Under the Dome

April 9, 2014

Legislative staffers dispute movie industry’s incentives study

General Assembly staff members have issued a scathing review of a new study on the economic impacts of film incentives in North Carolina.

General Assembly staff members have issued a scathing review of a new study on the economic impacts of film incentives in North Carolina.

Patrick McHugh and Barry Boardman of the Legislature's Fiscal Research Division wrote in an April 3 memorandum that the film industry-commissioned study incorrectly determines that the incentives result in a net positive return to the state.

"The (division) concludes that the reported positive return on investment is based on a series of misunderstandings of the State's tax laws, invalid or overstated assumptions, and errors in accounting," according to the memo. After correcting for the "most obvious errors in the report," the division analysis shows that the film production credit creates a negative return on investment.

The study in question is a recently released report by Robert Handfield, a professor of supply chain management at N.C. State University, who was working as a private consultant for the Motion Picture Association of America and several film commissions in North Carolina. In an email, Handfield said he stood by his study, but declined to rebut the research division's analysis. "My work is thoroughly documented and available for anyone to read," he said.

Debate over the study illustrates the contentious nature of the film incentives issue, one expected to be debated during the legislative short session that begins in mid-May. Under the existing program, production companies can claim a 25 percent credit up to a cap of $20 million on productions spending more than $250,000 in qualifying expenses. The program will expire at the end of the year without legislative action to renew it.

Handfield's analysis found that local and state governments collected $170.3 million in taxes as a result of film and television production from 2007 to 2012, while the state paid out $112 million in tax credits to production companies. That would mean that for every dollar spent on incentives, the industry generated $1.52 in state and local tax revenue.

But Boardman and McHugh wrote that "once the most significant errors in the Handfield report are removed," the return on the state's investment to state and local governments is 61 cents on the dollar. "Basic corrections of unsound assumptions and accounting problems make it clear that the Handfield report incorrectly asserts that the Film Production Credit 'pays for itself' through increased tax revenue," the memo states.

The General Assembly researchers list numerous assumptions and numbers used in the study that they believe are flawed. For example, Handfield used $60.1 million as the amount spent by the state on the film credit in the 2012-13 fiscal year. That was the total cost of refund checks actually paid by the state to film companies during that year.

But Boardman and McHugh say Handfield should have used $84.2 million. Because of lag time between when productions complete filming and when credit applications are filed and incentives paid, the $60 million number doesn't reflect the total cost of incentives ultimately earned by productions that filmed in the state that year. The larger number, McHugh and Boardman say, was used in the study to estimate the tax revenue benefits of the film credit and should be used as the cost.

McHugh and Boardman also wrote that they believe the Handfield study overstates by millions of dollars sales tax revenue generated by film company purchases, as well as the amount of personal income taxes, property taxes and gas taxes paid by film workers.

The legislative researchers also note that the Handfield study asserts that the state receives $9.7 million in sales taxes through "film induced tourism" and that local governments receive another $5.7 million. The estimates, McHugh and Boardman say, result from the "untested and unsubstantiated assumption" that 1 percent of all tourism in the state results from the film industry. That percentage, they say, was taken from a study commissioned by proponents of film credits in Georgia and applied to North Carolina.

The memo also states that many of the "errors" in the report were pointed out to Handfield before final publication of his study but that they weren't corrected.

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