This post is in response to a comment on the previous post Oh, the mess we’re in!. Blogger is unable to allow long comments so I've made a new post for the response.
Here's the comment:
" Mark said...
Thanks for replying to my comment. You're saying that the risk used to be that the studios would be held to ransom in some way, but now that's changed -- to a risk that the studio will find itself in financial difficulties.
I think it's unlikely that's a new consideration. The risk that the VFX house will be unable to complete the contract for some reason will already feature. Work gets pulled from even high-profile VFX houses which I see as the studio managing this risk in a hands-on way, and I expect they will continue to do so.
I think the reason I'm commenting on your blog is that it (and many others) are reducing the discussion to a simple one of "subsidies have introduced risk to the VFX business." Not acknowledging any existing risk is (to me) an indication that risk management is not high enough on the agenda within a sizable part of the VFX industry."
'I think it's unlikely that's a new consideration.'
Actually it is. Obviously studios wouldn't award projects in the past to companies that were just starting up or which there were indications they would fail from the get go.
Now there may have been a company or two that closed during a production in the pre-digital days but I can't think of any. But as you can see with R&H, DD, Meteor Studios, etc. that's a real risk now where it wasn't before. And this is as risky of the big companies as the small companies. The risk that a company may not be able to handle shots as desired or they may not be able to handle hundreds of new shots was always there but a company going out of business while working on a project? - That's a new one. Do the studios going to Weta or ILM think that tomorrow they may get a call saying they closed their doors while working on a project? No. And that was the case with almost all vfx companies pre-digital as well. Yet many projects are not done 100% at Weta or ILM. The work is split up among a few companies, not to reduce their risk of going out of business but in an attempt not to have all of their eggs in one basket. And by that I mean the studios don't want to hear about delays or problems or change orders. And they think it's cheaper.
A studio can check the quality of the work the company has done for other films, they can check their budgets, meet with the crew, they can talk to other studios, producers and directors - all of this to assess the risk and quality factor before they sign a contract. But the thing they can't do is check the books of the company and do a true assessment of their financial stability. In the past, they never had to.
Now a studio may pull work from a company and that's aways happened if the company wasn't delivering what was requested in the required time. There have been certainly 911 calls (emergency) when work needed to be shifted or shots were added. But that's a risk that is evaluated before the contract is signed and is monitored by the studio. This is not something they're blindsided with. A company calling them up and saying we're filing for bankruptcy tomorrow (or next week) is a much different thing and a much higher level of risk.
The studios have many risks when they make a film. They take on that risk with their crews and locations. But vfx is a 3rd party since the studios don't want to take on running their own vfx company (too risky). The real risk is laid at the doorstep of the vfx company. But the risk for the company is constantly changing by external forces which they have no control over. And in many cases their clients are the ones putting the companies at more risk either directly or indirectly.
'I think the reason I'm commenting on your blog is that it (and many others) are reducing the discussion to a simple one of "subsidies have introduced risk to the VFX business." Not acknowledging any existing risk is (to me) an indication that risk management is not high enough on the agenda within a sizable part of the VFX industry.'
No offense but this sounds like a certain management software company or a studio talking and not someone working in visual effects or visual effects management. Would there be some risk without subsidies? Yes but they'd likely to be much less.
As pointed out the studios and regions (countries, states) have created a situation where quality and efficiency are lower priority. If it were a true free market then those companies who were doing good work efficiently would be rewarded by more work. They'd be able to make a profit and be on much firmer ground financially. The companies that did poor work or that were inefficient would see their profits go down and possibly have to close. Studios would be clearly able to see the different levels and know ahead of time what their general risks were. This is natural evolution. Just like in nature the weak ones would be dying off and the strong would survive.
But now you've added in subsidies into the mix. It's no longer evolution based on quality and efficiency. It's evolution based in large part on politics. And those politics change frequently. Companies that would be strong and survive in a free trade market now find that there is no way they can cut costs 50% or more. They find they have to invest $1 million dollar into a satellite branch they don't want and didn't plan for. And companies that wouldn't even exist without subsidies now exist only due to the subsidies. Companies that were small found themselves very big in a short time not because the companies were the best at what they did but because of subsidies.
Imagine you've got 5 runners in the Olympics and you give some of them motorcycles. Is that fair? Is that a way to truly assess which runner is the best? Are people surprised when the actual runners don't win? Which one would you bet on?
Imagine a restaurant in a town and it's doing well. In fact it's very good and people are coming from other towns. And in another town right next to the first town the city government decides to pay for 50% of all orders at a similar restaurant. Don't you think that would have an impact on the first restaurant? Almost all of the people from both towns would flock to the one that they could get food for 1/2 price.
Is there a way for the first restaurant to compete with that? No. There are certain food, labor and building costs that they can't trim. They're not making over 100% markup so it's impossible to cut their prices 50% and still make any money. What are their choices?
1. Close their doors
2. Try to offer food at the same price. And this will bring back some of the customers but since they're now losing money every month it's simply a matter of when they will close their doors.
3. They can open another restaurant in the town with the discounts. Now they have the extra burden of a duplicate restaurant. They have doubled their building and overhead costs. They've had to hire a manger, hostess and the entire group of chefs and wait staff just for this new place. Do they have enough money to do that? Will that added unexpected cost now make them more at risk of going out of business? Yes is the answer.
Now imagine that another town right next to these two starts offering a 70% discount. Now where does that put the owners of the restaurant? Do they now build a 3rd restaurant in this new town? Do they try to lower their price to match? And with the more lucrative restaurant business in this new town, there will be more restaurants built by those who haven't done this before. The townspeople have paid their taxes and the town council has decided that offering food coupons is much more important than putting the money into their schools or their decaying bridges. There's no winners here except for the customer.
Are subsidies the only reason for troubles of the visual effects industry? No but it is a major reason. Natural evolution would tend to solve problems of poor management and other flaws by having them go out of business. Is there a risk? As in all of filmmaking, yes. Is the risk of a company running out of money on a project much greater now? Yes. See the restaurant example of options for a company. None are good. And it's not a question on how good management is at that point, you can't do the work for 1/2 price. And that's whats created the largest risk - closing doors even while working on projects.
