By GORDON RUSSELL | Staff Writer | email@example.com
In a year of flops for Hollywood, 2011’s “Green Lantern” was a memorable bomb, barely making back its $200 million production budget at the box office.
Happily for Warner Brothers, the studio didn’t have to put up all of the money.
About this special report
- “Giving Away Louisiana” is an eight-part series that examines the tax incentives the state gives to boost a historically sluggish economy. It’s not always clear the money is well spent, and the giveaways are growing at a much faster rate than the economy, leading to deep cuts in other state services. Click here to recap all parts of the series.
Louisiana taxpayers promised $35 million through a generous subsidy program that covers 30 percent of a film’s local costs. And if state cost-benefit analyses are to be believed, the state recouped only about $8 million of its investment.
By way of comparison, Louisiana sank more into “Green Lantern” than it is putting into the University of New Orleans this year.
Louisiana’s film tax incentive program is one of the state’s most popular and fastest-growing giveaways, and thanks to its industry-friendly provisions, the Pelican State has eclipsed Hollywood as the feature film production capital of the nation.
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But it’s also one of the state’s least effective incentive programs, according to economists. Every two years, the state produces an analysis that shows it to be a massive money-loser, and Gov. Bobby Jindal’s Economic Development chief says the state could get a much better bang for its buck elsewhere. But thanks to the glamour of the motion-picture business, hardly anyone pays attention.
The proliferation of big-budget productions like “Green Lantern” — and new chapters in the “Terminator,” “Jurassic Park” and “Fantastic Four” franchises shot in Louisiana this year — is one reason the program’s cost has been steadily trending upward.
But it’s not just blockbusters: Small films, movies of the week, as well as reality TV programs like “Duck Dynasty,” scripted series like “NCIS: New Orleans” and high-end television ads are all being shot here.
Last year, 107 such projects qualified for help from Louisiana taxpayers, at an upfront cost to the state budget of about $250 million. Stephen Moret, Jindal’s secretary of Economic Development, says he thinks that figure could double within a few years.
The program, the richest of its kind in the country, covers between 30 and 35 percent of in-state production costs, including eight-figure actor salaries, as long as a film’s local costs top $300,000. The subsidy is so large that it completely changes the economics of filmmaking. And its size has probably contributed to the program’s history of corruption as well, tempting some dishonest film producers into padding their expenses so they can recoup more money.
It’s not just Hollywood that has embraced Louisiana’s tax credit. Locals seem to love it, too — in part, perhaps, because it brings movie stars to town and puts the state on the big screen, not to mention in the national consciousness.
But the program’s popularity among residents may also owe to a fundamental misunderstanding. Because the subsidy is called a “tax credit,” it’s often understood as something that simply reduces a filmmaker’s tax burden. In fact, Louisiana is cutting checks to Hollywood — big ones.
Film productions don’t have any corporate tax liability because they are set up as limited liability companies that simply make payments to actors, crew and vendors. Profits from a film are taxable, but they go to the film’s investors, who are usually based elsewhere.
As a result, most productions sell their tax credits to someone who owes taxes, which is legal under state law, usually getting about 90 cents for each $1 worth of tax credit. Buyers, many of them wealthy movers and shakers, get 100 cents on the dollar from the state, creating a group of influential middlemen who benefit from the program.
A filmmaker who doesn’t want to deal with all that can simply return his credits to the state for a check worth 85 percent of the credits the film received. In that scenario, the credits are never applied against anyone’s taxes. But that simply makes more obvious something that observers of the program have long known.
“It’s never, ever been about the tax liability of the moviemaker,” said Robert Travis Scott, president of the good-government Public Affairs Research Council and a critic of the program.
“It’s got nothing to do with tax,” said Greg Albrecht, chief economist for the Legislative Fiscal Office. “We’re just using the tax-filing process and the Department of Revenue as the paying agent for a spending program. That’s what we’re doing.”
A film capital
If success was measured by activity, Louisiana’s film program would take home an Academy Award for best subsidy.
Of the 107 projects shot here last year, 49 were feature films — more than were filmed in any other state, including California. Eighteen of them were major studio productions, also tops in the country.
Louisiana was a pioneer in the incentives game, unveiling its program in 2003 by following the lead of places like Canada, particularly British Columbia, that had managed to snare a sizable share of the market from Hollywood through similar inducements beginning in 1997.
No one would argue that Louisiana’s popularity is attributable to anything other than the incentive program. In the first full year of the film program, 14 features big enough to qualify for the credit were shot here; that number has since multiplied sevenfold.
