Auditors say impact of Georgia’s film tax credits has been exaggerated

January 10, 2020

The economic benefits of Georgia’s popular and lucrative film tax credit have been greatly inflated, a new audit says, and past estimates have not considered what would have happened if the state had instead spent the money on things such as education or health care.

 

The latest state audit comes at a time when some lawmakers have talked about making changes to the program because of rising costs and fiscal problems that have caused Gov. Brian Kemp to call for budget cuts.

 

Kemp last summer ordered agencies to prepare 4% spending cuts this fiscal year and 6% next year, to both prepare in case of a recession and provide money for his priorities, such as teacher pay raises.

 

Only seven state agencies spend more tax money than the film tax credit costs. The state spends far more on film tax credits than on its court system, driver’s license services, the state patrol, enforcing environmental laws, housing juvenile offenders, investigating criminal cases or offering pre-kindergarten classes.

 

In a report released Thursday, auditors said: “The Georgia Department of Economic Development has used an inflated multiplier to calculate credit-related economic activity and has reported misleading job numbers.

 

“When discussing the economic impact of the credit, the agency has also publicized the number of jobs supported by the film industry. However, many of the reported jobs are unrelated to the credit.”

 

Auditors estimated the film tax credit’s net economic impact at less than $3 billion and fewer than 10,000 jobs in 2016, the latest year they studied.

 

That is far below the estimates of tax-credit supporters, and the Department of Economic Development, which helps administer and promote the tax credits, said studies have shown that far more jobs have been created and sustained and there is a far greater overall impact than auditors reported.

 

To get their figures, state auditors estimated the economic impact and jobs sustained by film production and then essentially deducted what would have happened if the state had spent the film tax credit money on health care and schools. More money for schools, for instance, would have allowed districts to hire more teachers. Hospitals might have hired more nurses with increased health care spending.

 

The economic development agency said that assumes the state would have spent the tax credit money on those areas, or at all.

 

Auditors said they weren’t advocating for higher government spending, but that including those figures provided a more accurate picture of what the state ultimately gains from the film tax credits.

 

“The film tax credit results in significant revenue loss for the state by reducing income tax revenue that would have been paid otherwise,” they said. “The lost revenue includes income taxes owed by tax credit purchasers on activity unrelated to film production.

 

“While the economic activity resulting from the credit generates revenue, the additional revenue is not sufficient to offset the credit.”

 

Officials with the Department of Economic Development strongly disagreed with the findings, saying “this audit presents information that paints an inaccurate picture of the overall impact of the film industry in Georgia,” adding that the auditors’ “approach to determine the amount of economic impact and job creation serves to undervalue the film tax credit’s impact on the economy.”

 

Ted Morrow, the managing partner of All About Props, a prop shop in Tucker, has done work with numerous productions and said the positive economic impact of the tax credit can’t be overstated.

 

“An average of 40 film and TV projects are happening at any given time in Georgia, creating tens of thousands of good-paying, full-time jobs and sparking tremendous economic activity,” he said. “It allows me and my family to live, work and play in Georgia. I am thankful for it.”

 

Making changes

 

State auditors recommended that the General Assembly cap how much film projects can receive from the tax credit. Currently, there is no cap, and production companies typically sell the credits for cash.

 

“As of March 2019, there were more than $1.7 billion in outstanding credits,” auditors said. “Because companies can sell the credit, we expect that virtually all credits generated will be claimed.”

 

But the economic development agency said that by limiting how much companies could receive for projects, a cap would “drive down investment” in Georgia. The lack of limits on how much projects can receive from taxpayers has helped spur the industry here, the department said.

 

“The General Assembly’s continued support of the film tax credit has created a predictable marketplace where individuals and institutions alike have made investments,” it said. “No market has seen the kind of bricks and mortar investment in the film industry that Georgia has seen, and Georgia’s stability in the film industry has helped to create it.”