And lets not forget when studios do stop or pull projects that creates a huge loss for the companies that was unexpected. As I say, the companies take on a fair bit of risk outside their control. Now they're on even shakier ground. The studio that pulls 1/2 their work can't plead ignorance that they increased the financial burden of the company and increased the risk the company could go out of business. Between these types of actions and the subsidies it's no wonder some companies go out of business.
6-5-2013 I know many don't bother reading the entire posts here so I will summarize. For those who wish the details and want want references please continue reading the rest of the post.
Summary: Subsidies are destroying the visual effects industry. Some article may call them incentives or rebates but they are in fact subsidies where governments take money from tax payers and give it to profitable studios, free and clear. Some call them kickbacks. Money that could have/should have gone to pay for things that actual area needs such as repairing bridges, education, etc.
Subsidies do not create jobs nor do they create industries. They merely move jobs from one location to another. Someone is losing when there are subsidies. The losers are everyone but the studios. The tax payers and those whose jobs have moved away because of subsidies are the losers. Even those who are in the area of the subsidies are losers because they do not have a solid industry and they will soon be unemployed.
Those workers benefiting from the subsidies will be losing their jobs as soon as their current location doesn't offer higher subsidies than anywhere else. Nor are they a way to build up a sustainable industry. Each and every film evaluates where the subsidies are. Studios have no long term stakes anywhere and quickly change to where ever the money is. When that happens the industry collapses, if the only reason it exists is because of subsidies. There is a race to the bottom as each location tries to provide more and more money every year to the profitable media companies.
(This blog covers visual effects industry but if you're interested in production film incentives subsidies just skip ahead and check out many of the links to unbiased reports and articles. Many cover states and country subsidies.)
Subsidies allows politicians to decide which companies and which industries win and which will lose. Subsidies create a very un-level playing field and distort the evolution of both companies and individuals affected. No matter how good a company is, it's impossible to compete with 50%+ subsidy from a government. There is no way to cut costs by over 50% and so even good companies are collapsing. Studios demand vfx companies setup branches anywhere and everywhere offering incentives. VFX companies have to spend $1 million or more to set up a branch or satellite location just for the privilege of bidding on show. No guarantee of being awarded a project. The vfx companies then have to request their workers move to these new locations or they have to import workers from other locations simply to fill spots that wouldn't have been there without subsidies.
Highly skilled, talented and experienced visual effects professionals now move like migrant workers. They have to leave their homes and families behind simply because a politician decided it was good idea to take government money from their own citizens and give it to the studios.
Some studios are also demanding in their contracts that visual effects companies are responsible for the studios getting their full, estimated subsidy amount. And if the studio doesn't receive the whole amount planned, the visual effects company will have to pay the difference. So even if it might be more efficient and produce better work to send some of the work out to places like Los Angeles, the visual effects company cannot because they have to operate within the restrictions of the subsidy requirements and now the contracts. This type of business approach is simply producing more inefficiencies and potentially lower quality of work.
Subsidies are causing schools to churn out many more vfx workers than there jobs available. This is happening especially in areas with subsidies which has created a very short term need for these workers. Not because there is more work but because the work has shifted. The number of visual effects workers has likely doubled from what the visual effects industry can actually support. Much of this is due to subsidies and the shifting evolution of vfx companies around the world that have nothing to do with supply and demand but rather short term political manipulation. More and more visual effects professionals are losing their jobs every year from this manipulation.
No unbiased report has ever shown any advantage to these types of subsidies. Every positive review or document has been funded by the studios, film commissions or others who benefit personally from portraying them as a winning strategy.
Studios should be looking to make the visual effects industry a healthy and sustainable industry given they rely almost a 100% on the visual effects industry to make their massive profits. But the studios would much rather focus on short term gains and are fine with decimating the industry.
More details follow along with links to article after article, report after report that shows the problems with film subsidies.
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[Many more updates since I wrote this post. I've tried to keep up with some of the related items at the end of the post. So what do we learn from all of this? Most people are confused by tax incentives and proponents use bad math to try to hide the fact that incentives / subsidies are a losing propositions for the majority of the people in those areas. If you are employed in a subsidized area at some point the industry will not be subsidized where you work and you may find yourself having to move. That film subsidies do not create a permanent industry and that it is a race to the bottom with only the film companies winning. Workers and tax payers lose.]
5-22-13 Added another batch of articles. How anyone can be convinced these are good for the local areas is beyond me.
4-29-13 I now seem to be updating this almost daily as the various state and national governments continue with providing film subsidies and yet none of the reports show that they are good for the tax payers. I'll probably stop updating since it's clear that there are problems with all film subsidies. If you have a link to an unbiased report I'd be interested in seeing it. That means no report sponsored by studios, film companies, film commissions or that contain tourism as a large return on investment. Penciled in values for 'intangibles' not permitted.
3-8-13 I can't even keep up with the sad stories and updates. I've added a few more at the end. Most US film subsidies earn back 16 cents for every dollar spent. Michigan collected almost 9 dollars from every taxpayer in Michigan to help fund OZ. Michigan backed up their film subsidies with their public employees (teachers, police, etc) pension fund! And lost. Tax payers in every state and country should be awoken to the true facts. What if this money went to fix bridges, improve education or other sustainable forms of job growth?]
3-10-13 Here's a video about Louisiana that sums up what the impact is to the tay payers in areas with film subsidies. For every $6 Louisiana spends on film incentives, they only get back $1. What if that money was invested in real infrastructure (schools, hospitals, roads, etc) instead of paying it directly to for profit private corporations?
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I was contacted a few weeks ago asking for more info on tax incentives. I did a write up for them and with some of the latest information I thought I should post it here, especially after the Rhythm and Hues article on their insights.
I'm no expert on tax incentives but here's the information I've gathered.
Incentives exist in many states and in many countries. The term 'tax incentive' is a misnomer. It sounds like it's simply a special rate on sales tax or some of the potential taxable costs of doing a production. But frequently these have little do to do with the tax payments the productions would have to pay. These are incentives that specific areas offer, through local governments, to productions. The term tax may apply to a reduction in taxes but most of the time it's strictly noting where the money will come from (i.e. the tax payers). As a result it is a local government giving a production money, sometimes in advance, to encourage them to shoot and/or post in that area.