There’s a tangible film presence here now — the predominant industry union now has 1,400 members in Louisiana, a tenfold increase since the program began. Thousands of other local people are employed in jobs that service the film business, many working out of large brick-and-mortar film facilities that were built with substantial taxpayer aid. By some estimates, the industry employs 15,000, almost as many as the seafood industry, long a mainstay of the state economy.
But the smashing success comes with a steep price tag.
In recent years, as the number of productions choosing to shoot here has mushroomed, so have costs to state taxpayers. Over the past six years, Louisiana has spent more than $1 billion on film, and the amount is growing steadily each year. The growth owes in large part to 2009 legislation that made the program more flexible and generous as other states, following Louisiana’s lead, began offering competing incentives.
While roughly 40 states, including California, now offer some kind of incentive, $1 of every $6 given away to the domestic film industry comes from Louisiana taxpayers.
The cost of the state’s program has doubled in size since the rules were liberalized, and Moret says he believes it could soon double again. It’s not a prospect he relishes.
“That would mean a net reduction in the state general fund of roughly $200 million,” he said. “And that’s going to directly impact health care and higher education. So nobody wants that to happen.”
Paying for impermanence
A succession of state-funded studies have shown the program — like those elsewhere in the U.S. — doesn’t come close to paying for itself. Simply put, Louisiana may not be able to afford more growth.
The most recent cost-benefit analysis of the program, by economist Loren Scott, found that in 2012, the state put $218 million into film production and recouped only $50 million of that through taxes, or about 23 cents for every dollar spent. The previous study found an even lower return, of perhaps 17 cents on the dollar. National analyses have come to similar conclusions.
And the studies suggest that the real returns may be even more dismal. Scott noted that more than a quarter of the Hollywood spending that Louisiana subsidizes goes to “talent” — writers, actors, directors, producers. Those people “in most cases do not live in Louisiana,” Scott wrote, and thus presumably don’t spend much of their money here or contribute much to the tax base. If the benefit of such “above the line” spending is removed — an assumption Scott thinks is fair — the state’s paltry return on its investment would shrink by an additional one-fourth.
Louisiana also covers 30 percent of other costs with a questionable return. For instance, if a filmmaker can’t buy a needed item in Louisiana — say, a vintage car — he can buy it through a “procurement company” based here, which in turn buys the item wherever it can be located, taking a fee for the service. The cost of the item, plus the markup, then qualifies for tax credits.
But the biggest problem may not be that the film program is extraordinarily generous compared with other government giveaways. It’s that there is no end in sight. With many incentive packages, state taxpayers help a company build a physical presence in Louisiana, which, while often expensive, gives the firm a reason to stay here even after the incentive winds down.
With film, “you’re constantly trying to refill the bucket, to try to keep the activity going,” Moret says. “It’s a huge incentive in perpetuity. It never goes away. You’re kind of incentivizing the same jobs over and over again.”
While the cost to the state on a per-job basis for film jobs — $12,000, according to the state’s most recent study — is far less than the state puts up for many industrial projects, the flip side is that the jobs are temporary, often lasting only a few months. In fact, one Louisianian might account for several of those subsidized jobs in one year.
Scott, of PAR, says that’s the film program’s fatal flaw.
“The only way the movie tax credit program works is you have to keep paying them that incentive every year,” he said. “I think one of the movie promoters gave the best argument against this program when he said, ‘If you change or eliminate this program, we’ll all go to Georgia tomorrow.’ That, to me, speaks volumes.”
Boosters say studies flawed
Film boosters say the skeptics continually underestimate the positive effects the industry has on Louisiana, many of which, they concede, are hard to measure.
For starters, they say, the claim that the state only gets back 23 cents on every dollar it spends is wildly misleading, failing to take into consideration the money the program puts into local tax coffers — especially in and around New Orleans and Baton Rouge, where the lion’s share of filming takes place.
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The last study by Loren Scott, the economist, estimated that of the $218 million the state put into film in 2012, perhaps $31 million came back to local governments. Were that added to the return on the state’s investment, the program would get back about 37 cents in taxes on every dollar spent — still a woeful return, detractors point out.
“I’m not sure we’re really looking at the full picture,” said state Rep. Walt Leger, D-New Orleans, a proponent of the film program. “The reality is that there’s a tremendous benefit that accrues to local governments. I’m not sure it’s being adequately measured.”
A bigger gripe of film proponents: None of the analyses performed so far adequately considers the massive ripple effects that moving Hollywood productions here has on the state’s economy.
