Film tax credits make money for brokers
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," state Sen. Gary LeBeau, D-East Hartford, said.
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 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, from the Motion Picture Association of America to 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 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 data 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 middle man (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, acknowledged 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."
Some 44 states offer some type of incentive to filmmakers. More than a dozen provide credits and several others offer rebates.
Lucia Fishburne, Florida's film commissioner, said that 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 representative 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."
Fishburne acknowledged 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.
LeBeau 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 says 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."
Lederer said the company used to mainly work in the loan and housing tax credit markets but investors asked them to diversify and they began dealing with film credits. They do 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."
Sen. Eileen Daily, D-Westbrook, who as chairman of the Finance, Revenue and Bonding Committee has reservations about film tax credits, said 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, arguing 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, announced an Illinois man pled 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 whistleblower 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 added 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 data is confidential and cannot be released to the public.
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 non-film 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 firstname.lastname@example.org