NC's film industry shaken as incentive program shifts
Posted October 13, 2014 5:58 a.m. EDT
Updated October 14, 2014 8:22 a.m. EDT
Raleigh, N.C. — When Elizabeth Orr takes one of her company's two trucks out to a film location, the owner of Luckey Craft Services could find herself serving hot soup in the middle of a field, snacks in a shuttered textile mill or grilled cheese sandwiches in the middle of a river.
Orr's company provides craft services for film and television shoots in North Carolina. She found her niche after an antiques business and return to a prior career as a medical sales rep didn't pan out when she moved home to North Carolina in her mid 40s.
"We are the snack people on set," Orr said, adding her job is to help sustain a crew that can work days that stretch on for 15 to 20 hours.
For each of the past five years, Orr said it was all she could do to shoehorn in a week of vacation, as commercial and television shoots filled up her days.
Then business dried up.
"I haven't worked in seven weeks," she said in early October, adding that she and her husband, who also works as a crew member for productions, have been forced to consider moving to Atlanta, a move that would mean leaving a place she considers home and working her way through an unfamiliar professional scene.
Orr's business is among those that have been disrupted by a shift North Carolina's film industry that is just beginning.
Those in the business say the shift can be traced directly to a pending change in the state's incentive program designed to lure movie, television and commercial productions to North Carolina. At the end of this year, the state's tax rebate for film and television productions' qualified spending will end. It will be replaced with a grant program with as-yet undefined rules and which experts say represents a much more modest taxpayer contribution to a business with a 30-year history in the state.Those who back the shift in North Carolina's program say the state should not have to pay companies – whether they be movie makers or machine parts manufacturers – to locate here, and at the least should put limits on what had been an unlimited liability for the treasury. But film producers, studio executives, recruiters and those who work in and around the industry, say a change in the program will drain away a base of jobs and intellectual capital built over decades and force typically well-paid, blue-collar workers to make hard decisions about their future.
"I hate to see that 4,200 people are scrambling for their lives," Orr said.
Incentives created to hold onto productions
North Carolina has regularly served as the backdrop for movies since the 1980s when movies like "Firestarter" and "Dirty Dancing" were filmed in the state, often with the state's ocean-to-the-mountains geography serving as a stand in for different parts of the country or, as in the case of the recently released "Tusk" by Kevin Smith, other countries. In the beginning, varied scenery, a friendly climate and skilled workers were enough to attract productions.
But around the year 2000, states started to set aside money to lure the business.
"Canada was taking an enormous amount of productions," said Vans Stevenson, vice president for state legislative affairs with the Motion Picture Association of America, an industry organization that has lobbied on behalf of film programs in North Carolina and elsewhere. Currently, 38 states offer some sort of inducement to the industry.
North Carolina joined the film incentive fray in 2005, although its tax credit program has taken different forms over the years.
In 2009, the state lost a production starring Miley Cyrus to Georgia, which offered a bigger incentive, changing states at the last minute after then-Gov. Bev Perdue, a Democrat, was preparing to announce that Wilmington would be home to the production. The incident helped galvanize policy makers to stem the tide of deals flowing out of the state with the program North Carolina has had for the past four years.
Since 2010, productions have been able to claim a 25 percent refund on qualified spending on a production. The credit is refundable, which means a production gets a check for any amount that exceeds what it owes in taxes. The total value is limited to $20 million.
Only one production, "Iron Man 3" in 2012, hit that maximum. More recently, "The Hunger Games" earned $13.7 million in credits, the producers of "Tammy" starring Melissa McCarthy applied for $3.6 million, and the Cinemax television series "Banshee," applied for $16.8 million in credits. The Fox show "Sleepy Hollow" is working on new episodes in the latter part of 2014, but in 2013 it received $1.4 million in tax credits.
"States are really, right now, just writing checks to the industry," said Joe Henchman, vice president for state projects with the Tax Foundation, a national organization that is critical of tax incentives.