There are untold spinoff jobs created by the industry that are essentially uncounted, they say. Many of these can be seen by visiting the large studios that have sprung up in New Orleans, Baton Rouge and Shreveport — themselves recipients of considerable Louisiana largesse, through a now-defunct program that covered 40 percent of the cost of film-related infrastructure. Among the tenants: trucking companies, tent companies, caterers, sound editors, and even law and accounting firms that specialize in film tax credits.
An oft-cited success story is that of Hollywood Trucks, a firm started by entrepreneur Andre Champagne that has become a juggernaut in Louisiana — and that has expanded into Mississippi and Georgia. (Georgia’s subsidy program is similarly generous to Louisiana’s and also has become a huge magnet for film productions.)
Champagne’s company got nearly $7 million in taxpayer assistance to build up his fleet, money he argues was well spent. He now has 400 trucks, and each of his trucks needs a driver.
But the spillover doesn’t end there. Champagne notes that his trucks and trailers need to be serviced by mechanics. And they need parts, and tires, and gas. And so on.
Then there are all the other people touched by film in uncounted ways — for instance, people who rent their homes out as film sets or lodging. A website called Key to NOLA caters to the industry with short-term, high-end rentals, some going for as much as $5,000 a month.
The ripples go out still further, the film boosters say, in sometimes incalculable ways. Would Brad Pitt have been inspired to underwrite his Make It Right green-housing project in the Lower 9th Ward if he hadn’t been drawn to the city through the film program? Would Sandra Bullock have become a vocal and generous booster of Warren Easton Charter High School?
10 celebrities who starred in the most expensive films made in Louisiana
And how many bright young people have opted to move to Louisiana, or return home, as Champagne did, because of the presence of the film industry?
More concretely, maybe, boosters say that seeing a place on the big screen can inspire lots of viewers to visit. For every “G.I. Joe II” — a picture that could have taken place anywhere — there is a “Duck Dynasty,” an “NCIS: New Orleans” or a “12 Years a Slave,” a movie or show that has a distinctive Louisiana brand.
A 2013 Florida study underwritten by the Motion Picture Association of America, the leading industry group, posited that film and TV prompted 11 percent of visitors to the state to come there. That estimate, according to the study, came from tourism “industry representatives.”
The Louisiana Film Entertainment Association, the voice of the local industry, has commissioned its own impact study, which will take such ripple effects into account. If film boosters can simply show the state gets more out of the film program than it puts in — even by $1 — that should end any controversy over the program, they say.
Will French, the president of that group, who also helps to secure financing for films, says early results from the research show that the effects of so-called “film-induced tourism” are considerable. Given that tourists visiting Louisiana spend more than $10 billion in the state each year, proving that even a small percentage of them were drawn here because of the film industry would show that the film credits pay for themselves, he said.
On the other hand
But skeptics doubt such a showing can be made — not credibly, at least.
At a recent meeting of a legislative committee tasked with recommending reforms to the state’s entertainment incentives, Albrecht, the legislative economist and a member of the committee, told his fellow panelists that he would object strongly to any study that attributes much tourism spending to the film industry.
“We’re talking about Louisiana,” Albrecht said in a later interview. “The state, believe it or not, is known all over the world. New Orleans alone gets 10 million tourists a year. I don’t think we’re having any material effect on that” through filming.
While it’s hard to know what precisely draws tourists to the state, Louisiana’s tourism industry hasn’t grown appreciably since 2003, when the film program was newly born, in terms of visitors or dollars spent, according to state figures.
Albrecht has little doubt the new study will say otherwise.
“I eagerly await the results of the study; I’m sure it will prove us all wrong,” he said. “I’m also sure it will have some fanciful assumptions.”
French promises the study, though it’s being paid for by the industry, will be rigorous.
Skepticism aside, Albrecht and others are willing to concede there are benefits from the film program that aren’t counted in their studies. But any spending, regardless of what industry does it, has a ripple effect, they say.
“My wife is a teacher, and when you pay money to her, that circulates through the economy and creates economic activity,” said Jan Moller, director of the Louisiana Budget Project and a longtime critic of the film program.
“There’s a plumber at my house right now fixing my kitchen sink who’s being paid partly with money from the school system. That’s economic activity supporting jobs. Everything does that.”
Scott, of PAR, notes that some of the “ripple” jobs that film supports are in fields that have long had plentiful employment in Louisiana without getting a boost from film, such as catering. The vast majority of high-level jobs on productions are still taken by out-of-state workers, an Advocate review of dozens of film audits found.
“We don’t need expensive tax credits to build a food industry,” he said. “To me, catering should be off the table.”
