Auditors: Georgia is No. 1 state for blockbuster film tax credit giveaways

A top Georgia Republican called damning state audits of Georgia’s generous film tax credit program “alarming,” though so far, the reports released this month are producing calls for reform, not repeal.

Yet critical audits, high costs to the state treasury and tight labor markets are some of the forces that drove other states to cut or end their film subsidies.

The growing presence of lighting crews, movie stars and sound stages earned Georgia the nickname Y’allywood in recent years. Georgia offers more incentives to makers of film, TV and video games than any of the 31 other states that offer such subsidies, according to a new report by Georgia’s state auditors. But the state requires the least documentation from the companies and individuals that claim those valuable credits.

Georgia issued $915 million in tax credits to media producers in 2017, according to state auditors. The examiners recently flagged the program for issuing credits in 2016 that left state taxpayers $602 million in the hole.

For comparison, unsteady state revenues prompted Gov. Brian Kemp last summer to order cuts to this year’s state budget of more than $200 million and cuts to next year’s spending plan of more than $300 million.

Georgia doesn’t require audits of projects that receive film tax credits, though the Georgia Department of Revenue does offer a voluntary audit process. Production companies sometimes sign up for those audits to protect themselves against questions later. In a sample of eight projects that went through revenue department reviews, state auditors reported this month that they found $4 million in ineligible expenditures.

States are rolling back film subsidies, according to J.C. Bradbury, an economist at Kennesaw State University. He is preparing a paper on movie production incentives and economic development. A decade ago, 44 states offered incentives like grants, tax refunds or tax credits, according to the National Conference of State Legislatures, a nonpartisan group for states. Since then, 13 states closed their film tax credit program completely.

Louisiana is scaling back its tax credits. Under budget pressure, Louisiana trimmed its annual tax credit to $150 million. 

“State governments themselves have been doing internal evaluations of their programs, finding that they are earning cents on the dollar … 20 cents on the dollar, 13 cents on the dollar,” Bradbury said. “Those are pretty clear findings in these studies. And you know, that’s not a good return, you spend a dollar to get 13 cents.” 

Most state incentive programs are capped by project or in aggregate, so state budget writers can offer an educated guess about the annual drain on the state treasury.

But Georgia’s program isn’t capped. The state’s roughly $27.5 billion in revenues available for spending on health care, education and other needs would grow by about $1 billion if it were collecting taxes on media productions instead of issuing film tax credits. Lawmakers must weigh that against things like the $530 million it cost to give $3,000 raises to Georgia’s teachers and public school staff this school year.

And when programs grow in relation to the size of the government budget, as happened in Kentucky and Georgia, they attract attention, said Nathan Jensen, a professor in the Department of Government at the University of Texas at Austin who studies government economic development strategies.

“When it’s this huge, that’s generally when you start to see some movement on it,” Jensen said.

Film tax incentives tended to be introduced when there was high unemployment, according to Michael Thom, a professor at the University of Southern California who’s studied both enactment and repeal. 

He said that falling unemployment is part of the cause for repeals. And there’s also evidence of a “neighboring” effect: some states have taken cues from their neighbors’ decision to scale back on TV and movie subsidies.

Thom said high costs, unflattering audits or criminal convictions for fraud in such programs are more like “special circumstances” that contribute to repeals in some states sometimes, but not always.

The more interesting question, he said, is why more states haven’t quit handing out incentives.

“Ultimately, it’s political. You wouldn’t want to be the elected official who supported this for years and suddenly didn’t,” he said. “You might also think, ‘We’ve put in a billion, a billion and a half dollars, we can’t cut loose now, we need to get back our investment.’”

Indeed, not everybody is cutting. For example, last year lawmakers supported a move in Missouri to get back in the film incentives game, but with a modest $4.5 million annual program.

But Georgia has some special circumstances, says one industry leader in the state.

“Georgia is just not comparable to programs like Michigan or Iowa that had a brief success and then blew up more or less,” said Peter Stathopoulos, head of government affairs for the Georgia Production Partnership, an industry group.

He said Georgia’s tax credit is building atop an existing media ecosystem that already included places like CNN and Tyler Perry Studios and that it’s bringing brick-and-mortar investment to the state. And it’s contributing to investment in Georgians themselves, like the folks who get education for film trades at Georgia’s technical colleges and universities.

And he argues it’s bringing business and tax revenue to places outside metro Atlanta, like Senoia where The Walking Dead generates fan-based tourism.

“States invest in lots of things which may or may not have a positive return,” Stathopoulos said.

“So for instance, roads or schools,” he said. “Sometimes you make investments and things that are at net cost because you think it’s an investment for the state and its future and you think it’s something that’s worth investing in even if it’s costing you.”

Georgia’s audits do suggest valid needs for improvement, just like in any program that matures, Stathopoulos said.

He thinks the industry would accept more oversight, for example, if it isn’t too burdensome.

“There’s always room for tinkering and tightening, but I don’t think that the audit report justifies any major surgery,” Stathopoulos said.

Georgia Lt. Gov. Geoff Duncan said some of the information in the Georgia audits was “alarming” and he’s open to talking about changes, but he also said that the film tax credit isn’t going anywhere. House Speaker David Ralson has also said that he’s open to changes but wants to keep the tax credit. 

Ralston said that it’s important to remember that the tax credits are putting Georgians to work.

With the backing of two of the Capitol’s star players, critical state audits might not be enough to stop the credits from rolling on.