Figures currently available from the N.C. Department Revenue show that producers applied for $83.3 million in grants for 2012, the most ever requested. In 2013, that number was down to $62.2 million. By comparison, North Carolina has committed to paying out $800 million in its JDIG and One North Carolina job development grant funds through the year 2027. That would work out to roughly $60 million a year for businesses involved in everything from financial services to heavy equipment manufacturing.
"Why should any industry be subsidized by other businesses and working families?" asked Sen. Bob Rucho, R-Mecklenburg, a powerful finance chairman who has championed the state's efforts to close tax loopholes, curb incentives and tax rates across the board. That effort, he said, should make North Carolina inviting to all businesses, including the film industry.
North Carolina's film tax credit program will expire on Dec. 31, 2014. Lawmakers have replaced it with a grant program that currently has $10 million available for the first six months of 2015. A grant process, Rucho said, will allow film incentives to receive greater scrutiny from lawmakers, forcing it to compete against other priorities like roads and schools. It also offers the Commerce Department greater control over which productions get funded and which don't.
To be sure, the tax credit program has it legislative allies, some of who are still lobbying for its return. But Rucho reflects the prevailing mood among many top Republicans when he says that bringing back the program would shift the tax burden to other businesses and open the state to paying credits to productions that would have come to North Carolina anyway.
Gov. Pat McCrory complained, for example, that Comedy Central's The Daily Show received $273,346 after producing segments in Charlotte during the 2012 Democratic National Convention. The program had to come here for the convention, McCrory said, so there was little reason to offer an inducement.
But that may be the exception to a bottom line driven rule.
"North Carolina's crew was as good as anywhere else in the world," said David Greathouse, CEO at Demarest Films and the producer who brought Kevin Smith's "Tusk" to film in the Charlotte area. He discovered locations for the movie while scouting for another project that fell through. North Carolina's tax credit allowed his company to move quickly and be assured of its return on investment for the production.
Greathouse said there are "project specific" considerations, but all things being equal, some sort of incentive is needed to make a production's bottom line numbers work. With the tax credit expiring and North Carolina's limited grant program untested, he said it's unlikely he'll be bringing another movie back to the state.
"I was excited about coming back there, but I don't think we would do that now without understanding how that grant is going to work," he said.
That sort of response does't surprise the Tax Foundation's Henchman, who said that the state should expect to lose some business.
"If you pick any industry and write checks to support it, you're going to get more of that industry," Henchman said. "What I see as the benefit is that North Carolina can focus on more sustainable stuff, things that don't require the state to write a check. The question is with all of these tens of millions of tax dollars that went to movies, could they go to other, more pressing projects?"
Moving to a supporting role
Henchman's question about costs and benefits was at the heart of many legislative debates this summer as industry proponents battled to save the existing program. They pointed to a study by Robert Handfield, a professor of supply chain management at North Carolina State University. The research, which was sponsored by the Motion Picture Association of America and North Carolina's regional film commissions, concluded that for every $1 spent in film and television credits the "the film and television industry generated $1.52 of tax revenue and $9.10 of direct spending." In other words, the study concludes the film and television credits spur so much economic activity that the taxes on that additional work repays the state in full for its investment.
Handfield did not return a phone call seeking comment for this report, but his study's conclusions were hotly debated and a review by the General Assembly's fiscal research system estimated that in terms of return to state's coffers, North Carolina only recouped 46 cents on every dollar in credit spent.
The legislative staff's figure is more in line with studies conducted in Ohio, Massachusetts, Michigan and other states, nearly all of which concluded states don't recoup the money they spend on credits, but they do spur increased activity in the broader economy.
"That's the way tax incentives work in general. The state isn't necessarily going to see that dollar-for-dollar return on any kind of incentive," said Candi Clouse, an analyst with Cleveland State University's Center for Economic Development. Her report on Ohio's film program projected that for every $1 in film and television incentives the state spent, it produced $1.20 in economic activity. The Handfield study projected more than 7 times that economic growth.
