When Danny Bigel was a film producer, one of his biggest headaches had nothing
to do with pampered actors, finicky directors or the fickle movie-going
public. Instead, it was finding anyone who would pay a good price for his
state tax credits.
Over the last decade, states have entered into a fierce competition for
the highly mobile movie business. Today, about 30 states offer tax credits to
try to lure moviemakers. In using these tax credits as an incentive, however,
states face a complication: Since most film production companies spend only a
few weeks shooting in a state, they don't usually owe much in state taxes.
States, though, have become adept at providing tax breaks larger than
businesses' tax burdens -- to, in effect, make a company's tax burden a
negative number. One way they do that is through "transferable" tax credits.
If the value of a company's credits is higher than its tax liability, it can
sell the excess credits to another taxpayer who owes the state taxes.
Bigel, like others in the film industry, would work with tax credit
brokers to find buyers for credits. But he'd never know whether the brokers
had really found the buyer who was willing to pay the best price. "It was
always frustrating and confusing and bewildering to me," Bigel says, "why
there wasn't a more efficient process." In November, Bigel launched the Online
Incentive Exchange, a new market where prospective buyers of transferable tax
credits can compare prices and complete deals.
Like Bigel, many people have found transferable tax credits to be a
little bit bewildering. But, they're also a significant -- and, at least in
some places, controversial -- tool that states use to attract businesses and
incentivize investments.
In this explainer, Stateline examines how and why states use transferable
tax credits, how the industry works and what the critics say.
Q: What types of tax credits are transferable? Why have states created
them?
A: Tax credits for entertainment, renewable energy and real estate
development are the ones states typically make transferable. More than a dozen
states have transferable film tax credits, including Georgia, Florida,
Illinois and Pennsylvania.
Businesses in these industries require large investments: It takes a lot
of money to build a wind farm or make a movie. Compared to the size of those
investments, their state tax liabilities are usually small. "Most of the
companies that come and film in Georgia are not going to have income tax
liability in the state," says Lee Thomas, director of the Film, Music and
Digital Entertainment Office in the Georgia Department of Economic
Development. "With transferable tax credits, Georgia provides incentives worth
20 to 30 percent of a production company's total spending in the state,
benefits that can easily reach millions of dollars for a major movie.
Transferable tax credits aren't the only way states provide tax
incentives to companies that don't owe much in taxes. Many tax incentives are
"refundable." That means that if a company earns more in tax credits than it
owes in taxes, the state pays the difference in a refund check.
Q: How much do transferable tax credits cost?
A: No one knows for sure how much transferable tax credits cost states,
but it seems clear that the total is billions of dollars a year. On its own,