There have been other studies and more linked on vfxsoldier. The impartial ones never find much good in them. Only the 'sponsored' ones do and that only with some 'adjustment' to numbers.
Incentives work differently depending on where they are and that's why there's a web site detailing the specifics for each area. Since the studios can save 10's of millions of dollars on tax incentives they typically have a team of people (accountant/legal) who can sift through the numbers. Any big studio vfx film has bids from a few companies. These numbers go through this department or values are assigned to calculate their final value (i.e. they may have a simple formula for Vancouver of % off )
The studios don't always go to the cheapest places. If it's a huge film they may go with the largest vfx companies anywhere in the world for key work. But the smaller the project or sequence the more likely they will take costs into consideration. In some cases it may be the largest influence, especially if that's the only way they can hit the figures allowed by the company. (i.e. we have to make this movie for $30 million)
In some cases such as Canada they're given money up front in some deals. I've also known some US companies to match UK prices with tax incentives and the studios still choosing to go to the UK because of the details of the incentive. (i.e. up front money or other factors)
A vfx shop in a place with tax incentives essentially can offer their services for their fully budgeted amount but the studio sees it as 30% off or whatever the current incentive is. It doesn't cost the vfx company in these areas anything but obviously they benefit. The vfx company doesn't receive the tax incentive money. They bill the studio for their full amount and the studio is the one that gets the incentive funds. If the government is giving everyone reduced coupons and picking up the tab, it's great for a company.
Obviously if you're in the US or some place w/o incentives then you have to do the work for less, much less. The company in the UK or Canada is still charging full price but the US company may have to shave 20% to 40% off just to match prices. And that's already on bids that have likely been trimmed for competition. And even if the US company matches pricing the studio may go back to the UK company and say "Hey, we got a US company willing to do it for the same rate of your incentives." So the UK shop will drop their price 10% and get the project. Just like when you buy a car you may go back and forth between two dealers to try to get the best deal.
Sometimes studios get bids from multiple companies with no plans to use most of them. But they can go back to the companies they want to use and show these other bids to encourage them to lower their own bids even more. The main company of course doesn't know the studio isn't really planning to take the work elsewhere so they have to play the game and trim their prices. Some vfx companies have understandings with some studios that they will meet or beat any other bid, even if that means them losing money on the project. The people at the studios are very good at all of this since it's worth so much to them in terms of money and keeping their jobs. And every studio has a point person so they do a few of these deals every year. Years ago producers were the ones striking the deals and they weren't as money fixated.
It works financially for the studios and it works to some degree for the companies in those areas when the incentives are working. There's still competition in those areas and underbidding even with the incentives. It doesn't work for any place w/o incentives and it doesn't work for the tax payers or governments in those areas. The local areas are not winning.
Let's suppose a state pays $10 million to a film as an incentive. Thats' $10 million less money for the state to spend on actual expenses or education or a thousand other things.
Let's suppose the state tax rate were 30% (which it's not), that would mean the studios would have to spend $30 million in local residences jobs to get that much money back into the state funds as actual taxes.
Now some of that money of course stimulates a small slice of the economy in that area for a short time. Hotel, car rentals, local diners, etc will be earning more during those few months. And of course some of that is taxable. But that trickle back to the state doesn't work. And because productions are short durations (unlike an ongoing factory) it doesn't really employ local people for any real length of time and doesn't keep these support businesses going. They will see a spike for a short duration and then it's over. Much of the money is spent on non-residents (cast and main crew) and other expenses that don't benefit the state or country. Much of the money the state provides ends up going out of the area. In many cases it would have been more cost effective for the local government to simply give money to people in the state or area.
And to keep getting film productions they have to be one of the top places with the highest incentives. If you're 10th on the list of incentives you may not get any productions.
Some tax incentives are transferable. So that allows a studio to transfer (sell) them to others. So if an area is structured to require a certain amount of money to actually be spent in that area, the studio can take the benefits and simply sell them to existing companies in that area. Somewhat like some of the carbon costs and issues. There's a secondary economy with people making money buying/selling tax credits.
The places doing better than most are those who keep it going for a long period of time and are able to keep productions coming back. Vancouver and London are two standouts. This has allowed them to build up their infrastructure and build multiple support companies. They have a thriving mini-industry in those areas. But if US productions stopped going there for any reason most of their local industry would implode since there's not enough 'local' productions to keep them busy.
Louisiana has been a recent hot spot for tax incentives and many studios and a few visual effects companies moved there to take advantage of them. But any place that relies on tax incentives could find the rug pulled from underneath them very easily. New report says Louisiana film tax credits hurting state
Harry Potter was filmed in England which made sense since it was it would require english actors and could use some of the UK backdrops. And also JK Rollin probably requested it. But 75% of the vfx had to be done there so they could qualify for tax incentives. At the time of the first Harry Potter most of that work would have come to vfx companies in the US. There were small but decent vfx companies in London and some work from the US was trickling in. But as soon as tax incentives hit big time then they were guaranteed all 8 Potter films which is a lot of work. All the companies were able to grow and hire many more people. Warner Brothers had so much work being done they built a studio at an old airfield. Other productions were streaming in. They were booked up 2 or 3 years in advance just so the studios could take advantage of the money. How many US vfx companies are booked 2 years in advance? So now the size and experience of the London vfx companies is on par with many in the US. That would have never happened without tax incentives. They would have simply continued along at the rate they were. Most in the UK don't want to acknowledge that. There are good people and companies there producing great work but they were certainly received a big boost from incentives.
Part of the reason for having tax incentives is to provide employment for local people. But in the UK and Vancouver a certain % of people come from outside the country. I was told by a company in one area I could bring in whomever I wanted and as many people as I wanted. Because in some areas they simply don't have the resources or people required at the skill level required. It didn't naturally evolve, it was thrust up simply because a politician decided there were tax incentives. And every area has different arrangements and requirements for tax incentives. In Iowa a producer was buying personal cars using the money. There are other areas where it's written to be so loose there's a lot of fraud or just simply poorly written regulations that give money even if it doesn't end up helping the local economy.
