State lawmakers are once again tinkering with the tax incentives for Connecticut’s fledgling film industry.
The proposed changes, recently approved by the finance committee, would restrict the transferability of the state’s film production tax credits, a move that could potentially shut the door on film shooting in the state not done in brick and mortar studios, lawmakers said.
Currently, productions that have little or no tax liability in the state can still collect the transferable corporation and insurance premium tax credits for film and digital media production, infrastructure investment, and digital animation.
But since they can’t use those credits because they don’t have a large enough tax liability in Connecticut, many production companies sell them through a broker to other businesses with in-state tax liability, mostly insurers and banks.
Lawmakers now want to restrict that transferability for any production not done in a Connecticut-based studio, since the economic impact from that activity tends to be relatively limited, officials said. That would save the state an estimated $9 million over the next two years.
The changes are being fueled in part by the state’s budget crisis, which has left lawmakers searching for every available penny. But the proposal also comes amid a backdrop of complaints that have surfaced in recent years from advocacy groups who have said the cost of the subsidies is outweighing their benefits.
Since the tax credit program went into effect in 2006, the state has issued $170 million in tax incentives, which has resulted in $600 million in in-state spending by production companies, state officials said.
“This is probably going to wipe out fly-by-night operations that come into the state to shoot a scene and then leave,” said Sen. Gary LeBeau, the co-chair of the commerce committee.
Under the proposal, which is supported by Gov. Dannel P. Malloy, only 50 percent of the tax credits earned by a production company could be transferred in 2011. That would be reduced to 25 percent in 2012 and every year after that. The transfer restrictions apply to any entity that is not subject to the corporation or insurance premium tax.
The proposal, however, exempts any production that occurs in a “qualified production facility,” in the state, meaning essentially work done in brick and mortar studios in Connecticut.
That is a key safeguard in the bill, which is being heavily lobbied by the state’s film industry, particularly the developers of the proposed Connecticut Studios project in South Windsor.
LeBeau, an East Hartford Democrat who also represents South Windsor, said the biggest economic benefits to states that offer film tax credits typically come from work done in studios, rather than simple street shoots. As a result, LeBeau said he thinks the changes will make the program more beneficial for Connecticut, rewarding companies already with a presence in the state, and encouraging other production companies to open facilities here.
In March 7 testimony before the finance committee, Kevin Segalla, who represents the industry’s chief association the Connecticut Production Coalition, raised concerns about transferability restrictions saying they “would neither achieve budget savings nor grow the economy.”
In an April 27 statement to the Hartford Business Journal, Segalla, whose own company the Connecticut Film Center serves as a major broker for film tax credits, took a much more conciliatory tone.
“We’re pleased that the administration and the legislature have decided to maintain Connecticut’s film, television and digital media tax credit program, which has been a source of jobs and revenue in the state since its implementation in 2006,” Segalla said. “CPC recognizes the need for shared sacrifice given the economic challenges facing our state, and we anticipate that the changes made to the program will ensure that Connecticut companies garner the greatest possible benefit from these credits.”
The transferability of the tax credits is a fundamental component of the film program.
LeBeau explained that production companies that shoot in Connecticut usually set up a limited liability corporation for every individual film. But those companies typically do not run up a tax liability equal to the potential tax credits they can earn to do work in Connecticut.
As a result, production companies must sell the credits to cash out, typically through a broker dealer to companies with much larger corporate tax liabilities in the state.
According to a 2009 report by the Connecticut Voices for Children, most of the companies that buy the tax credits are unrelated to the entertainment industry, including Bank of America, Comcast, Provident Life and Casualty Insurance Co., Wachovia Bank, and ConnectiCare.
Connecticut Voices has been a leading critic of the state’s film tax program, releasing a report in 2009 that concluded the state awarded $2.73 in production tax credits for every dollar of actual Connecticut spending on the production of films, television shows, commercials, infomercials, and video games.
The film industry disputed those claims vehemently, but the debate has made the tax credit program a hot-button political issue.
George Norfleet, director of the Connecticut Office of Film, Television and Digital Media, said he agrees that the proposed changes would negatively impact smaller independent films as well as potentially large budgeted feature films that want to shoot in the state.
Norfleet said there are several feature films with A-list celebrities in talks to shoot in Connecticut. He said he is unclear how the proposed changes to the tax credits would impact those talks.
But Norfleet also noted that the changes will lessen the cost of the film tax program, and incentivize more production companies to open studios in Connecticut, which would allow the program to have a much greater economic impact in the state.
“Unlike many other states, we still have our film credit tax credit program intact,” Norfleet said.
Developers of the proposed $50 million Connecticut Studios complex in South Windsor say they don’t expect the proposed changes to hinder their project.
“We feel comfortable that we are not going to be impaired by this,” said Ralph Palumbo, the chief financial officer and a partner of Connecticut Studios. Palumbo said, however, he is keeping a close eye on another aspect of the budget proposal that could also negatively impact the film industry.
As part of its dealings, the finance committee has also approved a measure that lowers from 70 percent to 30 percent the amount by which an insurer can reduce its insurance premium tax liability in any year through tax credits. That is projected to save the state nearly $28 million annually for the next two years.
But if passed, it would likely limit insurer’s ability to purchase the film tax credits from production companies. And since insurers are major players in buying up those credits, it could create a liquidity crunch in the market, Palumbo said.
“It doesn’t kill the industry, but it would make it potentially harder for production companies to sell their tax credits,” Palumbo said.
