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Dec 2008
04
December 04, 2008

State Film Incentives Successful

Attorneys make film incentives work and help boost Michigan's economy

by Cynthia Price

Legal News

It is clear that the film industry incentives put into place through the 16-bill package enacted this year are working.

That does not mean that they are without problems, however.

One of them, according to Cameron S. DeLong, a partner with Warner Norcross and Judd and chair of the firm's Entertainment Industry department, is ultimately political in nature. DeLong says that people who think the surcharge on the Michigan Business Tax (MBT) is unfair have linked their objections to the money potentially shelled out to the film industry, feeling the incentives show favoritism to that one industry.

The opposition, primarily spearheaded by Republicans, has taken the form of calls for a cap on the tax incentives available within the main provision of the package.

That provision allows up to a 42% rebate on "direct production expenditures" on the MBT for companies involved in the production of motion pictures, television programs, music videos, interactive video games, and some other productions. The full 42% refundable credit goes to productions in one of the 103 core communities in Michigan, which includes Grand Rapids, Wyoming, Muskegon, Kalamazoo and other nearby locations. Elsewhere in Michigan, the rebate is 40%, and it drops to 30% for some expenditures.

An understanding that the MBT needs an overhaul is bipartisan. State Rep. Mary Valentine of West Michigan (Norton Shores), a Democrat who won re-election and a strong supporter of the film incentives, went on record during the campaign as saying that the legislature needs to "redo" the MBT.

DeLong said that he spoke at an Oct. 13 town hall meeting Valentine hosted about the burgeoning film industry. At that meeting she emphasized that the need for improving the Michigan Business Tax is a separate issue from the film incentive package.

DeLong, who is also a Certified Public Accountant, agrees.

DeLong and Warner Norcross are heavily involved assisting the growing film industry, both in terms of the incentive package and tax issues, and with Intellectual Property law. Other law firms in Michigan have also stepped up to the plate, notably Smith Haughey Rice and Roegge, which has produced a very readable summary of the incentive package.

To qualify for the rebate, the production company needs to spend at least $50,000 in Michigan. For personnel expenditures, there is a $2 million cap on compensation used to calculate the credit.

The companies must enter each production they hope to qualify into an agreement with the Michigan Film Office, which receives half of one percent of the tax credit for its operations through the Michigan Film Promotion Fund. The Michigan Film Office, which predated the incentive package, must follow certain guidelines for approving a production, which include: a prohibition on obscene matter; whether it promotes Michigan as a tourist destination, or fosters job creation and economic development within the state; the chance that the production would be produced outside of Michigan without the credit; whether the credit will help attract private investors to productions; and the company's track record for project completion.

Most people doubt that the votes can be found to pass the incentive caps, but the uncertainty caused by talk of such caps means that some companies are hesitant either to produce movies here or to invest in expensive infrastructure, such as sound stages or postproduction facilities, that would not be profitable unless other production companies use them.

There is a 25% tax credit in the incentives package for infrastructure investment, with a cap of $20 million paid out in any given year. At least one out-of-state production company has pledged to build a studio in West Michigan -- Modernciné of New York will build in Muskegon. Modernciné also took advantage of the production incentive to film Offspring during the summer.

DeLong said that the provisions were intended to be revenue-neutral based on the assumption that off-setting taxes would come from the economic growth generated. He said that it seems to him there should be a model developed to calculate all the potential state revenues.

However, DeLong feels that even if the incentives are determined to be slightly short of revenue-neutral, he still supports them because they send the message that Michigan is willing to face its economic challenges and change. He also thinks that people who come to Michigan will like it so well that they will want to continue producing here, and that if Michigan places are the focus of a film, as Grand Rapids establishments were in the recent high-visibility film The Steam Experiment, viewers will want to visit.

Another less substantial problem DeLong sees with the statute itself is that it was not clear on whether production of commercials qualifies. The list of what is permissible starts out with "including, but not limited to" and goes on to list television shows, motion pictures, documentaries, music videos, interactive games,and even interactive web sites. Under the specifically prohibited activities is "[a] production that primarily markets a product or service," fairly ambiguous language. DeLong said he believes that the legislative intent was to include commercials, and it was in the Department of Treasury interpretation that they were disallowed.

Tony Wenson, COO of the Michigan Film Office, says that all indicators show that the incentive package has been highly successful.

The office has approved over 70 films for production, with 15-20 of them completed in 2008. He says the review committee does due diligence in investigating on the financial end, to make sure the project will actually take place. He adds that while this may make the process take longer at the beginning, it speeds up the payment at the end.

As far as infrastructure investments, Wenson said he knows of 12-15 "conversations" underway, noting that plans for larger projects take a longer time. The film office has approved smaller projects, but has just gotten in its first "huge" facility application. He said Modernciné, mentioned above, has not yet applied, so there are probably many more projects in the works.

Other provisions of the acts allow for a 50%-of-expenditure tax credit for training Michigan residents in film trades. Wenson said that no one has yet taken advantage of that credit.

Wenson summed up by saying about Michigan investment, "What we're doing is, we're doing films."

However, some Michigan filmmakers and film promoters see other problems with the incentives.

Rich Brauer, of Brauer Productions, has been working in films in Michigan for 30 years, doing corporate production, cinematography, and editing. He has made at least one feature film per year for the last nine years, including Barn Red, which has sold all over the world, and more recently Mr. Art Critic. Brauer has worked twice over the years with Jeff Daniels, the established actor who comes from Michigan, as well as with Animal Planet and the History Channel. He is for the most part highly supportive of the incentives.

The problem is, though he is sure his accountant will require him to apply for the incentives, he feels Michigan taxpayers gain almost nothing from their money in his case. As a Michigan-grown filmmaker, what motivates him has always been, "I care about the state and I love working with my friends."

When asked if the incentives will mean that he has the freedom to produce more, he says that is primarily a matter of time, not money.

He continues that he observed one production company come in and use almost exclusively crews they brought in from Los Angeles. Though Wenson says that over 20,000 jobs will be created just from the films already approved, Brauer says he remains somewhat skeptical about the incentives' ability to create a Michigan film industry. He also said he has observed that it has not had that effect in other states, such as New Mexico, which have offered film incentives.

Another potential downside of the package is brought up by Kevin Milton, of Grand Rapids Independent Productions (GRIP). Milton has been working with people from New Line Cinema.

He feels that the bills should have aimed more at incentivizing investment and ensuring that profits stay in Michigan through Michigan production companies. He is concerned that the production revenues are a mere drop in the bucket compared to the money investors make on a successful film, so most of the money made leaves the state.

He points out that even The Steam Experiment brought very little money into the area.

He also thinks that local businesses need more information on how to maximize the income potential of visiting production companies.

Source: Legal News

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