Tax incentives are usually done by politicians because they are being lobbied by groups in that area that will support them ($). It sounds glamorous to people in Iowa that they can bring in movies and make money quickly. Technically these things lose money for the tax payers but as long as the politicians and their lobbyists make it happen then it continues. It's a race to the bottom for the tax payers in those areas because there can be no winner.
Michigan offered great tax incentives at one point. Many movies switched their scripts to shoot their (Gran Torino, etc) Michigan started to build studios and vfx companies but that work went away as soon as they weren't offering the highest dollar. Look at New Mexico. Sony set up their place there and studios shot things like Book of ELi there for the tax incentives. North Carolina has stages which I think are empty most of the time. Unless an area continues the incentives for a long time they will never build up a full structure and even if they do, once that incentive money is gone the production companies don't want to be saddled with the extra costs of moving the full production there.
The Hobbit shot in New Zealand because New Zealand actually modified their laws to allow enough incentives to make it happen. As a number of people pointed out at the time it wasn't a wise use of tax dollars but it was the pride that caused the people and politicians to agree to change their laws just so they could give the studio money.
Some places are catching on, especially areas needing to tighten their belts. Check Saskatchewan. They cut all or most of their funding. People there were up in arms because some of them worked in the film business but the politicians looked at the numbers and said it don't make any sense.
The one place that makes the most sense for tax incentives is here in California since this is where the majority of the work has been and it's the source of everything else (money, studios, directors, writers, etc)
And as Scott Ross points out it costs money to set up satellite companies. US vfx companies are struggling but then they have to go deeper into debt to lease a building, equip it with render farms, wiring, power, etc and to hire an entire crew of people. Now they have even more overhead since they have to have management at both locations and they have equipment tied up. If they are ever slow in the new place then it's a double whammy. They feel that they have to be in places that offer these incentives just to be considered by the 6 major studios. Because of the amount of competition in places like Vancouver I'm not sure the situation is any better. They're having to compete against all of the same competition and more. Since all of the companies there enjoy tax incentives then they compete against each other to give the best rate, possibly less than the cost. So in some cases they're back to where they started.
What happens if Vancouver tax incentives go away? All of these companies would be strapped with this extra debt and would immediately start building satellites in Montreal or Toronto or wherever the next dollar was going.
From the studios perspective this couldn't have played out better. They have state and countries all trying to offer them the very best deal to make their films there. They have the US firms building satellite companies so now they know they can get the quality they need in these tax incentive areas. So they no longer have to say should we go to Sony or a nameless place in Vancouver. The studios still work vfx companies against each other so they have that as a means of lowering their expenses no matter where it is. And many US vfx companies have set up satellite companies in low cost areas (India, China, etc). The studios are thrilled since the US companies are literally training their replacements as far as the studios are concerned. The studios haven't been going to these lower priced areas because they don't have the skill sets, talent and know how. Now the US companies are training and providing that. The studios couldn't have planned this better themselves. In the future they will have the option to go to the lowest cost area, whether thats through tax incentives, vfx lowering their own costs below cost or a low cost area with low standard of living. They won't have to worry about the quality of the work. The commoditzation of the work will be complete and they can simply farm it out and get the best possible deals. The studios execs don't like to fly halfway around the world, especially to a place like India, but if they can get people they trust here to cinesyc and make it happen, no problem.
From a purely business standpoint it's hard to fault the studios. Most of us like to buy goods and services for less. But it should be pointed out this is not a commoditized product that is identical no matter who you buy it from. In the case of visual effects it's ultimately a service of talent and labor. The look of the effects, the quality of the effects, the time required to do the visual effects and the interaction with the visual effects team can vary widely. And those are hard to quantify factors that need to be considered.
Personally I try to buy a reasonable amount of products locally whether it's camera accessories, books, , produce or other items. I could save a few dollars online but I try to help support locally because I know at some point I'm going to need something now (not shipped), I'm going to have to interact or look at the item in person or I'm going to need to discuss with someone who works with these items. Without support many local vendors and services will disappear.
How much will the US industry whither while trying to compete with large tax incentives? What will the studios and directors do once most of the work is elsewhere? Will directors start having to travel to other locations for months to complete their post and visual effects work? Will they simply try to do it all remote using Skype and Cinecyc? While working remotely is possible you certainly lose a lot of the creative interaction that happens when you have a variety of people in close proximity. Imagine a live action shoot where the director, cinematographer, production designer and actors are all on Skype at different locations. It's not nearly as efficient and the results will certainly be less that what it could have been.
The cleanest solution of course is if all the incentives went away. Each company would have to compete on a level field. How efficient they are and the quality they produce would be the criteria. If there was local production then those areas would flourish. If they were simply a man made oasis of tax incentives then those would go away. India, China and other countries would move forward at
their own rate and priority.
Do you want to work in an industry and area where 75% of the work could be pulled on the whim of a politician? Would you invest in such a company? ]
[Update 10/15/2012 The VES held their Production Summit this last weekend.
Among the talks was Tax Incentives Around the Globe: The Whys and Wherefores of Domestic and International Incentives by
Mary Ann Hughes, Vice President, Film and Television Production Planning, The Walt Disney Company and Ruth Hauer, VFX Executive, The Walt Disney Company.
[Note that it was difficult at times to read the slides so it's possible I have a number wrong or in a couple of cases I have ? when I couldn't read the number)
They showed a US map of the 39 states that offered film incentives and they noted the number of companies in each state they felt had real visual effects capabilities. (They didn't define how they evaluated them)
California 70
New York 4 *
Louisiana 3 *
Illinois 2
Utah 1 *
Michigan 1 *
Massachusetts 1
* stand alone vfx incentives
Then they showed a US map of states that offered stand alone visual effects incentives. (i.e. don't require live production to take place in the state to claim incentive money)
Only 7 states offered stand alone visual effects incentives and only 4 of those states had viable vfx capabilities. New York, Louisiana, Utah and Michigan were the current states that offered some explicit vfx incentives. In many cases it was difficult to discern if there was a vfx incentive. They contacted Illinois and were told that it still would required 1 day of shooting. They pointed out that didn't make sense. (Are you expecting government politicians to make logical sense now?)