And Albrecht points out that the state’s studies have omitted costs as well as benefits. For instance, the state helps cover films’ “soft costs,” like financing and travel, that do little if anything for Louisiana. Those costs average about 4 percent of a film’s total expense, according to the most recent state study.
What that means in real terms: When Matt Dillon was coming to town to film “Bad Country,” to take one example, Louisiana taxpayers helped cover the costs of his massages, his first-class flights to and from New York, and his local gym membership. Likewise for the stars of “Twilight Saga: Breaking Dawn,” whose drivers, bodyguards, hairdressers and first-class travel were all subsidized.
More abstractly, the studies don’t take into account what economists call the “opportunity cost” — that is, what the state lost by spending the money on film rather than something else.
“A dollar you spend on films is a dollar you’re not spending on education or health care or to repair a bridge or put cops on the street or whatever else you think we should be doing,” Moller said.
Where to now?
The fundamental question facing the film industry and the Legislature now is where film should go from here. Should certain excesses be curtailed? Should a cap be set on spending? Or should lawmakers embrace Louisiana’s status as perhaps America’s film-friendliest place and keep the cameras rolling?
Film backers in the state have resisted any cutbacks to the program, saying that Louisiana has finally built an industry, that it’s starting to grow roots and that we should leave well enough alone.
But reform ideas abound, ranging from capping the annual funding for the program to simply paring back the incentive from 30 percent. Another simple fix — and one that would be unlikely to slow the industry — would be to set the price at which the state will exchange tax credits for cash high enough to persuade everyone to take that option.
Currently, the state will issue any production company owed film tax credits a check worth 85 percent of the credits’ value. So if a film is approved for $10 million in tax credits, for instance, the Department of Revenue will instead write the production company a check for $8.5 million.
That transaction saves the state 15 percent — for if the credits were sold to a third party, the state would be on the hook for the full value when the third party cashes them in against his taxes.
Viewed another way, the size of the state’s subsidy falls from 30 percent to 25.5 percent when the state writes a check instead of issuing credits.
Proponents say the traffic in film tax credits — while lucrative for some people — is not fundamental to the film program; there’s no reason to think getting rid of the credits would cause fewer films to be made in Louisiana. Opponents of a change, among them French, who trades in the credits, say the credits have helped to build a local group of film investors, and that local credit brokers also help market Louisiana’s film program.
One reform that seems likely to sail through is a plan to begin withholding income tax from payments to actors and other highly paid film professionals — something that, remarkably, hasn’t been done to date. While anyone who earns income in Louisiana is theoretically liable for paying taxes — which amount to 6 percent for high earners — actors, directors and others typically get around the requirement by having payment sent to tax-sheltered “loanout corporations” that they control.
Like other states, Louisiana has a system for ensuring that other top earners who don’t live here, like visiting professional athletes, pay income taxes on their local earnings, and the same logic would be applied to actors. While there’s been some pushback to the proposal from producers — who may see their own costs go up as actors seek higher fees to offset the taxes — French says the industry is willing to go along.
State Sen. J.P. Morrell, D-New Orleans, who is chairing the committee looking at the state’s entertainment incentives, says one of his biggest challenges is getting the industry to realize that it could be in peril if it refuses to make real concessions.
Other industries looking to protect their own programs from potential cuts will be happy to throw film under the bus, he said.
“I’m very concerned they don’t understand the forces they’re fighting with,” said Morrell, who is generally a fan of the film program. He warns that if other groups receiving tax breaks “can have no cuts by sacrificing two or three (other credit programs) in whole or in part, they’re gonna do it. They don’t care. They will absolutely spend all the money and power they have to lobby for that.
“My goal has always been, if the industry could figure out ways to repair itself, and to make the tax credit more solvent, when the general culling comes, I would have the ability to say, ‘Film has already done its penance. The treatment has been administered, the medication has been given, film is now healthy. Move on to some of the other ones — like the antique airplanes and the gold-bullion tax credits.’ ”
Morrell isn’t alone in the view that the film program could become a victim of its own success.
“I think the film industry has a vested interest in figuring out a way to get to a more stable solution,” Moret said. “If you get to the point that the net fiscal loss from the film industry overtakes the amount the state is funding into higher education, that would not be a good outcome — not just for higher education, but for the film industry. That would put their incentive at great risk, I think.”
French acknowledges that the film industry has “circled the wagons” when the program has been under attack in the past, but he says that’s only because the ideas on the table were ill-considered.
For instance, a proposed cap on how much of an actor’s salary would be subsidized by the state was poorly researched by Moret’s office and would have driven dozens of productions away, he said. Filmmakers want the program to work for Louisiana, he said, and this year the industry will put forth a number of proposals aimed at maximizing the state’s return that could be considered in the legislative session that begins in April.
