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F.U. Kevin Spacey

February 24, 2014
By

FULast Friday the Washington Post broke the story of Netflix’s “House of Cards” production company trying to shake down Maryland Taxpayers for at least $10 million:

Give us millions more dollars in tax credits, or we will “break down our stage, sets and offices and set up in another state.”

The newspaper helpfully posted the ransom note.

The Sun followed the next day, informing readers that not paying would be bad. Very bad.

“A leading Democratic lawmaker says the O’Malley administration isn’t doing enough to keep the popular Netflix drama “House of Cards” in Maryland,” said the report by Luke Broadwater. Further down he quoted Jed Dietz, head of the Maryland Film Festival, panicking:

“If we don’t correct it, why wouldn’t they leave?” he said. “They love being here, and I would hate to see us jeopardize that. It would be horrible if we lost them. If we kicked them out, it would take us years to get our credibility back.”

By all means, Jed. Let’s have some credibility.

Nowhere in the Sun’s story is there any mention of the stark and obvious fact that this whole shakedown is–like the public subsidies for giant stadia and Grand Prix racing–based on bullshit.

“As a Maryland taxpayer and ‘House of Cards’ viewer, I am aghast,” says Greg LeRoy of Good Jobs First, a labor [mostly foundation]-funded non-profit that studies tax breaks for businesses. “We have not done research on film subsidies, a) because no one has asked us to and  b) like stadiums, there is a longstanding left-right consensus that they don’t create net new economic activity, just move it around (what economists call ‘rent-seeking’). You and I do not have more leisure time or leisure dollars just because we have an additional TV show to choose from.”

The Tax Foundation emailed us later to tout its take on this matter. “It’s like Frank Underwood wrote this letter himself,” they wrote on their blog.

As tax incentives for movie studios are a relatively new scam, they illustrate well the pattern of well-heeled industries carving out special exceptions for themselves on the theory that–in their business at least–the provision of jobs for regular workers is a charitable activity more or less unconnected to general profitability or the insane compensation enjoyed by those at the top. Canada started it, circa 1997. Louisiana (that bastion of good government) followed suit in 2002.

It is self-evidently a zero-sum game. But instead of making a treaty or other agreement to stop it, states instead rushed in with their own tax credit programs in a mad scramble to attract star power (and jobs). By 2009 the Sun was editorializing in favor of “the tax incentives arms race”:

“It’s fair to argue that now is not the time to spend from the state budget. But the beauty of the film production tax credit is that it’s self-funded. The producer gets back only some of what his company has spent in the state. Maryland taxpayers still come out ahead – and using the state as a backdrop in film and television doesn’t exactly hurt the local tourism trade.”

The newspaper did not mention the rent its parent company had collected from production companies which used its empty offices as the set for fictional newspapers. David Simon did just that for the last season of “The Wire,” [Correction: No. He built a copy outside the city; sorry, David Simon] and “House of Cards” has reportedly done the same for the past two seasons.

Simon, perhaps surprisingly, given his usual principled stance against institutional injustice, has written in support of the tax breaks, arguing (on a Sun comment forum, no less!) that getting “100 percent of nothing” (by ending the subsidy) would be sub optimal. (The thread seems to be gone, alas, but we memorialized its existence here). Most lawmakers agree with him.

By 2012, 40 states were giving money to the film and television industry, competing with each other to get temporary employment for caterers, set designers, carpenters and chauffeurs. By last summer it was 42 states, according to a piece in Variety which, like many of the stories written about the practice over the past several years, suggests (without evidence) that a rethinking is underway in state capitols.

As the Fiscal Times reported, the amounts of these tax breaks have not been easy to determine. Some states are fastidious about disclosing who gets what (Texas! who’d suspect?), but many don’t. Maryland is pretty open, disclosing the amount of the credit going to each production. That’s how we know that season one of “Veep,” in 2012, got $3.4 million in tax credits on production expenditures of $14.1 million over 38 days.