New York was somewhat problematic the way the requirements are written since it requires at least 75% of the visual effects budget to be spent in New York state.
They showed a map of the world and where the visual effects companies were located.
USA 83
Canada 35 *
UK 12
India 11
Australia ?
Germany 3 *
China 2
Hong Kong 2
Korea 2
Mexico ?
Philippines 1
New Zealand 1 *
France 1 (?)
They focused on Canada where different region have different incentives. And many of the types of incentives add up. (i.e. they may have a labor incentive, a production incentive, etc so these can be cumulative to a large amount)
"Using the example of a $1 million dollar project – in BC a production could get back $379,000. In Ontario credits can be combined to return $437,000 and in Quebec the return rises over 50% to $572,000." (from fxguide article and my notes)
Over 50% of visual effects funding by a regional government!!
They said they would prefer to do the work in the California but California doesn't offer much incentives. They will be pushing legislators in California to increase incentives. They'll also be pushing the New York legislators to correct their terms and conditions as well as some of the other states and countries. As can be seen the studios receive an enormous amount of funding from various government agencies and the studios and MPAA lobby the politicians to provide even more money on better terms. Ultimately the studios would like 100% film incentives (or higher) if they could get it. Which area provides the highest incentive is there go to place if cost is a factor, which it is.
Scott Ross asked who receives this money. Some areas may in fact give the money to the visual effects company or the production may have the choice of themselves or the vfx company who receives the funds. If it is the visual effects company the studios will require them to deduct that amount from their bill. (i.e. the studios get the discount either way. The visual effects company gets no direct funding, only additional work).
As they pointed out cost isn't the only factor when deciding where to take the work - quality, capacity, location, etc. all play a part of the decision. But it's obvious cost is a big item and the studios put a lot of time and effort getting the very best incentives by lobbying for them and weighing in when deciding. And in speaking to others afterwards even if a company manages to match an incentive price, the work frequently still goes to the place with the incentives. In some cases the executives are only focused on the % off number and not the final number. That's like buying at a 30% sale at store even though the actual price may be cheaper than this sales price at another store.
Remember the governments have no official investments in these films and the studios have no obligations to these governments beyond their incentive requirements, which are minimal. A government may put up $50 million for a film that makes over $1 billion in profits but the governments only return will be the indirect employment and some modest taxes. Which is a loss in most places.
What corporation wouldn't want someone else to provide millions of dollars with no strings attached and no requirement to pay it back? Film incentives are a form of Kickstarter for huge multi-billion dollar studios. The rewards are x amount of employment for every $10 million donation. ]
Flawed report on the UK Incentives sponsored by the companies that benefit from the report. Read the US report above regarding flaws, including things like tourism.
"Government officials should not have the role of deciding who wins and who loses in the marketplace; they should allow businesses to succeed or to fail as a result of their own efforts, and the preferences of consumers.
Furthermore, targeted tax credits establish a system in which government favors certain businesses over others. These programs force every non-favored business to compete at a comparative disadvantage, creating inequality. "
Premier Brad Wall on the Saskatchewan Film Employment Tax Credit
Mass. tally finds thin return from film subsidies
“If you are seeing a cost per job that is greater than the salary of those jobs, that suggests there is a pretty serious problem with the tax break,” said Noah Berger, president of the Massachusetts Budget and Policy Center, a watchdog group.
Milke: Lights! Camera! Massive film subsidies! "Rhys Kesselman, an economist at Simon Fraser University, recently wrote that B.C.’s subsidies amount to a taxpayer cost of $125,000 per film job." "Besides, in a deficit environment which most governments are in, juicier film tax credits mean tax rates for other people and businesses must be kept higher to cover the lost revenue." "...a comprehensive 2012 report from the Washington, D.C.-based Tax Foundation found just the opposite: “The best evidence shows that film incentives cost the treasury more than they recoup from taxes on induced economic activity.”
"The Tax Foundation pointed out that “aside from studies paid for by economic development authorities and the Motion Picture Association of America, an industry trade association, almost every other study has found film tax credits generate less than 30 cents for every $1 of spending.”
"Perhaps American and Canadian politicians could reach some sort of detente and kill their film subsidies all at once. That way, no politician could be accused of chasing away the film industry because incentives are more lucrative somewhere else." How Hollywood Is Ripping Off Taxpayers
"Film tax credits don't deliver to state economies what they cost to treasuries and taxpayers."
"North Carolina's Legislative Services Office analysis shows their film credit program realizes even less impressive returns. In 2011, the state awarded $30.3 million in film credits – reimbursing productions that spent over $250,000 up to 25 percent for qualifying expenses. Yet, the program could only claim about 55 to 70 new jobs. Based on their model, the report claims that if instead North Carolina's business taxes had been reduced across the board by $30.3 million, between 340 and 450 jobs and $14 million in personal income would have materialized."
" I still believe that these subsidies, both in the U.S. and abroad, need to stop. They’re bad economics, they don’t make a film better (at times I think they actually make them worse, since trying to make one location look like another is never as impressive as just going to the place the movie is set), and they’re a misuse of public funds, especially during this seemingly unending recession.
Polone suggests its foolish for states to invest so much money in an industry that “is highly mobile and can quickly jump to any other state that bribes them to do so.”
"Such state incentives are widespread, and often substantial, but they don't do much to attract jobs. About $1.5 billion in tax credits and exemptions, grants, waived fees and other financial inducements went to the film industry in 2010, according to data analyzed by the Center on Budget and Policy Priorities. Politicians like to offer this largess because they get photo-ops with celebrities, but the economic payoff is minuscule. George Mason University's Adam Thierer has called this "a growing cronyism fiasco" and noted that the number of states involved skyrocketed to 45 in 2009 from five in 2002."
"Despite tens of millions of dollars in state [Michigan] investment, the promised 3,000-plus jobs didn't appear. As the Detroit Free Press reported last year, the studio employed only 15-20 people. That isn't boffo. That's a bust."
