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CHAPTER 1
THE BLOCKBUSTER SCAM: HOW HOLLYWOOD IS RIPPING YOU OFF
It wasn't as bad as shoving a reporter in front of an oncoming subway train, but it was still a move worthy of Frank Underwood, the unscrupulous, conniving pol at the center of Netflix's House of Cards (who, spoiler alert, offs a journalist in just such a manner during the show's second season). The move was calculated, cold, and ultimately bad for the people whom government is supposed to serve, much like nearly everything Underwood does in his unstoppable quest for Oval Office power — except it occurred in real life, to actual lawmakers and a real, live taxpaying public.
House of Cards had been filmed for its first two seasons in parts of Maryland, including downtown Baltimore, thanks in part to a generous subsidy program provided by the Maryland legislature. For season three, though, state lawmakers were threatening to yell "cut" on the flow of money, questioning whether the use of public dollars was worthwhile to subsidize a popular, successful TV show that aired on a premier website and seemed as if it could support itself in the absence of public funds. "It seems to me that House ofCards isn't doing so badly that it needs taxpayer help," said state delegate Kathy Szeliga.
And so the arm-twisting began.
In a letter sent to Maryland's governor, Martin O'Malley, Charlie Goldstein, a senior vice president of Media Rights Capital, the show's production company, wrote, "While we had planned to begin filming in early spring, we have decided to push back the start date for filming until June to ensure there has been a positive outcome of the legislation. In the event sufficient incentives do not become available, we will have to break down our stage, sets and offices and set up in another state." A similar letter was sent to the speaker of Maryland's House of Delegates.
The threat was anything but subtle: Provide us enough "incentives" — i.e., taxpayer money — to stay, or we'll take our show and all its Maryland jobs elsewhere. Underwood himself — or at least Kevin Spacey, the now-infamous actor who portrayed him — even personally lobbied Maryland lawmakers at an Annapolis wine bar in an effort to seal the deal. "We are enormously honored to be in this state," he told the gathered representatives. "I can only tell you that every single day I go to work, there's no doubt in my mind that the faces I look at of Marylanders are incredibly happy that we're here."
That happiness was, perhaps, not as universal as Spacey might like to think. As one Maryland state delegate correctly noted, "We're almost being held for ransom." Indeed, as Szeliga, a consistent opponent of the film subsidies, said later, House of Cards' ultimatum was the moment the downside of providing the show with subsidies should have been clear-cut to everyone. "Threatening to leave if you don't get your money?" she said. "If everybody doesn't see it in black and white today, they never will."
But even if it wasn't the most sympathy-earning move, the show's team had good reason to use this tactic: If there's anything local lawmakers hate, it's being blamed for job losses and accused of not doing enough to keep local people employed. Having Spacey deliver the message ensured that it gained media coverage, putting the potential departure of jobs directly in front of the public. TV stars from one of Netflix's hottest shows were saying how much they loved working in and around the community and saying what a shame it would be if politics forced them to go somewhere else. Politicians, on the other hand, were trying to explain why what those stars were saying perhaps wasn't true. A fair fight, this was not.
The ending of the episode wasn't hard to predict: Resistance among the legislators crumbled and Maryland paid $11.5 million in film production tax credits and another $7.5 million in grants authorized by the state's assembly, which the House of Cards crew graciously accepted. "We're going to keep the thirty-seven hundred jobs and more than one hundred million dollars of economic activity and investment that House of Cards generates right here in Maryland," O'Malley bragged.
It's no surprise the legislators ultimately caved, as Hollywood has gotten very, very good at wringing public dollars out of governments via these sorts of threats, and their attendant media campaigns, lobbying efforts, and even biased economic- impact studies. It's all part of the blockbuster scam, the many and various ways in which taxpayers are being ripped off by the film and TV industry.
As of this writing, about three dozen states subsidize movie and TV production in some way via tax dollars. This largesse comes in several forms, but the most popular is simply a credit toward production costs: Prove you spent X dollars in this place, and you will receive a percentage of it back via what is essentially a check. Some states provide rebates as high as 40 percent. Various exemptions from other forms of taxation, including breaks on sales taxes or corporate income taxes, are also provided. As I'll explain later, these credits can provide a windfall to companies that have no tax liability at all or even be sold off to third parties so that the buyers can reduce their taxes. The fancy language used to describe these credits shouldn't obscure that we're talking about cash that once belonged to the public and no longer does.