The industry would prefer that its welfare remain a private matter, of course, as the FT story reports:

Dama Claire, a consultant who works with producers to identify and acquire the best incentives for their films, says states that insist on disclosure could see productions go to states that don’t. “Disclosing the amount of tax credits may be akin to asking about a state tax return, which is privileged,” Claire says.

But here is the problem with handing out tax breaks to movie and video producers. Overall, nation-wide, you actually get 100 percent of nothing for it.

You just lose tax revenue that could have bought new roads, better schools, cops, sewer pipes, and the like. Either you get less of that, or other people–those not blessed with tax breaks–must pay more taxes to maintain the same level of services. It really is that simple. Here’s how it breaks down.

Maryland’s system–like that in most states–offers production companies a refundable credit. Basically for every dollar they spend, they get some percentage–32 percent in Michigan, 27 percent right now in Maryland–back from the government. That means that (like very low income people who get the Earned Income Tax Credit) TV studios with money up their colons can get more back from the state than they would have owed in taxes. A tax reform commission appointed by New York Governor Andrew Cuomo last fall wrote a report–which was leaked to the press, not published–that concluded:

The growth in the industry comes at the expense of higher taxes for other taxpayers or lower spending on state services and investments, possibly reducing activity in other sectors of the economy.

The Massachusetts Revenue Commission reported last year that two-thirds of the $175 million that state awarded to film and video production in 2011 went to out-of-state spending, Variety says.

Massachusetts and New York’s program dwarfs Maryland’s. New York doled out about $130 million in film and TV tax credits in 2008, and plans $420 million annually through 2019. Maryland is talking about ten or 20 million dollars. The total (currently) projected between fiscal 2012 and 2014 is about $22.3 million.

But in principle, on a nation-wide basis, “state tax credits do not appear to be growing more jobs or films. They are just moving jobs around,” the Massachusetts report said.

This is of course self-evident. The studios went 100 years without significant state tax breaks, and they did pretty well as an industry, and we got to watch lots of great movies and TV shows. The people working in TV are also paid pretty well. But even as new technologies have brought affordable video production to the masses, production costs on professional, tax-incentivized shoots have increased substantially. Typically, the tax breaks–in Maryland 27 percent of all production costs, off the top–aren’t even accounted-for in analyses of these show’s economics. But the costs rise.

That is because the incentives encourage production companies to inflate their “spend,” or the costs they claim, since every dollar spent is offset by taxpayer funds. This increases the claimed “economic impact” as well, and it just might be why you see steakhouse meals listed on Maryland’s “Veep” receipts.

The credits themselves, of course, are fungible. It is common for production companies to sell them off at a discount to a broker, who resells the credit to some other wealthy company or individual who can use it to escape some of their taxes.

Everyone’s a winner, see? Except you.

And, maybe, the guys who get caught scamming the scam even more. As Good Jobs First noticed:

In Louisiana, the former film commissioner was sentenced to prison for accepting bribes from a New Orleans film producer in exchange for transferable tax credits. And in spring of 2010, according to The Times-Picayune, “The head of a defunct Elmwood movie studio pleaded guilty Thursday to federal charges of selling $1.9 million in nonexistent film-industry tax credits to at least 27 current and former members of the New Orleans Saints organization.”

Though the tax credit is now considered by film production companies to be (again, like the EITC) an entitlement, the rules governing it–as spelled out by the Maryland Film office–offer no guarantees:

An episodic series that is presently shooting its second or later season in Maryland and anticipates returning to Maryland to shoot additional seasons may submit a letter of notification for up to an additional two seasons.  … Based on the letter of notification and the availability of tax credits, the Department may reserve future tax credits if available.

As one might expect, the incentive appears designed to lure in a company for a year or two. By the third season–if there is to be a third season–the production is going to be pretty profitable, and the thinking is it doesn’t need any tax breaks to continue to be profitable.