"The $1.5 billion in subsidies that states provide, according to the Center on Budget and Policy Priorities, "would have paid for the salaries of 23,500 middle school teachers, 26,600 firefighters, and 22,800 police patrol officers." Or it could have gone to cut taxes on small businesses, which, as Ms. Longoria noted in her DNC speech, produce two out of three jobs in the economy."
"Moreover, special rules allow film companies to claim a very large credit even if they lose money— as many do."
"Jobs for in-state residents tend to be spotty, part-time, and relatively low-paying work.."
"Subsidies don’t pay for themselves."
"No state can “win” the film subsidy war."
"Supporters of subsidies rely on flawed studies."
The UK's first VFX festival hopes to raise awareness of a vital industry "A lot of that is down to tax incentives -- currently, if at least 25 percent of a film's production costs are spent in the UK, then that film qualifies for a tax credit. Sir William Sargent of Framestore went so far as to claim that between 50 to 75 percent fewer films would come to the UK for visual effects work if that tax credit were not there. "
"Double Negative's Franklin argued: "The big thing is getting the message out there that this industry exists; that this is not just a Hollywood product. The kind of people we need are those with technical and maths skills, and creative skills. It's difficult to find those people."
[The flaw here is the industry and jobs ONLY exists while the governments continue to dole out money (taken from their other tax payers) AND if other governments don't out bid them for the work. The jobs created from subsidies are simply being moved from somewhere else. They are not 'creating jobs'. In this case they're educating more people for jobs that are not permanent. We now have too many vfx workers already. Adding new ones at each temporarily subsidized area does not help the industry or those getting jobs. And the companies and people who put their career into these areas are building it on quicksand. Should the government not continue to dole out yearly monies to the studios or another places offers a better deal, then it will collapse. Is that the way to make a sustainable industry and jobs? No.]
"The Republican-led state House is looking to eliminate tax incentives that lure moviemakers to Michigan so the money instead goes toward road maintenance."
"The film industry could still develop movies in Michigan without the subsidies, "but the playing field with other states won't be level," he said."
"but analyses that find job creation through subsidizing movies almost always ignore the cost of the program. That is, where that money may have been spent otherwise, whether in the private-sector or on other more worthy government projects like roads."
" found film subsidies to be ”a classic race to the bottom” and the economic benefits “more fiction than fact.”
Filmmakers fight bill to end subsidies
"Critics of incentives – which amounted to $45 million in 2012 – say the money could be put to better use. And they point to a legislative study that found the credit itself is responsible for a fraction of the jobs the industry claims."
Read more here: http://www.charlotteobserver.com/2013/04/24/4001945/filmmakers-fight-bill-to-end-subsidies.html#storylink=cpy"
"Classic economic case of concentrated benefits and dispersed costs. The film people know they are getting a sweet deal from the State and are organized to defend it (and obtain even more). Average taxpayers don’t see that they are getting hosed and are disorganized."
"Average taxpayers need to tell their elected representatives that the film program is not a good deal and hold theirRepresentatives and Senators (not to mention the Governor) accountable for their support of a program that takes tax dollars from average people and gives it to Hollywood studios."
"I think in our case it's very clear that our clients basically run financial models on each state, and the films taking place in 'Anytown U.S.A.' can be done in multiple locations," he said. "It basically comes down to a business decision."
"A recent analysis from the General Assembly's nonpartisan research division concluded that only 55 to 70 jobs in 2011 can be directly attributed to the state's tax credits. It also argued that the money spent in 2011 would have yielded 290 to 350 more jobs if the state cut business taxes across the board by the same amount."
"The current process of picking winners at the expense of taxpayers, that's what I oppose," he said. "We're on a tight budget, and we could use some of that money for schools, infrastructure and lower taxes for everyone."
Chancellor launches UK tax credits
"Osborne called the new tax reliefs (which follow on from the UK Film Tax Credit in 2006) as among “the most generous tax credits now available in the world.”
"While California has numerous soundstages, not many have been built in recent years as the state has been grappling with the effects of runaway production and the lagging economy. A survey last year found California lost $3 billion in wages from 2004 to 2011 because of film and TV production moving to other states and countries, according to a report in the Los Angeles Times.
Half the wages went to states like Georgia that offer tax incentives and rebates to the industry. Other states include New York, Louisiana and North Carolina."
"The industry follows the dollar," Forshee said. "They are going to go where they can do the best product for the cheapest cost. This tax credit has made Georgia a viable and lucrative place to make films."
"The economic benefits have been debated in Georgia, although the state has remained committed to the film incentives. Meanwhile, lawmakers in North Carolina are debating a plan that would place certain limitations on the state's program, with supporters of the effort saying there's no evidence the $30 million in tax breaks in 2011 matches the job growth cited by the industry. In comparison, Georgia handed out $140.6 million in tax credits in 2010."
Lights, camera … and a $69 million N.C. rebate to movie industry
"State leaders blamed each other in October 2011 after Continental Tire chose South Carolina for a large new factory that will employ 1,600 workers. .... That same month, Hollywood producers made a decision that cost North Carolina taxpayers millions and supported far fewer jobs – jobs that have already come and gone. They announced the filming of “Iron Man 3” in and around Wilmington."
Read more here: http://www.newsobserver.com/2013/05/01/2863585/lights-camera-and-a-69-million.html#storylink=cpy
Read more here: http://www.newsobserver.com/2013/05/01/2863585/lights-camera-and-a-69-million.html#storylink=cpy
"• Film subsidies are not tied to job creation. Instead, the program gives filmmakers a quarter back for every $1 they spend in the state, including wages to actors and crew members." "The most powerful part of the film incentive program lies in a single word: “refundable.” The film incentive is officially known as a “refundable” tax credit, which allows production companies to receive checks from the state treasury, even if they owe little or no taxes.
That’s because film production companies are formed around a single project, such as a movie or commercial, and are structured to generate little actual tax liability, according to industry officials."
"The film incentives are granted no matter how much money a film makes. The popular “Hunger Games” movie, for example, was filmed in North Carolina and grossed nearly $700 million worldwide, according to tracking service Box Office Mojo.
