Film tax credits make money for brokers
Only in print: Who gets the money? Even Legislature can't find out
Proponents of Connecticut's film, television and digital media production tax credits say the incentives are good for the local economy and diversify a business climate heavily dependent on the beleaguered financial-services sector.
But the program, at the expense of the cash-strapped state, is also lining the pockets of brokers who help visiting productions trade the credits to Connecticut companies. And the details of the transactions are not public, even to frustrated legislators, a Hearst investigation has found.
"The tax credit sellers have made millions. And I don't think they provide much value when you can have a program that does not need them," said state Sen. Gary LeBeau, D-East Hartford.
LeBeau, co-chairman of the Legislature's Commerce Committee, has been pushing to convert the 4-year-old tax credit program to a direct cash rebate system that eliminates the need for the brokers.
LeBeau said he believes the rebate would allow Connecticut to continue to offer the same level of incentives to qualified productions but decrease the costs to the state.
"We would get more bang for our buck," LeBeau said.
When he aired the idea at the start of the 2010 legislative session, it was panned by industry insiders, including the Motion Picture Association of America and the Stamford-based Connecticut Film Center, considered the leading film tax credit broker in the Connecticut market.
"Listen, the credit is working," film center President Kevin Segalla said in an interview for this story. "The more we fiddle with it, the more difficult we make it to build an industry."
Connecticut's film, television and digital media tax credits are among a handful of the 31 types of business tax credits that can be transferred to other taxpaying entities.
"These features make film credits more attractive to production companies, which usually do not have significant tax liability in New England states," read a report by the New England Public Policy Center at the Federal Reserve Bank of Boston. But "transferable credits usually sell at a discount, meaning that the selling firm receives less than their full value. The state, however, still forgoes the entire amount."
According to information provided to Hearst Connecticut Newspapers by the state's film office, located within the Department of Economic and Community Development, of the 80 productions that have so far received credits, only nine applied them to state taxes.
The rest were transferred by third-party brokers, some of whom, like Segalla and New Jersey-based Tax Credits LLC, are identified on a resource list posted at the film office's website.
There is virtually no public information available on these transfers, although Tax Credit President Bruce Deichl was willing to give some insight into his business.
"What happens is the producer would do his film, then they do their audit, then it gets submitted, the tax credit is issued. We then sell it to a third-party taxpayer, and then he files it on his open tax returns," Deichl said. "It's almost as close to a security transaction as you can get without it being a security."
Deichl offered the example of a hypothetical transfer of a $10 million film tax credit.
"Let's say we sell them at 90 cents on the dollar to the buyer. If he had a $10 million in-state tax liability, and he buys these for 90 cents ... he saves $1 million," Deichl said. "Let's say we work for 2 points on that trade. We're selling them at $9 million; we're paying the producer $8.8 million. So on a $10 million transaction, we may gross $200,000. But that's a rare trade. Most are $500,000, $1 million, $1.5 million."
LeBeau said that if Connecticut were to instead offer a rebate, it could lower the incentives by the amount of profits the tax brokers are currently earning.
"You can actually give the maker of the film a lower percentage ... and they can get the same amount of money. You can eliminate the middleman, (and) you've cut the cost to the state," LeBeau said.
George Norfleet, hired as director of the state's film office after the passage of the tax credit legislation, said that producers just want an incentive.
"So they're going to be able to work with a rebate or a credit," Norfleet said. "I don't think one way or the other it's going to matter that much to film production companies."
But Norfleet said it would be "difficult at this point ... to switch from a credit to the rebate, given there is a three-year carry-forward on issued credits, so we could not come to a full stop."
About 44 states offer some type of incentive to filmmakers. More than a dozen provide credits, and several others offer rebates.
Eric Witt is the film and media adviser to New Mexico's governor. Advocates of film incentive programs often point to New Mexico's success story with its 25 percent rebate.
"Say I'm with a production and get a $5 million credit. I want to sell it to a Connecticut insurance group and go through a broker to do it. The broker charges me 5 percent of that credit, so I'm not realizing as the production company the full value of the credit," Witt said. "If instead I shoot a film and earn $5 million in a rebate, I get a check right from the state ... and the turnaround time is a lot quicker. I don't wait for a broker to find a buyer."
But Deichl said many states, particularly during times of budget deficits, prefer tax credits because they are often not used for several months while lawmakers need to appropriate money for rebates in budgets. And occasionally, they expire without being claimed.
"If it's a rebate, the state writes a check to the production company, which is an immediate hit to general revenue," Deichl said. "If we sold a credit in January of 2009, and that taxpayer doesn't file that until October 2010, there's a 22-month free ride before the state gets hit with the amount of the credit."
Lucia Fishburne, Florida's film commissioner, said that the state's lawmakers recently switched from a film tax rebate to a transferable tax credit program.
"The industry loves a cash rebate program ... if you've got the cash," Fishburne said. "We, like many other states, do not have a lot of cash at the moment."
Former Connecticut state Rep. James Amann, a Milford Democrat who, during his tenure as state speaker of the House, spearheaded the film tax credit legislation, recalled turning down the rebate for the reasons Fishburne cited.
"The problem with the rebate is the Legislature at any time can say, `Hey, we can't afford to do a rebate. Sorry,' " Amann said. "You can't make business decisions on `maybe,' especially when it's hundreds of millions of dollars."