But since the credit is volatile, the companies know that the 27 percent break can apply to them. As the Film Office notes: “The aggregate total of tax credits issued in a fiscal year cannot exceed $7.5 million, except in FY2014 which is now funded at $25 million.”

Realize too that this law is not about nurturing home-grown creative types; it’s strictly for the big boys. To even be considered under the tax incentive program, “The total qualified direct costs projected to be incurred in the State must exceed $500,000.”

So Matt Porterfield’s Putty Hill? Uh uh. Kickstarter for you, baby. Blair Witch Project? Fuck no! That was done before the tax scam existed.

These productions are still being employed as PR for the giveaway though.

Chances are excellent (since when I found it on Feb. 22 it had only 175 views) that you have never seen this exciting trailer compendium of films and shows shot in Maryland:

Blair Witch is there, and Ladder 49–which also predated the tax incentive it now helps advertise the need for. And too, “House of Cards,” which is now attempting to extort more taxpayer money.

But extortion is such an ugly word.

Of course there is another side to this. And on cue Regional Economic Studies Institute (RESI)–our friendly economic researchers at Towson University–has produced this handy 64-page statistical amalgam [PDF] claiming our tax breaks have resulted in more than $200 million worth of economic activity–and that is after deducting the government outlay of (so far) only $179 million–or $85 per household.

As one might expect, that is slicing things on the thin side. And more tax breaks would not increase the state’s margins much: “For every reported $1 claimed in film tax credits, Maryland gains $1.03 in total,” RESI breathlessly reports, adding hopefully: “Were the tax credit to be doubled or uncapped, the expected ROI would increase to $1.05 for every $1 of tax credit claimed between CY 2012 and CY 2015.”

We give for-profit businesses 27 percent of their claimed production costs in order to get a three percent return on our tax base. Yet these sad numbers are employed to argue for more of the same.

With a three percent margin at stake, one would expect the figures to be precise out to several decimal points and the arguments backed by unimpeachable science. And so the RESI report is veritably brimming with footnoted good news:

Following filming of Better Living Through Chemistry, Jane Fonda publicly spoke about “how utterly charming” Annapolis is on her blog.(8)

When Kevin Spacey has free time, he likes to take in the local culture and enjoy a good meal—in 2012 he listed his favorite restaurants for Men’s Journal.(11) An Annapolis restaurant, Metropolitan Kitchen & Lounge, made the cut.(12) Spacey referred to it as “a very cool place.”(13)

But examine the footnotes detailing the actual economics–the sort of thing RESI’s professionals would be expected to take seriously. In footnote 14, RESI cites a McClatchy news bureau report of a Commerce Department report released last December. According to the McClatchy item, which was obviously written from this press release, the government claimed to quantify the arts impact on the nation’s economy. In 2011, the researchers concluded, the arts and culture industry provided jobs to 2 million Americans who earned $289.5 billion in wages.

That’s $289,500,000,000 divided by 2,000,000 humans. Which works out to an average arts-industry salary of just more than $144,000–which would be impressive as hell if it bore any relation to reality.

I could find no critical coverage of the screwy number anywhere, so I worked out the math via the figures that were reported. Unsurprisingly, the motion picture and video industry had the largest share of workers at 300,000 and the largest overall compensation at $25 billion. That works out to about $83,000 apiece, which sounds about right. As that is where the movie stars are (Kevin Spacey, who is executive producer on “House of Cards,” but may or may not be a shot-caller, is estimated to be pulling down $4 million per season) and since their compensation would reasonably skew the average upward, one wonders in what subset of the arts industry all those workers operate who managed to increase the overall arts and entertainment industry number to $144,000–nearly double the film and video component.

The Performing Arts industry got about $80,000 in wages per head, and museums about $60,000, according to the report.

The imputed high earners in the arts world–who would have to earn, on average, very much more than $144,000 annually in order to skew the average compensation to that level, are nowhere seen in the report or any media accounts of it.

