with black belts in expenditure voodoo as well. Instead of looking at the reimbursement request carefully, they cut a check before they could say "What was that for, again?" If Commerce doesn't seem capable of presenting the public with numbers that make sense now, what are the chances that they were able to use them correctly back when it came time to pay the piper?

Instead of admitting that there's going to be something of a learning curve to these credits, Commerce is covering itself during a time when the state has a $5 billion budget deficit by holding "Public Enemies" up and saying "All films are going to be like this, so it's just not worth it."

Again, that's just speculation based on what's available in the public record. I sincerely hope this is not the case.

The second reason is political. Sticking it to those rich fat cats in Wall Street/Washington/Hollywood seems to be all the rage these days -- and there's no one better for politicians to pick on than folks who don't vote here. That makes the "Public Enemies" producers easy targets. I'm worried that this might be a classic example of someone seeing an angry mob roaming the streets and saying to himself "I must follow them, for surely they will need a leader!"

Doyle's probably running for re-election next year and you can probably bet the house that a phrase you're going to hear over and over again is "$5 billion budget deficit." (Hell, it might even be $6 billion by then.) So now would probably be a good time to start flexing some fiscal muscles. While not exactly loved by the Left, Doyle's got some capital to burn and this is a convenient way of riding the current wave of populism in an attempt to poach moderate voters. I have to admit, from a political perspective, it's not a dumb idea.

Again, this is all just idle speculation.

The Governor's handled the tax credits issue just like a politician. He's set the credits' death to a slow burn and got a proxy to do the dirty work. The problem is that it's not necessary. Barring some calamity, Doyle will probably win re-election handily.

Doyle is at his best when he takes the long view, like with his biotech proposal. A vibrant film industry in Wisconsin will not just provide folks with a few hours of entertainment, but will help change the image of the state (more so than any fancy new logo will ever do). There is a solid and sound economic argument for continuing the tax credits. There is an even better argument for keeping the credits for the next few years just to see what happens, and it would be a shame to see a fledgling industry with a lot of potential strangled in its crib for the sake of scoring a few cheap populist points.

Regardless of its motives, it's clear that the Doyle Administration wants nothing to do with these tax credits. I imagine there's some urgency to kill the tax credits before "Public Enemies" is released on July 1st. If the movie is released and is a huge hit (and there's some indication that might be the case), it's going to be harder to get rid of them -- and let's face it, the alternative offered in the budget will effectively do just that. I just hope that when they do go we don't see someone from the Doyle Administration standing in front of a movie theater praising all the hard work that folks from Wisconsin did to make this movie happen.


Britt Arnesen said...

I'm rooting for Governor Doyle. I'd like to see every state scrap film incentives to level the playing field again. All the states are fighting film subsidy wars right now, and the taxpayers are losing.

I like your detailed analysis, and you make some good points. But we could go there with any industry. So what music? Or sod farming? Or furniture making? See, government shouldn't be picking and choosing who gets a lollipop. We should have as few subsidies (incentives) as possible, and instead shoot for low taxes and promote entrepreneurship.

I'm following Wisconsin's struggle because I'm encouraging Alaskans to ask tough questions about our states transferable tax credit scheme. As a taxpayer, I just plain and simple don't want to pay for the film subsidy. Plus all the highly technical reasons why Alaska's program in particular is bad public policy.

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