 

House Speaker David Ralston, R-Blue Ridge, a supporter of the tax credit, told reporters Thursday that he’d not read the latest audit.

 

“I was asked a day or so ago would I favor abolishing (the tax credit), and the answer is an unequivocal ‘no’ because what we have to understand is at the other end of that tax credit is Georgians working,” Ralston said. “If we need to make some tweaks in it, I’m glad to sit down and make the changes that are true to the Legislature in adopting it many years ago, but I also want to satisfy myself.

 

“I am not in favor of ending it, will not favor ending it and will not let a bill ending it go through the House.”

 

Big money involved

 

The film tax credits, which grew from $141 million in 2010 to an estimated $870 million in 2019, have been a policy mainstay over the course of two previous Republican administrations.

 

Georgia has grown its film industry by leaps and bounds by giving the nation’s most lucrative credits for film work, up to 30%. Roughly $4 billion in tax credits has been doled out in Georgia. Hundreds of projects annually receive the credits: The audit noted that 450 movies, TV shows and other projects were eligible for tax credits in fiscal 2016, for instance.

 

About 80% of the credits are sold by film companies that pay little in Georgia taxes to people or companies that do owe state taxes, auditors said.

 

So, for instance, if a film company spends $3,333,333.33 in Georgia and meets all the necessary state criteria, it can earn a 30% tax credit worth $1 million.

 

But since many companies aren’t based in Georgia, they owe little or no money in state taxes, so they sell the credit — for cash — to any entity that owes state taxes. Those entities — often other companies — buy the credits at a discount. They may pay $800,000 for a $1 million credit. The film company receives the $800,000, and the buyer — either a person or company — sees a $1 million reduction in taxes.

 

State officials have spent the past few months trying to find ways to both cut the budget and find more revenue.

 

Through the state’s budget, taxpayers help educate 2 million children, provide health care to more than 2 million Georgians, build roads and bridges, manage parks, investigate crimes and incarcerate criminals, and regulate insurance firms and utilities, along with dozens of professions. The state also provides tax incentives to promote businesses and create jobs.

 

Some of the most expensive things the state does — educating students, providing public health care to the poor, disabled and nursing home-bound, and building roads — were exempted from Kemp’s cuts. But decreasing spending in other areas would save about $200 million this year and $300 million next year.

 

While much of Georgia’s economy remains strong, the state’s fiscal economist told lawmakers in September that there was a 50-50 chance of a mild recession this year, and tax collections have been down or largely flat for much of fiscal 2020, which began July 1.

 

First audit found problems

 

Earlier this week, auditors released a report saying state agencies that administer the program have allowed some companies to receive credits they didn’t earn.

 

Among other things, auditors found millions of dollars in ineligible expenditures by film companies that weren’t disallowed by the state for credits, including payments to workers or contractors for work performed outside Georgia. The way the state audits such projects gives companies an incentive to pad their numbers with ineligible expenses, the report said.

 

Kemp last week refused to rule out legislation that could seek changes to the lucrative credits. State Sen. Lindsey Tippins, R-Marietta, is one of several Republicans looking at reducing the credits this year to avoid steeper budget cuts.

 

The earlier audit recommended state lawmakers require an audit of each project that receives a film tax credit. The report contains dozens of other recommendations to the General Assembly, the state Revenue Department and the Department of Economic Development to improve credit administration.

 

Auditors said both agencies would need more state resources — such as increased staffing — to improve controls on the tax credits. It would also likely mean changes in state law.

 

In the latest audit, state officials said while the credit is not designed to provide incentives for hiring residents over nonresidents, it provides credits regardless of where a worker resides. While Georgia residents held most of the jobs in the period studied, most of the wages were paid to nonresidents, including highly paid, out-of-state actors.

 

Of the 31 other states with a film tax credit or rebate, 20 have residency requirements or provide higher incentives for hiring residents, who are more likely to spend their wages in their home state.

 

Read the original article on the Atlanta Journal Constitution, here.

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