In the report itself [PDF] the most highly compensated of any group reported on was CEOs: “earnings reported for the 360 chief executives working in the performing arts, and who earned an average salary of $157,660.”

Those 360 high earners could never pull the average salary in an industry with 2 million workers to anything like $144,000. Where could these people be hiding?

The Bureau of Labor Statistics–the federal agency charged with keeping track of the actual wages workers earn–did not locate these phantom high-earners either. Table B3–the hourly and weekly earnings of all employees on private nonfarm payrolls by industry sector–finds the highest December, 2013 average weekly earnings in the “utilities” sector. Those workers took home an average of $1,489.32 each week of that month. That sums out to $77,444.64 per year.

So the highest-earning group of workers made half of what the report said all workers in the arts industry made on average.

Salary.com helpfully notes median salaries instead of averages. Median means half of everyone in the field makes more, half make less. That gives a better idea of what people actually earn, since big winners don’t skew the numbers up. According to Salary.com “The median expected salary for a typical Artist in the United States is $48,704.”

Actor/Performer: $51,629. Media Program Director: $64,326. Surprisingly, “producers” make only $46,146 (Mel Brooks would be appalled). A Talent Director is worth $58,799. Set Designer: $46,633.Technical Director: $99,029. Videographer: $58,118. Tape Editor: $32,976. Usher/Ticket Taker: $18,528. Museum Research Worker: $49,305.

Among the dozens of discrete job titles not a single one offers a median salary even close to $144,000.

I belabor the point because these kinds of bogus, unexamined statistics are everywhere used to justify tax breaks and other special favors from the rest of us. Like climate change deniers, the proponents of tax breaks for certain industries (or individuals) have their credentialed supporters and their studies, but the studies are always shoddy, and usually paid for by the industry or interest group in question.

So what is the right way to look at film industry tax breaks? Glad you asked. One potentially credible way to do it is to look at the cost per job created, based on a whole year of work. Since the typical film shoot or TV show is not a full year, we need to find the average for Maryland’s recent productions and convert that figure into full-time equivalents, then divide the amount of taxes foregone by the number of would-be full-time jobs created.

Unfortunately, that data is not available.

You would not realize this from the RESI report, which purports to explain things just so. Figure 3 (on page 24) reports total employment of 694.3 jobs at total wages of $85,920,000. For an average wage of $123,000.

Such is the power of statistical modeling in economics. The wage in question is apparently for some period longer than a year.

RESI claims the actual average annual wage of the film and video jobs so subsidized is $56,487. It also claims the figures are for jobs “through 2016,” which could mean three years’ work, but that doesn’t math-out either.

RESI also does not specify the exact amount of the tax breaks necessary to ensure this outcome (as explained above, it’s upwards of $22.3 million–or $32,000 per job, by my calculation). Most of what it reports are projections. In other words, these are jobs projections predicated on the notion that “House of Cards” continues production here even if the state legislature does not cave in and hand over another $10 million or so.

On this level of precision the entire film tax break edifice rests.

Fortunately the Maryland Film Office’s Economic Impact Study [PDF] helps us see the real figures for one show. Here we see that Season 1 of  “Veep” worked in Maryland for 38 days, while in the state’s Economic Impact report [PDF] we find that the production “hired 187 local technicians and 791 local actors/extras” during that time. Now, even though it is obvious that most of those workers did not get paid for all 38 days, let’s assume they did. That’s 978 people with 38 days of work, which nets out to about 15 percent of a work year, or 147 full time jobs.

The tax credit cost Maryland $3,410,885–or $23,203 per job. That would be a great return on investment if the average job in the industry paid $144,000 (or $123,000). At $83,000, however, it’s a 28 percent subsidy.

At RESI’s wage of $56,487 the subsidy would be 41 percent.

