Politics & Policy

Republicans Poised to Clean House On Hollywood Credit Scheme

Hogan gets final cut after legislative report pans movie tax benefit.

Larry Hogan, governor-elect of Maryland, has gained an important tool in his upcoming struggle to close a massive hole in the state’s budget: a severely critical report on the state’s film production tax credit. The harsh review by a state agency paves the way for the incoming Republican administration to end or severely curtail an accounting scheme that fleeces taxpayers and has enriched the series House of Cards and Veep to the tune of more than $60 million.

“DLS recommends that the General Assembly allow the film production activity tax credit to sunset as scheduled on July 1, 2016,” writes the Department of Legislative Services’ (DLS) Office of Policy Analysis in its draft Evaluation of the Maryland Film Production Activity Tax Credit. “Going forward, DLS recommends that the General Assembly focus economic development efforts on incentives that create permanent and lasting employment, rather than temporary jobs.”

The report is encouraging a small group of Maryland politicians who have long opposed the production tax credit. “The gloss has really come off this,” Republican delegate Andrew A. Serafini (Washington County) tells National Review Online. “People are asking what are we doing and is it worth it.”

Hogan has not responded to requests for comment from NRO and other media. Members of Hogan’s transition team also declined to speak about the credit, but during his successful campaign for governor, Hogan inveighed against helping “Hollywood millionaires to produce subscriber-only TV shows.”

Bad blood related to the state’s bitter negotiations with House of Cards’ producers has also soured many Marylanders on the deal, while a wealth of studies have demonstrated the wastefulness of production tax credits for state budgets and economies. In a fiscal note earlier this year, the DLS judged “that the primary beneficiaries of the tax credit are the film production entities and that the majority of tax credits have been awarded to or encumbered for companies that are not Maryland small businesses.” A 2010 study by the Center on Budget and Policy Priorities concluded that film-production tax credits — which give public subsidies to movie and TV producers through a convoluted market in tax write-offs — generate as little as 7 cents for every public dollar spent. Multiple studies have found that they never generate enough tax revenue to pay for themselves. Some of the 37 states that provide such subsidies have begun to phase out or sharply reduce them, though a few have become even more generous.

“Clearly, there were reports last year that pointed out the economic benefits were not worth it,” Serafini says. “Other states have been saying it wasn’t worth it. And as the stakes get higher, it’s a race to the bottom. Other states will outbid us.”

The draft report goes beyond many previous critiques of state tax credits. Although a story in the Washington Post bears the anodyne headline “Benefits of Maryland’s tax credits for films are questioned,” and quotes a state senate supporter expressing shock that “people are so unhappy with” the credits, the DLS is remarkably straightforward in its criticism.

“Maryland has provided $62.5 million in tax credits between fiscal 2012 and 2016 while only receiving a fraction of the tax credit amounts back in revenues to the State and local governments,” the DLS reports. “Additionally, states are fiercely competing with one another to draw  productions into their state. This type of competition is not only expensive, but  promotes unhealthy competition among states.” The DLS also notes that nearly all jobs and business activity related to the credit are temporary and that these vanish soon after production wraps.

The report features chapter headings such as “The Film Production Activity Tax Credit Does Not Provide Sustainable Economic Development” and “The Vast Majority of Film Production Activity Tax Credits Have Been Awarded to Two Productions.” Since 2012, the bulk of the benefit (which covers about 27 percent of the production costs for a qualifying shoot) has “been awarded to two productions — House of Cards and VEEP.” The agency says these two series (which play on Netflix and HBO respectively and are aspirational favorites among  political wannabes) account for $60.3 million, or 96.5 percent, of the total $62.5 million the Old Line State awarded to producers.

The DLS also takes aim at an aspect of the movie benefit that rarely gets much attention: the cockamamie structure that donates public money but does so indirectly, with tax credit packages that producers then liquidate through local and out-of-state middlemen. This introduces new complexities into Hollywood accounting processes that are already notoriously opaque. More importantly, in state budgeting, the credits are counted on the revenue rather than the expenditure side, so their impact on the state’s treasury is masked. (Maryland’s general fund is projected to spend $16 billion in its next budget, and in September the state comptroller predicted a $405 million shortfall in revenues over 2014 and 2015.)

