Recently, the Quebec and Ontario governments announced changes to enhance certain tax credits aimed at the film and television industry with the goal of bringing more foreign based productions into these provinces. In doing so, both governments have recognized the increasing global competition to attract film and television productions with the use of government incentives.
Canada was already a pioneer in the development and implementation of government incentives when it introduced the current system of tax credits in 1997. The success of Canada’s tax credit model in attracting film and television projects to the major production centers of Vancouver, Toronto and Montréal, did not go unnoticed. Similar incentives have since been introduced throughout Europe, Australia and the U.S. Presently, there are over 40 states in the U.S. which employ some form of government incentive program targeting the film and television production industry. This increasing competition and the rise in the Canadian dollar were cited as key factors in the recent Quebec and Ontario announcements.
It may then seem paradoxical that while the tax credit systems in Quebec and Ontario are being enhanced, some of their direct competition in the U.S. are coming under criticism for failing to live up to expectations. A recent article in the IEDC Economic Development Journal assesses incentives in certain states which seem to have significant flaws which detract from their overall value and efficacy.
While the tax credit systems already in place in Canada’s production centers are considered a cornerstone in the strategy to both feed the existing infrastructure, create high skilled sustainable jobs and continue to grow the existing film and television industry, in most U.S. states (with the exception of New York and California), incentives were introduced with the goal of creating both a film and television industry and a supporting infrastructure. Consequently, the experiences in these states have been markedly different than the experiences in places like Vancouver, Toronto and Montreal where such incentives are part of an overall strategy.
There was a tremendous growth in U.S. incentives starting at the beginning of this decade. Many state politicians seemed to fall under the spell of Hollywood, and notion that all that was required was an attractive incentive and the state would become, in the parlance of the film business, a “player”. As a result, incentives and film offices appeared all over the U.S. in places as disparate as Connecticut, New Mexico, Hawaii and Alaska.
The reality now coming into focus is that certain factors have resulted in these incentives being criticized as ineffective in achieving the goals of the lawmakers, and in many cases, resulting in a net loss for those states:
The absence of an existing infrastructure and some critical mass in the work force required states to permit the “importing” of many of the skilled jobs and suppliers, who then left the state once a production was completed. This mobility has made the establishment of a permanent infrastructure very difficult. Further, those individuals and suppliers who left the state offering the incentives, would pay income taxes to their home state and not the one offering the incentives.
Increased competition among jurisdictions has meant that many states allowed significant portions of a production’s budget to be spent outside of the state, thereby undermining one of the goals of the incentives and reducing the economic benefit to the state.
Many states adopted the use of transferable tax credits (as opposed to the type used in Canada) which could be sold by the production company (to the extent not required) to third parties who wanted a tax deduction. This unintended consequence added to the “cost” of such incentives as a result of the third party’s avoidance of tax.
The experience of states which have attempted to create an industry where nothing existed before, seems to support the position that incentives alone won’t achieve that goal. Whether U.S. state officials heed some of these concerns remains to be seen – but what is clear is that the lure of Hollywood extends beyond those who just want to be in the movies.