“We are going to suggest a set of improvements to the program to make it more efficient, to make sure the program is better for the state and builds a better industry,” French said. “Hopefully, we won’t be put in a bad position which puts us on the defensive going into the session.”
Despite program, major studios not sinking much into Louisiana's infrastructure
By GORDON RUSSELL | Staff Writer | firstname.lastname@example.org
One of the big knocks on Louisiana’s tax credit program for film productions, apart from its huge cost, is that it hasn’t built an industry that is grounded here.
Critics say the state is just “renting” jobs, attracting productions by the score by dangling an incentive that is as generous as any in the nation. The minute Louisiana quits paying them so handsomely, filmmakers will move on, they say.
Proponents acknowledge as much, and history shows the industry is quick to abandon states that cut back. But they urge patience. The movie business is in a period of reorganization, they argue, and Louisiana will benefit if the state — currently North America’s busiest locale for feature films — is still a moviemaking hub when things settle down. Any curtailment of the film incentive now, they say, would cut into Louisiana’s share of the business and hurt the state’s chances of building an industry with real lasting power.
In fact, filmmakers are expected to ditch North Carolina after that state’s decision to limit tax credits to $10 million a year, about 4 percent of what Louisiana gave away in 2013. It was a cutback of 84 percent for North Carolina, which had been one of a handful of states, along with New York, Louisiana, Georgia and New Mexico, that was luring away a substantial chunk of the work that once went almost exclusively to California.
Recognizing the impermanence of the local industry, Louisiana lawmakers responded with yet another giveaway, this one to help encourage the film industry to put down roots here by helping to cover the cost of brick-and-mortar projects. That program, since eliminated, was even more generous than the film-production credit, covering 40 percent of the cost of all eligible projects.
It worked, after a fashion. New Orleans, Shreveport and Baton Rouge now all boast large soundstages that can play host to Hollywood blockbusters.
But the problem is that the big players in the film industry — that is, the major studios and production companies based in California — are not invested in those projects. They rent the facilities, which typically have few full-time employees, and they don’t have any stake in whether they fail or succeed. Louisiana taxpayers, on the other hand, are on the hook for almost $70 million of the $170 million cost of the projects.
“Hollywood is still very much in Hollywood,” said consultant Sherri McConnell, who oversaw Louisiana’s film program for four years as head of the Office of Entertainment Industry Development and now is one of 16 people serving on a legislative panel convened to examine the state’s entertainment incentive programs and recommend possible reforms. “The money still starts and ends there. If we are interested in just being a venue for people to come here and shoot, that’s one thing. But if, in fact, we are interested in building a sustainable industry, we should be finding a way to get those businesses to move and expand here.
“It’d be great if we had Sony or Disney or Warner Bros. set up shop here instead of coming here and making a movie and leaving. But unless and until we really want to cause these companies to invest in the state and be Louisiana taxpayers, the (film production) credits will never make sense.”
Not only are the big studios not invested in local infrastructure, but their earnings also are not subject to any Louisiana taxes.
Each film production made here sets up a limited liability company that serves essentially as a payment vehicle for costs associated with the movie. The LLC has no tax liability itself because it does not earn income.
“It’d be great if we had Sony or Disney or Warner Bros. set up shop here instead of coming here and making a movie and leaving.’’ -- Sherri McConnell, who oversaw Louisiana’s film program for four years as head of the Office of Entertainment Industry Development
Whatever profits a film makes are subject to corporate income taxes, but those taxes are paid by the backers of the film itself, who generally are not based here, so the money goes to other states.
State Sen. J.P. Morrell, D-New Orleans, who chairs the legislative panel scrutinizing the credits and is generally a booster of the industry, says he hopes that, with time, the industry will become more grounded in Louisiana and will thus find it more difficult to leave. As an example, he cites efforts by the city of Montreal to incentivize the video gaming industry to put down roots there..
The program has been so successful, Morrell said, that as Quebec officials begin scaling back the credits there, the industry is finding it difficult to pick up stakes. “It’s reached such critical mass that the industry can’t just leave,” he said. “They’re stuck there. You have to put the industry in a position where if you scale back, you’re still competitive. But we’re not there yet.”
It’s worth noting, however, that many video game makers are at least threatening to leave if Quebec follows through with planned cuts.
There’s fairly broad agreement that for Louisiana’s film program to really become a permanent feature of the local landscape, a bigger slice of industry decision-makers must be based here.