The theory behind providing film subsidies is simple and seductive: Give production companies and filmmakers money, and then jobs that would have gone elsewhere will instead be in your state or city, and they'll be high-paying film industry jobs, too, with all the glitz and glamour that entails. These very visible jobs in the community — such as security guards, camera workers, or in construction — are usually accompanied by lots of newspaper articles about Hollywood A-listers coming to town, so it's easy to see why politicians have tripped over themselves for the last several decades to provide the biggest and the best subsidy programs. As one budget analyst put it, "There's an allure to policymakers, who get irrationally starstruck and like the idea of being at a production shoot with Ben Affleck or whoever."
Production companies, of course, love this. One director explained it like so in 2006: "Hey, you know what? Studio executives? They'd shoot a movie on Mars if they could get a twenty-five percent tax break." The advent of digital filmmaking, which can make anywhere look like anywhere else, has helped the cause; shooting a movie about New York City doesn't mean one has to be anywhere near the Big Apple. (A lot of movies set in American cities are shot in Vancouver or Toronto, thanks to Canada's lucrative movie subsidies.) Studios have chased tax breaks around the country and beyond, leading to a massive proliferation of schemes in state after state after state, as nearly all of them have attempted to get in on the action.
The first explicit tax break for movie production was created in Louisiana in 1992, and a few other states started up small programs in the years after. But the golden age of the US film credit began in 2002, when the Bayou State initiated the Louisiana Motion Picture Investor Tax Credit program; after the number of productions in the state clearly increased, it set off a great race among the others to subsidize silver screen activity. By 2009, forty-four states and the District of Columbia had some sort of film incentive program on the books, as did the federal government. Only Delaware, Nebraska, New Hampshire, Nevada, North Dakota, and Vermont held out. The total cost of these programs in fiscal year 2010 was $1.5 billion.
These dollars aren't going to boosting independent films made by locals or to giving smaller production companies a leg up against Hollywood behemoths, which would perhaps have been defensible as an effort to build an industry from the ground up. Instead, it's money going to Twentieth Century–Fox, Warner Bros., Disney, and DreamWorks, a veritable who's who of the moviemaking elite, the corporate giants of the industry. In 2015, nearly every Academy Award Best Picture nominee, including the eventual winner, Birdman, received some public funding. Ditto in 2014, when American Sniper led the way in public largesse. "The name of the game, all over the country, is tax incentives," said Lee Shapira, who works on sets and lighting in Maryland.
But these programs don't work as advertised. They often don't come anywhere close to justifying their cost when it comes to economic activity, jobs, or sustainable development. States and cities have been buying precious little but some short-term glam and a long-term hole in their budgets.
Louisiana is an instructive place to start in trying to explain why these subsidies are almost always a waste but create the illusion that they do some tangible good. Undeniably, Louisiana's tax credit program has convinced production companies to look at the state seriously when previously few did. In 2002, before Louisiana started doling out serious money to entice silver screen moguls, just one motion picture was filmed there. Five years later, the number had jumped to 54. In 2013, 107 projects qualified for public help, 49 of which were feature films, more than in any other state in the nation. Some of the biggest film franchises of the day — the likes of Terminator and Jurassic Park — called Louisiana home, as did some of TV's biggest names, including NCIS: New Orleans and Duck Dynasty. Hollywood had moved, in a major way, from L.A. to LA.
The total cost of all this to Louisiana taxpayers was nearly $1.5 billion over the last decade. About $1 of every $6 spent subsidizing film production in the United States was spent by the Bayou State, as of 2015. And that's where the trouble begins.
To start, it's worth remembering that nearly every state in the United States — unlike the federal government — has a balanced-budget requirement; the states are constitutionally required to have outlays not exceed revenue. They can't run a deficit or add debt via the annual or biennial budget. That requirement means every dollar dedicated to one thing is one less dollar for all the other responsibilities state governments have. Whereas the feds can argue that borrowing money to invest in a program is worthwhile, states often can't, constrained as they are by legislative budget fiat. Thus, trade-offs are inherent in everything a state does, every fiscal decision it makes, every cent it decides to spend on one thing versus another, more so than they are on Capitol Hill in Washington.
So the first measure of whether a subsidy program is working is how much of a return it's generating. And study after study, analysis after analysis, report after report, year after year after year, has shown how little money states recoup when they dole out funds for film production.
In Louisiana, one analysis found that the state received about $44.3 million in revenue — state and local taxes combined — in 2010 thanks to its film program, which cost nearly $200 million that year. A 2012 analysis found similar numbers: more than $200 million in outlays, about $50 million in revenue.
