ATLANTA — The economic benefits of Georgia’s popular and lucrative film tax credit have been exaggerated, a new state audit says, and past estimates have not taken into account the heavy toll on state spending.
The latest audit comes at a time when some lawmakers have talked about making changes to the program because of rising costs and fiscal problems that have caused Gov. Brian Kemp to call for budget cuts.
Kemp last summer ordered agencies to prepare 4% spending cuts this fiscal year and 6% next year, to both prepare in case of a recession and provide money for his priorities, such as teacher pay raises.
Only seven state agencies spend more tax money than the film tax credit costs. The state spends far more doling out film tax credits than it spends on its court system, driver’s license services, the state patrol, enforcing environmental laws, housing juvenile offenders, investigating criminal cases or offering pre-kindergarten classes.
In a report released Thursday, auditors said, “The Georgia Department of Economic Development has used an inflated multiplier to calculate credit-related economic activity and has reported misleading job numbers.
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“When discussing the economic impact of the credit, the agency has also publicized the number of jobs supported by the film industry. However, many of the reported jobs are unrelated to the credit.”
Auditors said the film tax credit had an estimated net economic impact of less than $3 billion and fewer than 10,000 jobs in 2016, the latest year they studied. That is far below the estimates of tax credit supporters.
“While these figures capture the impact of the projects supported by the credit, they do not consider the cost of the public subsidy of the industry and the resulting decrease in government spending,” the audit said. “The net impact appropriately considers both the economic benefits and the economic costs of the credit.”
Auditors recommended that the General Assembly cap how much film projects can get from the tax credit. Currently there is no cap, and production companies typically sell the credits for cash.
“The film tax credit results in significant revenue loss for the state by reducing income tax revenue that would have been paid otherwise. The lost revenue includes income taxes owed by tax credit purchasers on activity unrelated to film production.
“While the economic activity resulting from the credit generates revenue, the additional revenue is not sufficient to offset the credit.”
The Georgia Department of Economic Development, which helps administer and promote the tax credits, strongly disagreed with the findings, saying it “believes an audit should be neutral, unbiased, and present information in a fair and independent manner.” The agency said, “this audit presents information that paints an inaccurate picture of the overall impact of the film industry in Georgia,” adding that the auditors’ “approach to determine the amount of economic impact and job create serves to undervalue the film tax credit’s impact on the economy.”
House Speaker David Ralston, R-Blue Ridge, a supporter of the tax credit, told reporters Thursday he’d not read the latest audit.
“I was asked a day or so ago would I favor abolishing it (the tax credit) and the answer is an unequivocal ‘no’ because what we have to understand is at the other end of that tax credit is Georgians working,” Ralston said. “If we need to make some tweaks in it, I’m glad to sit down and make the changes that are true to the Legislature in adopting it many years ago, but I also want to satisfy myself.
“I am not in favor of ending it, will not favor ending it and will not let a bill ending it go through the House.”
Through the state’s budget, taxpayers help educate 2 million children, provide health care to more than 2 million Georgians, build roads and bridges, manage parks, investigate crimes and incarcerate criminals, and regulate insurance firms and utilities, along with dozens of professions. The state also provides tax incentives to promote businesses and create jobs.
Some of the most expensive things the state does - educate students, provide public health care to the poor, disabled and nursing home-bound, and building roads - were exempted from Kemp’s cuts. But slashing the other areas would save about $200 million this year and $300 million next year.
While much of Georgia’s economy remains strong, the state’s fiscal economist told lawmakers in September that there was a 50-50 chance of a mild recession next year, and tax collections have been down or largely flat for much of fiscal 2020, which began July 1.
The tax credits, which grew from $141 million in 2010 to an estimated $870 million in 2019, have been a policy mainstay over the course of two previous Republican administrations.
Georgia has grown its film industry by leaps and bounds by giving the nation’s most lucrative credits for film work, up to 30%. Roughly $4 billion in tax credits has been doled out in Georgia. Hundreds of projects annually receive the credits: The audit noted that 450 movies, TV shows and other projects were eligible for tax credits in fiscal 2016, for instance.
About 80% of the credits are sold by film companies that pay little in Georgia taxes to people or companies that do owe state taxes, the audit said.
Earlier this week, auditors released a report saying state agencies that administer the program have allowed some companies to receive credits they didn’t earn.
Among other things, auditors found millions of dollars in ineligible expenditures by film companies that weren’t disallowed by the state for credits, including payments to workers or contractors for work performed outside Georgia. The way the state audits such projects gives companies an incentive to pad their numbers with ineligible expenses, the report said.
When he was governor, Nathan Deal treated the tax credits awarded to film and TV production companies that do business in Georgia as a prized legislative accomplishment, routinely warning lawmakers not to even consider a threat to the program. The state has previously said the industry has created and maintained tens of thousands of jobs in Georgia, although some researchers say boosters have exaggerated the impact of the tax credit.
Kemp last week refused to rule out legislation that could seek changes to the lucrative credits. State Sen. Lindsey Tippins, R-Marietta, is one of several influential Republicans looking at reducing the credits this year to avoid steeper budget cuts.
Georgia’s film and TV tax credit system has two unique features. First, there is no limit to how much companies can receive. Second, the tax credits are transferable.
So, for instance, if a film company spends $3,333,333.33 in Georgia and meets all the necessary state criteria, it can earn a 30% tax credit worth $1 million.
But since many companies aren’t based in Georgia, they owe little or no money in state taxes, so they sell the credit — for cash — to any entity that owes state taxes. Those entities — often other companies — buy the credits at a discount. They may pay $800,000 for a $1 million credit. The film company receives the $800,000, and the buyer — either a person or company — sees a $1 million reduction in taxes.
The earlier audit recommended state lawmakers require an audit of each project that receives a film tax credit. The report contains dozens of other recommendations to the General Assembly, the Revenue Department and the Economic Development Department to improve credit administration.
Auditors said both agencies would need more state resources — such as increased staffing — to improve controls on the tax credits. It would also likely mean changes in state law.
In the latest audit, state officials said while the credit is not designed to provide incentives for hiring residents over nonresidents, it provides credits regardless of where a worker resides. While Georgia residents held most of the jobs in the period studied, most of the wages were paid to non-residents, including highly paid, out-of-state actors.
Of the 31 other states with a film tax credit or rebate, 20 have residency requirements or provide higher incentives for hiring residents, who are more likely to spend their wages in their home state.
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