The North Carolina film study has "the largest return on investment that I have seen in an impact study on film credits," Clouse said after reviewing the Handfield study. Previously, a 2010 Louisiana study showed the biggest such impact, estimating a $1 invested to $5.37 in economic activity return.
"I would question if all of that money was spent in North Carolina," Clouse said. Some of the money, for example, could have flowed back to production editors in California, which would not benefit North Carolina.
While not speaking specifically to the Handfield report, Brent Lane, director of the Center for Competitive Economies at UNC-Chapel Hill, agreed that, in general, states don't profit directly from the film programs.
"In terms of efficiency, it’s a terrible deal. You lose money on every dollar you put out there," he said.
Even Hollywood isn't immune to the incentives game. California set aside $330 million per year for the next five years in a bid to keep productions in the state.
"Your program was always frugal," said Dama Claire, a film industry executive with The Incentives Office at Ease, a company that helps productions put together financing and navigate the warren of state tax credit programs. Even before North Carolina's tax credit was allowed to sunset, Georgia and Louisiana had more generous programs. But North Carolina's geography, crew base, and the simplicity of its credit program made up for the difference in funding, she said.
The industry claims that it supports at least the equivalent of 4,200 full-time jobs across the state. Other estimates put that number higher and lower. Critics often point out that crew members work on multiple productions throughout the year and question whether the corps of film crews is really so large.
"It must be underscored that this analysis is based on accepting the report’s estimate of 4200 workers earning approximately $60,000 (each) per year," reads the legislature's Fiscal Research Division's critique of the Handfield study. "While this was used for the purposes of recalculating consumer spending tax revenues, there are still unanswered questions about how the estimates of total workforce and average income were generated."
In reporting data in order to draw credits, 31 productions reported cutting checks to 13,649 different individuals, although not all of those are full time crew. And those numbers don't count those who have jobs associated with the industry but aren't directly employed by productions, such as printing companies and lumber yards.
A small example: Claire says her company is breaking a consulting arrangement with a one-person office in Wilmington as productions shift to Georgia.
Another big target for critics of North Carolina's program has been that a production could count up to $1 million of an individual's salary toward the "allowable costs" against which they claimed the credit. It is unlikely that movie stars and directors earning those high-dollar salaries will spend all that money in the state.
That line of attack aggravates people like Sabrina Davis, owner of Port City Signs and Graphics, which has done steady business printing "large format" signs and other materials for television shows and movies. In 2012, "Iron Man 3" was her second biggest customer and the extra work allowed her to buy new equipment and hire new workers.
"There's just a misunderstanding about how good this industry is," she said. While production companies and big stars might get eye-catching sums, the steady work employs the tradesmen and crew members who work with her business. "They know what they want and they're ready to pay for it. They just want it fast."
Davis, a Republican who said she normally applauds the effort to do away with corporate subsidies, said the film and tax credits aren't luring some foreign, fly-by-night operation. She is the third owner of her business, which has been working for many of the same people over the past three years.
"Unfortunately, the rules are different with this because all the other states are playing by a different set of rules," she said.
One show stays put; others are on the move
Guy Gaster, who took over as North Carolina's interim film commissioner this summer, said the state is still working to put the rules for the new film and television grant program in place.
He acknowledges there is a wide gap between the $84 million the state spent in 2012 and the $10 million available for the first six months of 2015. The state, Gaster said, will have to find a new niche, taking aim at smaller, story-driven movies and commercial work.
"Certainly, we're not going to see something like an 'Iron Man 3' based here and do 90 percent of their production here," he said. "I don't see us taking a starring role in a major tent-pole type feature. But I know we can be a guest star in it."
Bill Vassar of EUE/Screen Gems in Wilmington was grappling with that new reality last week, as he worked to keep production of the CBS drama "Under the Dome" in Wilmington for a third season. The New York City-based company purchased the first iteration of its North Carolina campus in 1996. Today it occupies 50 acres, providing studio space and support services to movie, film and television producers.