The most oft-cited analysis of the state's film program took place in 2005, conducted by its chief economist, Greg Albrecht. He found that the state only recouped about 16 percent to 18 percent of the cost of its film subsidies through tax revenue. He wrote that those numbers should be considered "generous," as "a number of aspects of this particular analysis work to overestimate the likely true impact of the program."
That's not a great return, to put it mildly. And the same result has held across the country, consistently.
Maryland found that its film subsidy program recouped just six cents in revenue for every dollar spent. For Massachusetts, it was thirteen cents, New Mexico fourteen, and South Carolina nineteen. Few independent analyses have found a return that cracks thirty cents per dollar spent. Just two that I've seen — a study from New Jersey and an analysis from California — found the revenue even getting back half of what was initially spent. The dollars that went out the door were not coming back; in the strictest sense, these programs do not come close to "paying for themselves" in the popular governmental parlance.
So if that is the case, the next question is "What are these states paying for?" After all, it's not necessarily bad for states to spend money on things that are worthwhile, even if the return on investment is less than 100 percent. Governments do that all the time, filling gaps that the private sector won't or fulfilling other responsibilities that are unprofitable or prohibitively complicated for private entities but necessary for the public good. There's not much profit in Medicaid or building roads, for instance, but few say we shouldn't do such things. However, what film production programs are buying isn't worth having most of the time.
The top-line justification is jobs. "This is a crown-jewel industry that provides jobs and opportunity for middle-class families in every region of our Golden State," said one California state senator in support of upping such spending. "We're sending a powerful signal today that we are one hundred percent committed to keeping the cameras rolling and bright lights shining in our state for years to come." The same rhetoric is used everywhere else: Subsidize movies and get good jobs. It's a simple equation on paper and one that makes for a nice sound bite. University of Southern California professor Michael Thom has found that rising unemployment is one of the most reliable predictors of whether a state will create a film tax credit. "Rising unemployment increased enactment likelihood, and falling unemployment increased termination likelihood," he wrote.
The simple "subsidies equals jobs" equation suffers from a few problems, however. First, by their very nature, these are temporary jobs. Even television shows that run for years aren't filming all the time, while movie productions clearly have a limited time frame, even in an age in which it can feel as if every other film is part of some "franchise." A Massachusetts study noted that "since all film productions are short-term," employees on those projects end up "working from a few days to at most a few months." A study by the Center for Economic Analysis at Michigan State University found that the "typical 2008 production filmed for 23 days" in that state, so it took 2,763 short-term positions to create the equivalent of just 250 full-time, yearlong jobs. This isn't creating jobs so much as renting them for a few weeks at a time.
That dynamic is fairly evident at the anecdotal level. I lived in Baltimore when the early seasons of House of Cards were being filmed there. The production would come in, do its thing, and leave. Trailers and lights would proliferate for a few days, then vanish. By its very nature film work is not the sort of gig that local politicians should dream of building their economies around. (Yes, House of Cards did have a permanent set in the area, but that opened and closed with the production schedule, too.)
Szeliga, the state lawmaker, described a neighbor who works in trucking. He did get some work hauling materials to and from the movie sites, but inconsistently. "That's not the same as a permanent Maryland job," she said. This effect was even more apparent when it looked as if House of Cards might get canceled in the wake of Kevin Spacey's sexual-assault scandal; positions associated with the show looked for all the world as if they would just disappear into the black hole that had become Spacey's career. Headlines blared about the economic effect a cancellation would have on Baltimore, making the city yet another casualty of the Hollywood sexual-assault scourge. (Those same jobs will presumably also vanish when the show ends as planned after its sixth season, but everyone seemed less worried about that.) Film jobs come and go with popular sentiments of the TV-viewing public and the whims of financiers; structurally, no one can do a whole lot to change that.
The line of thinking at work here also assumes that the jobs created by film subsidies go to locals, helping people in the show's filming location who wouldn't have found employment otherwise. But that is often not the case. As economist Robert Tannenwald, who has done some of the most in-depth and critical work on film tax credits in the United States, explained in a 2010 paper, "Most locations in the United States (other than Los Angeles and New York City) lack 'crew depth'— an ample supply of workers possessing the skills needed to make a feature-length movie. However, movie-making is so mobile that producers import their own scarce talent, such as principal actors, directors, cinematographers, and screen writers. ... These non-resident 'top personnel' enjoy the best jobs and a large chunk of the income created by feature film."
(Continues…)
Excerpted from "The Billionaire Boondoggle"
by .
Copyright © 2019 Pat Garofalo.
Excerpted by permission of St. Martin's Press.
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