The production company has asked North Carolina taxpayers for $13.7 million, new records show."
"It said the film incentive “created 290 to 350 fewer jobs than would have been created through an across-the-board tax reduction of the same magnitude.”
Read more here: http://www.newsobserver.com/2013/05/01/2863585/lights-camera-and-a-69-million.html#storylink=cpy
Read more here: http://www.newsobserver.com/2013/05/01/2863585/lights-camera-and-a-69-million.html#storylink=cpy
Vancouver, Canada, sees sharp drop-off in movie, TV production
"The city that pioneered the use of film incentives now finds itself struggling to compete with emerging rivals offering stronger tax credits and rebates. The industry also has been spooked by the return April 1 of a provincial sales tax that had previously exempted film productions.
As a result, film activity in Vancouver fell to its lowest level in recent memory in the first quarter, leaving many soundstages empty and thousands of crew members struggling to find work."
[Maybe film industries in areas with subsidies should realize they're not building a permanent industry?]
Five Reasons Government Subsidies For Films Are A Bad Idea
"The Michigan film subsidy program does not create jobs. Virtually no one who has analyzed film subsidy programs across the nation finds them to be worth the cost. The subsidy has led to massive investments in film studios leading to disastrous results. Film subsidy programs are being shut down in other states because of a multitude of problems. "
"In reality, when measuring
the economic impact of an activity on the state one should only include money actually
spent in the state. Measuring the impacts using certified spending means including under
the film production section, payments made to talent, directors, producers, and writers---
who in most cases do not live in Louisiana and are highly unlikely to spend all that
money in the state. Thus the state’s return on investment is typically worse for those
projects (primarily films) that involve a large proportion of multi-million dollar payments
made to non-residents." Hollywood surprised by tax from China
"China is reportedly imposing a value-added tax that would cut into film profits. If the two sides can't come to terms The Office of the U.S. Trade Representative would have to appeal to the World Trade Organization." [Studios are fine with countries offering them free tax money and ignore the WTO but to think of actually taxing the studios is forbidden and they'll go to the WTO for protection.]
Read more here: http://www.newsobserver.com/2013/05/01/2863585/lights-camera-and-a-69-million.html#storylink=cpy
Star Wars Episode VII May Shoot And Do Visual Effects Work In London
"The move to London, as you might guess, is partly inspired by the tax breaks offered in the United Kingdom-- it's why ILM opened up an office in Vancouver last year too. These tax breaks make it a whole lot easier to outsource effects work and cause chaos in the visual effects world, but ILM is currently swearing they won't close up shop in San Francisco, so there might not be cause for alarm… yet. "
Update 5/22/2013
****** The film tax credit farce*****
"But if you really want to see who wins, look at who is pushing for the benefit. Filmmakers win. Taxpayers will be left holding the empty popcorn bag."
"When people are taxed to subsidize one industry, they have less money to spend the way they want. Some people win, but a lot of others lose. Politicians are simply picking the winners and losers."
"Proponents say that our taxes aren't really going up because the $60 million is a credit. Out-of-state film crews don't pay taxes in Pennsylvania, so enticing them here with tax credits means only that they still won't be paying taxes in Pennsylvania. But this ignores the fact that they will be using state services: police and fire protection, public schools, roads and — notably — unemployment benefits when their movies wrap up. We taxpayers will be footing the bill for these services."
"If film production is such a great cash cow, why aren't venture capitalists lining up for a piece of the action? The problem is that the film industry wants special treatment. It wants someone else to shoulder the risk of investment while it keeps the profit for itself. No investor would agree to such a deal, and that is why the film industry has turned to our state government.
Filmmakers know the state can force taxpayers to invest in something taxpayers would never choose on their own."
The Film Incentive Bill hurts you and me
"The new law is a raw deal for almost everyone involved, except, of course, those privileged few who benefit the most from the largesse and, most likely, those who could most afford to pay taxes in the first place. "
"Paul Campbell of Goose Creek "had been told producers were looking to film the series in Savannah if the law had not passed." If that sounds like extortion to you, well, it is."
"Today, South Carolina finds itself in a film incentive arms race along with North Carolina, Georgia, and Los Angeles, and at some point, there will be nothing left for our state to give. When that happens, we will be abandoned for some other state offering even better incentives."
"That any company, and especially those who dare to call themselves "American," would essentially extort bigger and better deals out of our cities, states, and the nation itself, is obscene. That our governments not only give into the extortion, but also insist that we gleefully accept the terms given to us, is a complete failure of public policy.
The continued arms race of lowering taxes to serve the wealthy needs to end, and it needs to end before we are paying corporations for the "privilege" of working for them.'
Nashville paying the price to be mini-Hollywood
"Even before the first season aired, the studio was lobbying the state to grandfather the production into a more generous incentive package than the one that cleared the legislature last year."
"All sorts of industries get special state incentives. But film might be the silliest industry for states to subsidize, because, with all these other states offering their own incentives, the price has been bid up pretty high. Josh Barro discussed this a couple of years back at Real Clear Markets:
We are in a film subsidy bubble, and states that trail Michigan and New York would be unwise to bid high enough to win film productions back. Instead, states should foster economic development by improving their infrastructure, human capital, and tax and regulatory environment. Or if they’re going to offer incentives to specific industries, they should at least pick less crowded fields than film."
La. tax breaks under scrutiny
"French said the industry wouldn’t exist in Louisiana without the tax break program."
"But the state also loses at least 85 cents in tax revenue for every $1 it spends."
"And the price tag of the tax break has been growing annually, with the state spending $800 million over five years for the movie and TV industry."
Is movie making in Cleveland worth the cost?
"That incentive is paid by state taxpayer money, but industry experts say it's a necessary part of building a full-time industry. "
[Note: You don't have and will never have a full-time industry if the government is funding it.]
Michigan's film incentive loss is Maryland's gain?
"In Michigan, we’ve been having a prolonged argument about the absolute value of film incentives, with the governor saying they’re essentially nothing, while advocates argue that they’re unlimited."