"One way or another, the state has to account for the value of the credits or rebates it plans on issuing when it's doing a budget," he said.
Fishburne said that Florida replaced the 15 percent cash rebate with a 20 percent tax credit in order to accommodate the tax brokers' fees.
"It needed to go up to be more competitive," she said.
Sherri McConnell, director of Louisiana's entertainment office and who oversees that state's film tax credits, suggested that Connecticut lawmakers eyeing a rebate instead consider adding a provision to their incentive packages allowing qualifying productions to sell credits back to the state.
Louisiana currently offers 85 cents on the dollar per credit.
"It's less of a hit to the state in the long term," she said.
LeBeau said he is also troubled by the inability of Connecticut lawmakers to get details about the tax credits once the brokers and buyers have entered the equation.
"That is the question: Who's walking off with all these bucks?" he said.
The report by the New England Public Policy Center at the Federal Reserve Bank of Boston concluded transferable credits result in a lack of transparency.
Hearst asked the state film office for the names of the specific brokers involved in each of the 71 transfers, hoping to understand which company or companies were profiting the most and whether they are in or out of state. But Hearst was told the Department of Economic and Community Development does not keep track of the middlemen in the deals.
Although he said that the film credit market has expanded from $50 million to more than $500 million in the last five years, Deichl insisted brokers like him are not making that much and often face great uncertainty.
"It took us over two years to close on a major television show in New Jersey. Two years to get that," Deichl said. "We're trying to close on a major production in Massachusetts. We expected to close in February. Here it is July. We still haven't closed, and the movie's been released."
Josh Lederer, of California-based Fallbrook Credit Finance LLC, is also listed as a resource on the Connecticut film office website.
Lederer said the company used to mainly work in the loan and housing tax credit markets, but investors asked the company to diversify, and it began dealing with film credits. It does a small amount of business in Connecticut, he said.
He said the brokers' take is "typically one to three percent" of a transfer.
"It depends on the credit size," Lederer said. "But it's really a volume game. We're not making much money per deal."
Deichl said tax credit brokers help market states to the film industry.
"We do influence independent (films) and, in some cases, studios," he said. "Obviously, you're going to suggest they go to a (credit) tradable state, although if there is a state that's better, we'll tell them to go to a rebate, although we don't earn a living on that. But we figure if we help them on this project and send them to, say, New Mexico, the next one they may go to Connecticut or Massachusetts and keep us in mind."
But LeBeau said that is what the state film center staff is paid to do.
Louisiana's McConnell said brokers also play a role in helping get films and television shows made.
"The tax credit clearly has created a boutique industry of brokers," she said. "But it also allows for front-end financing." She said a producer can approach a broker seeking funds for a movie in exchange for a pledge to sell that broker the anticipated tax credits.
The broker "is basically taking the chance and acting like a bank," she said.
Sen. Eileen Daily, D-Westbrook, who, as chairwoman of the Finance, Revenue and Bonding Committee, has reservations about film tax credits, said that without brokers like Segalla, state lawmakers might not have been able to get the legislation off of the ground.
"We had no expertise," Daily said.
Amann said Segalla was one of several industry insiders he relied on when he was crafting the legislation. But unlike his out-of-state competition, Segalla and the Connecticut Film Center have leveraged their broker profits to build soundstages in Fairfield County to help attract more productions.
Segalla was reluctant to even discuss the matter of rebates versus credits, saying that such talk scares away business.
"Last year and the year before, they (state lawmakers) went in and did things to the credit that shook the stability of it and shook the confidence of it within the industry, and we still haven't recovered from that," Segalla said.
The tax credit industry has also attracted bad apples, as two high-profile cases from Louisiana show.
In May, Jim Letten, U.S. attorney for the Eastern District of Louisiana, said that an Illinois man pleaded guilty in federal court to the fraudulent sale of $1.9 million worth of Louisiana film tax credits to current and former members, coaches and staff of the New Orleans Saints football organization.
A few years earlier, Letten's office successfully prosecuted a case in which an applicant for tax credits bribed the then-head of the Louisiana program to certify his application.
In Connecticut in 2007, a whistle-blower complaint was filed with the Auditors of Public Accounts alleging the state film office was improperly steering productions to Segalla and staff.
Such complaints are not subject to public disclosure. But auditor Kevin Johnston in a recent interview said his office concluded its work earlier this year and was unable to substantiate the complaint. He also said there did not appear to be any prohibition against the state referring work to the Connecticut Film Center.
Hearst Connecticut Newspapers also asked the Connecticut Department of Revenue Services for the identities of the taxpayers who are buying the film, television and digital media tax credits from the brokers. Kaufman responded that the information is confidential and cannot be released to the public.
But Deichl offered this tantalizing piece of information.
"Almost all major corporations in Connecticut do not pay taxes because of all these credits," he said.
Daily said legislators are continually frustrated with their inability to get data about tax credit transfers.
"If Company A can reduce their tax burden to zero when nobody there has never even been to a movie, then we would likely have something that would be a cause for further review," Daily said.
But Fishburne said there is a benefit to helping nonfilm companies reduce their tax liability.
"Perhaps they'll be able to expand and create jobs," she said.
Investigative reporter Brian Lockhart can be reached at email@example.com.