Boosters point to a few successes in that vein: Some local people have begun investing in film productions, with “Dallas Buyers Club” being a notable example. Film producer Scott Niemeyer, who has offices and homes in New Orleans and Hollywood, has co-produced four films made in Louisiana in the last four years, including “Pitch Perfect” and “Pitch Perfect II,” which filmed over the summer.
Niemeyer, a New Orleans native, left the city for Hollywood after graduating from Tulane Business School in the late 1980s. He’s thrilled to be working here again, and he’s trying to put together capital for what would be the biggest film production facility between Atlanta and Albuquerque. Called Deep South Studios, it would include 11 structures on an 18-acre campus underneath the Crescent City Connection in Algiers.
Hollywood Trucks is another Louisiana-owned firm with real skin in the game, although state taxpayers put up 40 percent of the money for roughly 300 of the company’s 400 trucks. And those are obviously mobile investments that could easily be moved elsewhere were Louisiana’s film program to dry up.
But Andre Champagne, the company’s CEO, says Hollywood Trucks is a perfect example of what the infrastructure program was meant to do. The state “helped us build a company based in Louisiana, and helped it expand globally,” he said. “It was beyond successful.”
The company hasn’t needed a subsidy to buy its last 100 trucks, he noted, and it plans to buy more next year without any taxpayer aid.
Moreover, the firm pays Louisiana corporate income taxes on its out-of-state profits — an inversion of the typical film production, where taxes on a movie’s profits generally accrue to other states.
Niemayer and Champagne both say there would be far more Hollywood investment in Louisiana — and more locals doubling down — if there wasn’t a continual cloud of doubt hanging over the state’s film program.
A major challenge Niemeyer has faced in raising capital for his proposed Algiers project is that investors have no assurance that the tax incentives will stay.
“That’s certainly a concern,” he said. “The biggest risk inherent in the business … is that we’re beholden to the legislation. If it changes or goes away, so do these businesses. And that’s not generally attractive to capital providers.
“The stability of the program, I think, will help breed more of my kind. The more that there is perceived to be a commitment to the program on a long-term basis, the more we’ll see real deep roots planted in the industry in Louisiana.”
There’s general agreement, though, that that hasn’t happened yet.
Not only has Hollywood yet to sink much money into local infrastructure, but most of the key people who work on films — in particular, the writers, producers, actors and directors — are still not based in Louisiana. “Maybe 95 percent of those people are from out of state,” McConnell said. “And we’re not getting any economic benefit out of that.”
Those people not only take most of their money back home with them, but they have no particular allegiance to filming in Louisiana, outside of the financial incentive to do so.
Will French, president of the Louisiana Film and Entertainment Association and a leading voice of the local industry, concedes the lack of high-level film horsepower based here is a real problem.
“We want to be responsible for the development of the work down here and not be reliant on California sending work to us, farming it out to us, and have all the decisions, the back-office work, still being done in California,” he said.
French, Morrell and others, including local union officials, say the state should consider giving filmmakers a bigger incentive to use bona fide Louisiana residents than it does now, especially in higher-paying jobs. Currently, state taxpayers pick up 30 percent of the tab for a film’s Louisiana costs; the number is boosted to 35 percent for certified Louisiana residents on a film’s payroll.
If the split were bigger, Mike McHugh, business agent for Local 478, the film workers’ union, thinks filmmakers might be tempted to hire more locals — for instance, if the state covered 40 percent of Louisiana payroll but only 25 percent of other in-state spending. French says the notion of a wider gap has general support in the industry, although there is not yet a consensus on what the numbers should be.
“It’s not enough to hire people to build sets; we have to have people in middle management,” Morrell said. “We’re kind of just creating the lowest tier of jobs. It’s great that we’re having lots of artisans working on films, but we’re not building a management structure.”
Morrell also is interested in lowering the threshold for companies to participate in the program. Currently, a production must spend at least $300,000 in Louisiana to be eligible for credits. Lowering it would both increase the cost of the program and potentially open it to far more filmmakers, prospects that may make it a difficult sell.
“Most local filmmakers can’t make the $300,000 cap,” he said.
Scandal plagues state's film program from the start
By GORDON RUSSELL | Staff Writer | email@example.com
You might say Louisiana’s film incentive program was born under a bad sign.
The state official who ran the film office in its early days, Mark Smith, and the lawyer who brokered most of the film deals back then, Malcolm Petal, both wound up in prison after they were caught in a bribery scheme.
Smith was in charge of interpreting the rules for the nascent program, and Petal wanted liberal interpretations. So he paid off Smith, who in turn signed off on Petal’s inflated expense reports, creating industry-friendly case law along the way.
