Iowa Film Tax Incentive Program: Is There Really a Problem?

There is an excellent article in today's Wall Street Journal about the suspension of the Iowa Film Tax Incentive Program. Clearly, the program was driving a lot of film business through a state that would otherwise have very little. But when an audit of the program expenditures revealed subsidies helping to purchase luxury cars, an expensive bed and an iPod, the governor halted the program and heads began to roll.

In reading the article, it seems that everyone was probably acting within the technical limits of the law. No one has claimed that these expenditures were not allowable under the program. However, having the state pay for half of a film producer's Mercedes clearly went against the local sensibilities. This isn't about math or money as much as it is about a clash of cultures. It's like inviting a rock musician or famous athlete over for dinner. You're very excited until you see what they're really like, and then you can't wait for them to leave.

Objectively, it does seem that the Iowa program might have been crafted in a bit of a hurry. I haven't examined the law in detail, but a 50% credit is definitely a big number and allowing things like vehicle purchases, without careful limitations, might not be smart.

Being in the business of representing producers in the financing and production of films, I am naturally a big fan of state tax incentive programs. However, I also know that the best financial arrangements have to truly benefit all parties in order to be successful and sustainable.

In designing and implementing a film tax incentive program, I think states need to follow a few simple guidelines:

1. Before drafting the laws and regulations, states should consult with people who really understand how films are financed and produced. The regulations need to not only provide a list of acceptable expenditures, but also guidelines for a responsible production. The state should approach each film like a bond company or an investor, looking at the budget, schedule and personnel responsible for making the film.

2. The goals of the program need to be carefully considered and honored in the crafting and implementation of the program. There are obviously potential short term benefits in the form of additional tax revenue. But there are also potential long-term benefits from improvements in infrastructure, education and culture. The program architects need to consider how these goals will be reached, and how long it might take. Then, they need to make sure the program drives money and other resources in the right directions, and that they can sustain the program long enough to reach their goals.

3. Finally, they need to really do the math -- both at the front and the back of the process. It is important to quantify expected benefits and then measure results to assure that the expectations are occurring. Inevitably, there will be some discrepancies, but regulators shouldn't overreact. Instead, they should evaluate, adjust, and try a few possible strategies. Nothing is going to work perfectly from the first day. And who cares what kind of car the producer drives home if the state is truly getting the intended benefits?

The real lesson here is that building any industry is not an overnight process. If Iowa had instead decided that its future was in high tech, it would have needed to spend a lot of money to attract technology people and companies. Some of that money would probably be wasted and the program would probably need to be adjusted, and it would take several years before they could truly measure the program's success. It is really no different when building a film industry.

The folks in Iowa need to put aside their Midwestern sensibilities (and I say that with all due respect for those values). They need to stop being offended and start being pragmatic. If they are just looking for some fast tax revenue and to hang out with famous people for a few days, then I agree that they should stop wasting their time and money. But if they are looking to build something that truly benefits their citizens for years to come, then they should get the program back online -- perhaps going a bit slower and being more careful in their application process while they figure out what works and what doesn't.