"Under the Dome" is a profitable show, a well-watched summer series that takes much of its look from the communities in which it films around Wilmington. But the change in the state's film and television incentive model upon which the company was depending disrupted the show's financing, Vassar said. There was so much uncertainty about the state's new program that Commerce Sec. Sharon Decker had to personally meet with CBS officials.
"CBS wanted an understanding of how the grant was going to work," he said. "She gave them the assurance that they would qualify for it and apply for it."
If "Under the Dome" is successful in its application, it will soak up $5 million of the available $10 million. In 2013, the show drew down $8.3 million in state incentives.
So is this a success story for the new grant program?
"You got one show, and it's going to take half the grant, and you're still not maintaining the industry throughout the state," Vassar said. "The crews in Charlotte, Asheville and Winston-Salem – they don't have any work right now."
Claire, of The Incentives Office, said that if two television shows can use up the state's entire grant program for a year, the state will experience long dry spells in production works.
"You're not going to have a year-round business," she said.
During the summer legislative session, backers of the grant program said that it could expand to $20 million for the coming fiscal year, but that's not guaranteed. At most, the legislature can budget for two years at a time, which means a new television series looking for a five-year commitment from the state could be left wanting.
While Vassar is happy he will be able to keep his 30 employees on board for the foreseeable future, Mooresville Mayor Miles Atkins is watching the crew that has produced the Cinemax series "Banshee" decamp from his city's downtown.
Street closings and late-night pyrotechnics are hazards of hosting an action series, he said. But in exchange, empty buildings are rented out, local businesses do a booming trade in equipment rental, food service and lumber, and an off-duty officer can pick up around $3,500 in extra pay working security on the set.
"They've already started taking down parts of the set," Atkins said earlier this month. Crew members, he said, are telling him that the show is moving to New Orleans to film a prequel to the story line that is set to air next year.
Producers associated with "Banshee" refused to be interviewed for this story because they did not have permission from HBO, the production's parent company.
"We are proud of the work that has been done in Charlotte and the rest of North Carolina. Our attention is currently focused on launching 'Banshee' into a successful third season. When we have formulated our plans beyond that, we will certainly let you know," said Rabia Ahmad, a spokeswoman for HBO who said that no plans had been made for filming the fourth season of the show.
That runs counter to what crew members who work in and around the production have been told. And a video posted online shows Greg Yaitanes, a director and producer with the show, giving and end-of-season wrap up speech talking about his frustration about not returning to North Carolina.
"It is a very sad time to look at what we've built, both in the community in relationships and physically what we've built on stage, to be pushed out essentially by state politics, not by our own doings or our failings," Yaitanes said, praising the crew for their hard work. He concludes by saying, "That's a wrap on Charlotte."
The question North Carolina now faces is whether the new grant program is sufficient to prevent a wrap on its film industry.
At one point, Michigan scaled back its program and watched productions flee for states like Ohio. A newly reinstated program landed the iconic "Batman v Superman: Dawn of Justice" movie, which is taping in Lansing and Detroit right now, according to the MPAA's Stevenson.
Iowa shut down its program after a 2009 scandal involving improper payments.
"I'm really focusing on grassroots development and making it sustainable for people to live and work here,"said Liz Gilman, the newly installed director of Produce Iowa. Iowa's production industry focuses on mainly smaller projects, she said, although there is one feature film doing work in the state now, she said. Rather than credits or grants, Gilman said, she sells Iowa's friendly people, good natural light and ease of doing business.
"We make it easy to shoot here," she said. "We don't require a lot of permits."
Still, by all accounts, Iowa's film and television industry is modest compared to North Carolina's. And boosters for the industry say they hope the state chooses another direction.
"The legislature comes back in January," said Johnny Griffin, director of the Wilmington film office. Like others in the business, he is hoping the exodus of film crews and lack of productions choosing North Carolina will once again spur top policy makers to action.
"We've had an industry here for 30 years," Griffin said. "For us, the question is do we want to let this slip away? Do we want to hold onto the industry or not ... If all we have is the $10 million a year, that's just inadequate."