“DLS recommends that the General Assembly [in the event it ignores the agency’s top-line advice to kill the tax credit outright] consider replacing the tax credit with a grant program funded through the State budget,” the report says.

The two-thumbs-down review comes as Maryland is already smarting over a perception that star-struck politicians have been buffaloed by a high-handed production company. In March, a vice president at Media Rights Management, House of Cards’ production company, threatened to leave the state if it did not renew and increase the benefit. A letter from MRC senior vice president Charlie Goldstein to Governor Martin O’Malley informed the state’s chief executive that “we are required to look at other states in which to film on the off chance that the legislation [expanding the tax credit] does not pass, or does not cover the amount of tax credits for which we would qualify.”

The letter incensed some Maryland politicians, one of whom threatened to seize the show’s assets if it tried to leave Maryland after receiving benefits. (The shows assets in Maryland are not believed to be extensive, and the grounds for the taking appear not to exist: MRC had completed two seasons of production, apparently to the state’s satisfaction, and was negotiating on coming back for another year.)

But a subsequent charm offensive by the high-megawatt cast of House of Cards left an even more sour aftertaste.

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In March, House of Cards leading man Kevin Spacey was ushered in the back door of the Red Red Wine Bar in Annapolis for a closed-press, politician-packed reception in support of the tax credit. The meet-and-greet appears to have worked, and the state soon agreed to another year of production subsidies. But a Facebook video of the unctiously charming actor wheedling votes in favor of the credit, along with the spectacle of fan/pols crowding in for selfies with Spacey, was singularly unappealing.

“We’ve got a billion-dollar shortfall,” delegate Kathy Szeliga (R., Baltimore County & Harford County) tells National Review. “I’m concerned when the main people benefiting from this credit are not Marylanders. These are temporary jobs, and the benefits to caterers and hotels are temporary as well.”

Szeliga suggests that, regardless of the sunset recommendation for 2016, the incoming governor could simply not fund the tax credit in his budget. (Maryland’s governor presents the proposed budget to the legislative branch and thus has considerable leverage over spending.)

Szeliga and Serafina (and possibly Hogan, judging by his campaign comments) are among a handful of political opponents of the credit, which has enjoyed wide bipartisan support. State senator Edward J Kasemeyer (D., Baltimore & Howard Counties) dismisses the report’s finding that production incentives, in every state except California, return less than 50 cents for every dollar spent. “My perspective, candidly, is that generating revenue was never our intent,” he tells NRO. “Our intent was to increase economic activity and employment.” He calls the DLS’s low estimates for employment created by the credit “sketchy.”

But the controversy over the pushy House of Cards promotion has strengthened the opposition. MRC’s threat to leave Maryland is not empty. In April National Review found film commissions in other states eager to attract House of Cards, which depicts Washington intrigue but does much of its shooting in Baltimore, in keeping with the strange dynamics of production tax credits — which have in the past resulted in such oddities as having humble Baton Rouge stand in for America’s movie-making capital in a $70 million movie entitled Battle: Los Angeles. Although the Virginia Film Office conceded “we can’t afford it,” film agencies in neighboring Delaware (which is among the minority of states not offering a production tax credit) and Washington, D.C., both expressed interest in drawing the production out of Maryland, while an official at Louisiana Entertainment cooed, “Louisiana’s program is currently uncapped and if the producers were looking to locate in Louisiana, we would welcome them into the state.” (With $236.4 million in production tax credits in 2013, the Pelican State now trails only New York in show business largesse.)

In terms of the generosity of its production incentives, Maryland is about mid-pack among states. But some states with very expansive credits — including Michigan, which funds up to 40 percent of production costs, and North Carolina — have begun to cap or reduce their programs. Controversies including the termination of Iowa’s program after its film office head was convicted of felony corruption, a $40 million bill to Michigan taxpayers for Disney’s Oz the Great and Powerful, and publicity around runaway production after the L.A.-based effects shop Rhythm & Hues (Babe, Life of Pi) went bankrupt, have all helped to put film production tax credits in bad odor.

Representatives of MRC and Maryland comptroller Peter Franchot declined to comment.

— Tim Cavanaugh is news editor of National Review Online. Follow him on Twitter and Facebook.

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