Iowa Tax Program Update

After yesterday's post, I got into a great Facebook discussion with attorney/writer/producer/sales agent, Darlene Cypser (@DarleneCypser) of Colorado. She was kind enough to provide a link to the actual auditors' report which ostensibly caused the governor to shut down the program. Darlene suggests that, based on this report, there was definitely a problem. I don't disagree, but we probably differ slightly on where to place the blame.

I have to agree that the report describes circumstances under the program that were almost certainly not in the state's best interests. Ultimately, I think the report supports my suggestion that more careful planning and operation is critical for a successful program. My reading of the report is that a lot of smart Hollywood people figured out ways to mostly stay within the letter of the law while maximizing their tax credits using strategies that the State of Iowa never anticipated.

And I think that's the key. I think Darlene wants to hold Hollywood accountable, but most everything I read in that report could probably have been anticipated and prevented with more careful planning and drafting of the law. I don't want to sound like a typical L.A. entertainment lawyer (or at least like the popular misconception that we are a bunch of arrogant sharks), but if the Iowa regulators understood the Hollywood movie-making culture, they would know that every effort would be made by producers to squeeze the maximum dollars out of the law as it was written. They could have hired any number of consultants that would likely have anticipated every maneuver, and then they could have crafted the law to prevent most of the alleged abuses.

You can't blame a producer for chasing dollars any more than you can blame a lion for eating an antelope. It's what they do. Some people may not like the way they do it, but it is naive to think that they would leave any money on the table. That's not consistent with the prevailing culture of Hollywood film making.

As far as the governor's reaction, even after reading the audit report, I think I would have been much quieter and less dramatic in my response. Clearly some things weren't working. So, they could slow down the application process, get some better regulations written, quietly replace a few people and continue the program. I think that the starting and stopping is potentially much more damaging to their perceived desire to build a film industry than any over-payments. They should just take what they've learned, correct their course and keep going.

Ok, that's all from me on this topic. I think it is probably more interesting to me than to most of you. I'll look for something a bit less dry for my next post.

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.