“Those were the Wild West days. That really was Hollywood accounting meets Louisiana largesse,” said Robert Travis Scott, now president of the Public Affairs Research Council and formerly a Times-Picayune reporter who covered Smith’s and Petal’s travails. “It was just perfect.”
The embarrassing Smith scandal brought reforms, but it hardly ended the program’s corruption. Louisiana’s Inspector General Stephen Street, who investigates wrongdoing in state government, said the film program has “kept us very busy in recent years,” and he doesn’t expect that to change.
Since Smith’s 2007 indictment, at least eight other people have been charged with crimes related to the film incentive program. They include Wayne Read, who was sentenced to four years in prison for selling bogus tax credits to several members of the Saints, among others, and Michael Arata, a prominent attorney married to one of New Orleans Mayor Mitch Landrieu’s top aides, whose trial is set for January. More indictments appear to be in the works.
Why so many? Street isn’t sure. But one obvious reason is that the program is so generous, there’s a huge temptation to game it. Since the state pays for 30 percent of a film’s “Louisiana spend,” filmmakers have an incentive both to overstate their spending and to say it all happened in Louisiana.
The barriers to such chicanery are hardly impregnable.
“If a person is determined to steal from these programs, the way that it’s set up right now, it’s not that hard to do — if they get an auditor that is either willing to be part of the scheme or one that’s willing to sort of stick their head in the sand and just take what they’re provided without questioning the validity of it,” Street said.
To be sure, the film program has been shored up since its early days.
Back then, no audits were required; filmmakers simply turned in paperwork saying what they spent and credits were issued. Now, a certified public accountant must audit every film, and two state bureaucrats pore over the CPA’s reports before approving any credits, often kicking them back with a lengthy list of queries. In some cases, when the answers are unsatisfactory, they’ll order a deeper “forensic audit.”
Often, second audits are commissioned in cases where filmmakers acknowledge some spending involves “related party transactions” — that is, payments between firms that have shared ownership.
A number of the fraud cases have centered on allegations that such transactions were abused in order to generate credits. The pending case against Arata and his business partner, Peter Hoffman, for instance, charges that the two shuffled checks among a daisy chain of companies they owned while building a studio on Esplanade Avenue, racking up more tax credits with each payment.
State bureaucrats, while wary of “related party transactions,” hasten to say that most of them are not contrived. For instance, a studio might own a subsidiary that handles a certain type of work — lighting or prop rentals, say. It’s perfectly legitimate for the company to hire its sister firm, provided the rates it pays for the equipment are not inflated to gin up extra credits. The state requires proof that comparable rates have been charged elsewhere.
But other related-party transactions raise deeper questions. It’s not uncommon, for instance, for an actor or producer to invest in a movie, and then be paid a large salary by the production. The salary, of course, is an expense that qualifies for a 30 percent credit; the effect is that state taxpayers are offsetting the actor’s investment risk.
A recent example involved the 2014 film “Wild Card,” starring Jason Statham. Statham was a major investor in the film, but also was being paid $5 million as an actor. Typically, when actors help bankroll projects, they settle for lower fees, betting that they’ll make some money on the back end through box-office receipts.
Stephen Moret, head of the state’s Department of Economic Development, which administers the film program, says that because such transactions have “been abused a good bit,” the state is taking steps to rein them in. While the accountants who review film tax-credit applications are supposed to scrutinize those payments, the problems aren’t always flagged.
In the Arata-Hoffman case, the credits were approved after two auditors had signed off. And in some other cases, auditors aren’t aware of relationships that might exist between some of the parties.
In yet another case that is still being investigated by federal authorities, two men who knew each other are accused of cooking up a scheme to inflate the cost of building a film set for “Sports Trivia Clash” in order to game the system for extra tax credits.
An FBI search warrant application filed earlier this year alleges that Baton Rouge film producer George Kostuch persuaded contractor Zach Gyler to bill the production $89,000 for the set, even though it cost only $7,000 to build. That resulted in the state approving $26,700 in credits for the set alone, far more than its actual cost. All told, the production got nearly $200,000 in unearned credits, the feds allege. Neither man has been charged to date.
Such cases may point to another soft spot in the regulation of the film program: the ability of auditors to spot such shenanigans. In the Kostuch case, as with the Arata case, auditors found no problems with the transactions later deemed problematic.
The auditor in the case involving Kostuch, Clint Mock, said he did everything that could be reasonably expected of an auditor, even looking at photos of the set before signing off on the production report for “Sports Trivia Clash.”
“There’s nothing that a standard audit can do to discover this,” Mock said. “The intent is to deceive, and that’s what’s causing the trouble. This is about as creative as it gets,” calling the web of transactions a “very complex collusion scheme.”
