In strapped states, film subsidies lose glamour

In a Troy office building where advertising executives once courted Motor City automakers, film production workers discuss which stretch of downtown Detroit would offer the best sense of urban decay. Down the hall, in a warehouse that has been converted to a makeshift studio, dozens of prop builders are fashioning blocks of foam and stacks of plywood to build a set for a rocky mine shaft.

For the next 11 weeks, the cast and crew of “Red Dawn,” a remake of the 1980s action thriller that Metro-Goldwyn-Mayer is scheduled to release next year, will be working in Michigan. The film, starring Chris Hemsworth and Josh Hutcherson, is one of dozens of Hollywood productions drawn in part by the state’s generous film tax-credit program, which could shave as much as $14 million off the movie’s estimated $54-million budget.

Nearly 95 miles to the west in the state capital of Lansing, lawmakers are wrestling with how to bridge a $2.7-billion budget gap -- and whether a state with the highest unemployment rate in the nation can afford to subsidize the movie business. The budget woes have hit cities across the state and have forced the layoffs of thousands of Michigan police officers and firefighters in recent years.

“We are still not sure what exactly our tax dollars are being spent on with these films,” said Republican state Sen. Mark Jansen, who backs a bill that would reduce and cap how much the state could hand out in filmmaker incentives each year. “If we don’t know that, how can we justify it?”

The debate in Michigan echoes around the country, from Wisconsin to Iowa to Connecticut. More than 40 states offer tax breaks or rebates for film and television production, a major contributor to the sharp falloff in industry employment in Southern California.

But as those subsidies have become increasingly generous and widespread, several states are having second thoughts. Even as some states, including Louisiana and North Carolina, expand film incentives, others are rethinking their programs in the face of budget crises.

“The bottom line is, there really aren’t enough film productions in the United States for every state to play in this game, and eventually the states where it doesn’t make economic sense aren’t going to be players,” said Peter Dekom, an entertainment industry attorney who helped craft New Mexico’s successful film program.

Wisconsin Gov. Jim Doyle in effect quashed his state’s tax program this summer after a report by the state Department of Commerce raised questions about money the state paid for “Public Enemies,” the Universal Pictures gangster movie starring Johnny Depp.

Doyle replaced the previous program -- a 25% tax credit with no cap -- with a $500,000-a-year grant designed to bolster Wisconsin-based film production companies. That’s a drop in the bucket compared with the $6.1 million the state awarded in tax credits in the last year.

As lawmakers wrestled with how to bridge a $700-million budget gap and Doyle floated the idea of closing public schools for several weeks, every state program was scrutinized.

That included the film tax credit. The state Department of Commerce, which manages the program, concluded that the crew for “Public Enemies” was in Wisconsin for 32 days, The movie, about the life of the bank robber John Dillinger, was filmed in Oshkosh, Columbus and Madison. It received about $4.6 million in taxpayer money, including payments that offset part of the $5,625.16 paid to Depp’s hairstylist, $16,490 for his makeup artist and $38,771.40 for two chauffeurs, according to documents obtained by The Times.

The study said the production contributed about $5 million to the Wisconsin economy and about $270,000 in taxes, figures that are disputed by a film advocacy group that placed the movie’s economic impact at $7.4 million.

“We lost a lot of money,” said Zach Brandon, senior policy director at the Department of Commerce, who declined to discuss the details of the document. “We had to get off the crazy train.”

Michigan lawmakers have introduced a bill that would place a $50-million annual limit on tax-credit funds and require that at least 90% of the workers on subsidized projects be Michigan residents. The current program, which gives filmmakers up to a 42% credit on qualified expenses, is not capped and has paid out $31 million for 2008 projects.

Gov. Jennifer Granholm remains a staunch supporter, noting that credits have lured dozens of projects such as Clint Eastwood’s “Gran Torino.” “It’s an important part of diversifying the economy and creating jobs,” said Granholm spokeswoman Megan Brown. “We want to continue to have the most aggressive incentive program in the nation.”

But she noted that the film-credit program could be curtailed amid difficult budget negotiations to bridge the budget gap. “Clearly, we have some painful decisions ahead,” Brown said

In manufacturing-dominated states such as Michigan and Wisconsin, some critics say they don’t see the longer-term economic benefits that can come from a nomadic industry such as filmmaking. For them, healthy economic growth is rooted in supporting industries that are more traditional and factory-oriented, such as building “green” batteries for electric cars and assembling electric generators for wind turbines.

One of the most generous tax-credit programs in the country is offered by Iowa, a state better known for its sprawling farmland than as a movie hub (notwithstanding Kevin Costner’s baseball movie “Field of Dreams,” which was filmed in Dubuque County). Iowa offers a 50% credit on qualified production expenses that the state’s film office bills as “1/2 Price Filmmaking.”

Since the program began in 2007, the state has drawn 22 projects valued at about $65 million, according to the Iowa Film Office.

But confronted with a budget shortfall, Iowa lawmakers voted to cap the program at $50 million a year. The state faces a $903-million gap between revenues and expenses in the 2010 fiscal year, prompting calls from lawmakers to scale back the program further.

“I believe it’s too generous,” said Democratic state Sen. Joe Bolkcom, chairman of the Senate Ways and Means Committee. “We’re in a really tight budget situation, and it’s really important we make sure we can afford these type of incentives. . . . All spending needs to be on the table.”

On Monday, Iowa Gov. Chet Culver asked the state auditor’s office and Iowa Atty. Gen. Tom Miller to join the investigation into the film tax-credit program amid growing reports of a lack of oversight and flawed accounting procedures.

Culver suspended the program last week after an internal audit found a number of accounting problems, including using tax credits to pay for luxury vehicles that filmmakers never used in their movies.

The director of the Iowa Department of Economic Development -- which administered the program -- resigned from his post Friday, and the manager of the state’s film office was dismissed.

Although Iowa’s situation is unusual, film subsidy programs and their costs have been hotly debated in several other states, including Pennsylvania, Connecticut and Massachusetts.

Nonetheless, some states continue to increase or broaden the scope of their subsidies, as have the Canadian provinces of Ontario and Quebec. Some cite studies by accounting firm Ernst & Young that concluded that tax-credit programs have more than paid their way in New Mexico and New York. (The government of New Mexico paid for its study, and the Motion Picture Assn. of America financed the New York report.)

Hollywood is pleased, because tax credits have become an important source of funding as other sources, such as hedge funds, have dried up.

Some states couch their film programs as a kind of economic stimulus.

When North Carolina recently increased its film tax credit to 25% from 15%, backers cited the need not only to compete with nearby states but also to preserve an industry that employs 16,271 people.

Since the program began in 2006, productions have spent $162.7 million in the state while the state has paid out $24.4 million in rebates.

“States aren’t used to it, but they’re real jobs, like it or not,” said Aaron Syrett, director of the North Carolina Film Office.

To protect the homegrown industry, California lawmakers this year approved the state’s first film tax-credit program, allocating $500 million over a five-year period.

The program, which offers a 20% to 25% tax credit for certain movies and TV series, has kept some productions from leaving Southern California. But it is considered by many in the industry to be too small and restrictive to compete seriously with what other states offer. And given California’s own budget crisis, there is no move in Sacramento to sweeten the incentives any time soon.

--

p.j.huffstutter@latimes.com

richard.verrier@latimes.com