Pennsylvania Governor Tom Corbett recently signed into law the new state budget. In a tough budget year, that budget left Pennsylvania’s film tax credit capped at a total of $60 million per year. The impact of this cap is likely to be felt keenly throughout the Commonwealth, and will directly impact the state of the film industry in Pittsburgh and Western Pennsylvania.
Increasingly, motions pictures (and television productions) are no longer the exclusive domain of Southern California and New York City. Starting in the late 1970s, a large number of these projects have been filmed in Canada, lured by cheaper production costs and incentives. Vancouver, Montreal and Toronto became major centers of film production.
In an effort to get those projects to film in the US, starting in the 1990s many states began to offer various forms of incentives to encourage in-state film production. Since then, a sort of “state film production incentives arms race” has developed as states have offered increasingly competitive incentive packages to lure productions away from other states. The structure, type, and size of the incentives vary from state to state, including tax credits and exemptions, cash grants, location use rights and other benefits.
The most common incentive offered is the state tax credit. Currently twenty-eight states offer film tax credits of varying amounts. Of the twenty-eight states that currently offer tax credits, twenty-six of them make them either transferable or refundable. Transferable credits allow film production companies that generate tax credits greater than their state tax liability to sell those credits to other taxpayers, who then use them to reduce or eliminate their own tax liability.
How does the tax credit transfer work?
Pennsylvania’s film tax credit program, first enacted in 2004, offers a transferable tax credit equal to 25 percent of the qualified production expenses of a film production that shoots within the state, with movie shoots required to incur at least 60 percent of its budget within Pennsylvania to qualify. For example, a California film company that films in Pennsylvania (and meets the other eligibility requirements for the credit) may not be able to fully utilize a Pennsylvania state tax credit because it does not have sufficient Pennsylvania taxable income. However, that production company can sell the unused credit to another Pennsylvania company, for example, a manufacturer with sizeable Pennsylvania income, who can then use the credit on its own tax returns. Normally, the purchaser will pay some percentage on the dollar, say 75-90% of the credit, as the purchase price. So, the film producer pockets that money and the local company gets a break on its taxes.
Some of the major films shot in Western Pennsylvania that have taken advantage of the tax credit include: Zack and Miri Make a Porno (2008); Adventureland (2009); Unstoppable (2010); Abduction (2011); Out of the Furnace (2012); and American Pastoral (2013). The result of these projects, and many others, has been to spawn an expanded and permanent film crew presence in Pittsburgh. These projects also have generated millions of local revenues to restaurants, hotels, etc.
Because these film tax credit incentives have become so widespread, states are competing against each other for film projects. Twelve states currently have no caps on their annual film tax credits. Under the new budget, Pennsylvania will remain capped at $60 million per year. Once that annual limit has been reached, no more tax credits may be issued for the fiscal year. If tax credits are promised for the next year, that amount will then be unavailable for that year (for example, before fiscal year 2012 even started, only about $45 million in credits were still available). Whether you believe that such credits merely subsidize already wealthy out of state production companies or are a vital piece of Pennsylvania’s burgeoning film industry, this cap is likely to have a huge impact on the film industry here.
A study and accompanying report prepared by Pennsylvania’s Independent Fiscal Office stated that Pennsylvania’s film industry totaled $248 million in wages within the state in 2011, ranking it sixth in the country. Many of these jobs (approximately 18,000) are in Western Pennsylvania.
The Pittsburgh Film Office, which works to bring film production to Western Pennsylvania, has stated that the film credit has helped to lure over than $100 million in economic activity to the region for the past several years. They estimate that the lack of film tax credits, which also previously were capped at $60 million per year, has cost Pennsylvania twenty-five different film and TV productions, including eleven in the Pittsburgh area. How long film crews will be able to remain based in Western Pennsylvania without the promise of film productions beyond the first few months of every year remains to be seen. One thing is for certain: the level of film production in the Commonwealth will continue to be negatively impacted by Pennsylvania’s restricted tax credit program.