A June report by the consultant Alvarez & Marsal, which was hired by the Jindal administration to find ways to wring savings from the state budget, noted that most of the film audits are being done by “three to four” firms. While not singling out any particular firm’s work, the consultant said audit reports are of “mixed quality” and sometimes “substandard.”
A dearth of auditors
The state does not track in any systematic way which firms do the bulk of the audits. But a review of 50 film files by The Advocate found that Mock’s firm, Mock and Associates, a Baton Rouge-based specialty outfit with three accountants that does only film- and entertainment-related work, handled the audits for more than half. A second firm, Malcolm M. Dienes LLC, of Metairie, did about 20 percent and the rest were handled by a handful of other accountants.
The Dienes firm handled one of two audits for the infrastructure project that led to the indictment of Arata and Hoffman. The firm later withdrew its audit.
Another potential weakness in the audit system noted by Alvarez & Marsal is that the auditors are hired by the filmmakers, who then include the cost of the audit as part of their expenses eligible for credit.
In some cases, state officials have found that the auditors were too cozy with their clients, in part because they sometimes advise filmmakers on the front end, telling them what expense will be approved, and then handle auditing duties. In one instance, state regulators last year rejected an audit by Mock on “Dallas Buyers Club,” deciding it had the appearance of a conflict because he had served in such an advisory role.
The Alvarez & Marsal report recommended that the state, not the filmmaker, should engage auditors in the future, so that it’s clear that the real client of the auditor is the state of Louisiana.
The recent rule revisions proposed by the Jindal administration do not make that change, but they do exclude the cost of the audit from the expenses that should qualify for a state subsidy.
Mock said in an interview that such steps are unnecessary, and that CPAs have a responsibility to the truth rather than to the people who hire them. “An auditor has to have professional skepticism,” he said. “We view ourselves as the guard dogs for Louisiana taxpayers.”
Too strict, or not strict enough?
The auditing process has become a source of some tension in the industry as the state, stung by fraud, has sought to take a more skeptical look at filmmakers’ tax-credit applications.
“They’re taking time to make sure every taxpayer dollar going out the door is legitimate and there’s no funny business going on,” said Daniel Lewis, chief operating officer of Active Entertainment, an independent film production company that has made 25 films in the state since 2007. “As a Louisiana taxpayer, that doesn’t really bother me.”
But some producers complain vocally of delays in getting their money from the state.
And the state’s decision to reject Mock’s audit of “Dallas Buyers Club” last year — a sign of a tighter regime at the state level — brought vocal protests from Will French, president of the Louisiana Film Entertainment Association and a tax-credit broker.
“They’re taking time to make sure every taxpayer dollar going out the door is legitimate and there’s no funny business going on. As a Louisiana taxpayer, that doesn’t really bother me.’’ -- Daniel Lewis, chief operating officer of Active Entertainment
And the state’s decision to reject Mock’s audit of “Dallas Buyers Club” last year — a sign of a tighter regime at the state level — brought vocal protests from Will French, president of the Louisiana Film Entertainment Association and a tax-credit broker.
Earlier this year, French ripped into Stephen Hamner, director of the state’s film office, which gives final approval to tax credits, again for being too persnickety. In particular, French was irked by the state’s demands for additional documentation of Statham’s fees for “Wild Card.”
In an email to Hamner’s boss, Chris Stelly, he accused the office of “acting like a bull in a china shop,” adding: “Please rein in Stephen Hamner.”
Stelly responded that he didn’t understand the production’s refusal to turn over the requested tax forms, adding that he was just trying to guard against any bookkeeping trickery.
“Given the amount of potentially fraudulent activity within RPTs (related-party transactions), why would you disagree with our wanting to validate without a doubt the substance of any transaction?” Stelly wrote back. “This isn’t a bad decision or even bad policy, just trying to protect the taxpayers’ investment and ensure this program isn’t abused.
“When a production outright refuses, you can imagine the concern that raises.”
The documentation regarding Statham was eventually turned over, and state officials are still reviewing it.
French said in an interview that he understands the need to protect taxpayer money. But he says many in the industry simply don’t trust the bureaucrats they deal with. Too often, they feel as though Jindal’s Economic Development team is trying to squeeze them rather than nurture them.
“I’m worried about the Department of Economic Development,” French said. “I don’t think that they understand this industry. I don’t think they understand their own numbers. I don’t trust that what they say they will do, they will do, and that what they say they won’t do, they won’t do. It’s just the history of how they’ve operated.
“If there’s anybody that could screw this up, it’s them.”