Central Europe Jumps Onto Incentives Bandwagon
"In the 10 years since Hungary introduced its production incentives, it has emerged as the leading country in Central and Eastern Europe in the race to pursue Hollywood blockbusters and upscale TV series."
But during the film's global release, its studio, Warner Bros, made clear The Great Gatsby was an American film."
"Twentieth Century Fox and Hugh Jackman's X-Men spin-off, Wolverine, received a direct federal government subsidy of $13m in addition to the 16.5 per cent location offset it received on its budget. And the Gillard government allocated an extra $22m to the Walt Disney Company on top of the location offset to lure the remake of sci-fi adventure 20,000 Leagues Under the Sea to Australia. As reported previously on these pages, Disney has yet to green-light the film, which won't come here until next year, if at all.
Both payments were justified as countering our high exchange rate."
""Providing incentives to foreign companies to make films here is a little more problematic because it's harder to follow through and analyse," he says."
"But Throsby and others question the "multipliers" used by the film and tourism industries to quantify the value of one imported dollar into many dollars of subsequent expenditure. Molloy says: "There's a whole other discussion about how industries looking for assistance bandy about multiplier effects. One criticism I have is industries tend to overuse these arguments and tend to use the higher multipliers.
"To count them as an added benefit may be misleading."
IDEAS Announces Cash-Based Post Production Incentive "As part of the incentive package, if a client signs a contract, and completes post production services (editing and post audio) for a minimum of $50,000, the client will receive 25% cash back rebate within 60 days of completion of the project and full payment made to IDEAS." Big bucks to be made on small screen New Zealand "Under the Screen Production Incentive Fund, television series filmed here with significant New Zealand content currently qualify for a grant of 20 per cent of the total local production cost, only half the 40 per cent rebate feature films are eligible for." How Do Tax Incentives For Movie Productions Work? An Expert Explains It All
[Unfortunately not an expert but merely a producer. Doesn't cover who pays for it all (tax payers) and what the true return is for the tax payers.]
“The theory is, ‘We’ll subsidize all these movies and eventually we’ll get this critical mass of industry and we won’t need to subsidize it anymore,’” Henchman said. “It’s certainly not succeeded anywhere. The films will come as long as you offer the best deal. There’s no loyalty from this industry, they’re in whatever state is cutting them the largest checks.”
“Disney and others receive millions of dollars from the state,” Luebke said in a e-mail sent from the House floor. “It is an extremely expensive subsidy.”
The program’s flaws create an incentive to hire out-of-state contractors instead of Wisconsin labor.
The program is really expensive because it is a refundable tax credit program, not just a tax credit program.
The program’s cost-benefit analysis compares poorly to other programs aimed at manufacturing, technology, and agriculture.
In fact, Commerce can offer much more assistance to a film or video game than a manufacturer, a biotech start-up, or a cheese plant.
The program is an unlimited liability for Wisconsin."
Movie Production Incentives: Blockbuster Support for Lackluster Policy Tax Foundation Report
"While the imagery associated with putting the unemployed to work is quite compelling, the reality of the situation is somewhat differ- ent. Most film production jobs are filled by out-of-state residents specializing in particular areas of audio or visual production.
9 Addition- ally, producing a film is a relatively short-term venture in comparison to other investment projects. Since most of these positions are not permanent, “workers are left unemployed” after the production ends unless a steady stream of films is present.
10 In many cases, therefore, state officials are creating temporary positions with limited options for upward mobility. Of course, those visitors pay for lodging, spend their wages, and generally contribute to the economy, but that isn’t the sort of economic benefit that ordinarily makes a compelling case for a massive tax subsidy.
Read more here: http://www.newsobserver.com/2013/05/01/2863585/lights-camera-and-a-69-million.html#storylink=cpy
And of course there is fraud in some subsidized areas."
"MPIs are certainly generating wealth for one group of citizens: the movie industry. "
"Short-sighted state officials may not be ex-
pected to worry too much about neighboring
states’ job counts, but what goes around comes
around. By committing tax dollars and state
effort into securing film jobs, state officials
miss the chance to use those resources instead
for lowering tax burdens for all industries. Be-
cause MPIs are a field crowded with state
competitors, committing huge resources may
have little payoff.
Officials should acknowledge that moving
100 jobs from one state to another does noth-
ing for the nation’s economy except enrich the
film industry at the expense of other state
taxpayers." "The flood of dollars from MPIs can induce
spending on what would otherwise be considered a poor investment. At an estimated $150
million, The Curious Case of Benjamin Button
was deemed “too risky” by industry giants
Paramount and Warner Bros. Nonetheless, lobbying efforts and film incentives eventually
landed the film in Louisiana."
5 Things to Know about Tax Credit Incentive Schemes
"A study by the Arrowhead Center at New Mexico State University argued the return on investment was only $0.14 per dollar spent, and the conservative Tax Foundation has recently issued a report opposing incentive programs at a national level, arguing the motion picture industry should not be favored over other industries, and that research on the benefits of incentive schemes is questionable." Film Subsidies: Stimulus or Crutch? "3. So when does that expertise become the draw, not free money? Disney turned a $1.4 billion profit last year, yet the industry expects B.C. taxpayers to increase subsidies to Once Upon A Time and other productions. It’s bad economic policy."
" In 2012, we spent $437 million on film subsidies, six times as much as in 2005, but virtually the same amount of production happened in B.C.—$1.2 billion. With every conceivable tax spinoff counted, B.C.’s treasury likely lost $220 million or more—money that should have gone to education, health care or tax cuts. [1]"
"The math is scary: B.C.’s $437-million 2012 subsidy is one-third as much as the $1.3 billion the 37 states who offer credits put in combined. [2]"
"The majority of Hollywood studios have already substantial amounts of money in the bank. It’s not as though they cannot afford the full cost of making a film domestically (or abroad if the requirements dictate it)."
"A massive rush to the bottom."
"So film tax subsidies don’t mitigate the risks of making films – they only increase them."
Audit Uncovers Serious Problems with Film Incentives
"But the audit found that the state handed out more than $ 25 million dollars in expenses that didn’t qualify." "In some cases, the companies never moved to the state or only set up empty offices. The comptroller’s report only looked at a small sample of films."