And again, we are generously computing this as though every one of these workers did the whole 38 days. If the average person on this production did half (and again, 80 percent of these folks are local actors/extras, so assuming they were paid even 19 days is probably generous) then the per-job subsidy doubles to $46,400, which would be more than half the average salary earned in the business–and 82 percent of RESI’s imputed salary figure, which, indeed, accounts for many jobs created that are not in the film and video production industry, whose average is greatly enhanced by the figures of top earners, few of whom reside in Maryland. (“Veep” star Julia Louis-Dreyfus annual salary is unreported, though irrelevant to her financially. She is an heiress with a reported $3 billion net worth).

Maryland’s actual per-full-time job payments are not available. But David Cay Johnston, the former New York Times reporter who made taxation his beat, got better figures when he analyzed the Michigan film and video tax break in his 2012 book, The Fine Print. He found that state’s per-job subsidy was $189,000.

Thought of another way, it’s a year’s salary more than even the bogus $144,000 number. The RESI report speaks approvingly of Michigan’s “aggressive program.”

That none of this made the Sun or WaPo stories is not surprising. Who has time to read and sum numbers anymore while simultaneously tweeting the latest celebrity sighting? And so the completely made-up, bullshit propaganda of the film and video industry becomes the common sense of lawmakers.

“If I’m some filmmaker in Los Angeles and I’m looking at Maryland, I’m going to look elsewhere because these guys changed the rules in the middle of the game,” Sen. Kasemeyer, who authored the 2011 film company tax break bill, told the Sun. “They’re saying, ‘If we don’t get this money we may leave.’ That makes sense to me.”

So long as it makes sense to politicians to give away ordinary people’s money so that millionaires and corporations can pay less taxes, that is what will happen.

Would that it made sense–had “credibility”–to politicians to work with each other across state and national boundaries to set standard tax rules that don’t compel them into this race to the bottom. It’d make a good story line in “House of Cards,” even.

On second thought, nah. Not enough drama.

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  • Emily

    The Maryland Film Office explains the numbers.

    Step 1: Television or movie production companies express interest.
    The first question companies ask is not, “Tell us about this location or that location.” Nope, Gerbes says, the first question is usually: “What tax credits do you have?” Making a hit series or blockbuster movie is a business, and producers are easily enticed by the idea of saving millions of dollars.

    Step 2: The production company applies.
    Company executives say what they plan to do, how long they plan to work and how much they plan to spend, as the state will reimburse them for a chunk of production expenses incurred in Maryland. The Maryland Film Office reviews this application and will then reserve some tax credits for the company. Most years, the office has $7.5 million to divvy up, although last year it had $25 million thanks to legislators approving a bump.

    Step 3: Filming begins and ends.
    This is the fun part: Locals help build and decorate sets, Kevin Spacey spottings happen and the governor is invited to visit the set. During the filming of Season 2, the Maryland House of Delegates chamber was transformed into a faux U.S. Senate chamber, much to the delight and amusement of lawmakers. When the show finally airs, it’s required to include this closing credit:“Maryland Film Office, Maryland Department of Business & Economic Development.” Within 180 days of wrapping, the production company has to give the film office closing documentation — including numbers of Maryland residents who were hired to work, businesses impacted, payroll sheets and receipts — along with an auditors report.

    Step 4: State determines the final tax credit amount.
    Within a month or two, the film office finishes its review of that mountain of documentation and determines the exact amount for a refundable tax credit. The production company receives that money when it files its Maryland taxes, so often there is a lag of time between the show being filmed and the production company getting its refund. Typically, companies are reimbursed for about a quarter of qualified expenses — and the film office has a detailed list of what is qualified or not.
    “House of Cards,” Season 1: The production company received a final tax credit of more than $11.6 million, with that money coming from the state’s budget for fiscal years 2012, 2013 and 2014. Production expenditures topped $63.6 million, and the Department of Business and Economic Development estimates that the season had a $138 million economic impact. More than 1,800 Maryland businesses were involved and nearly 2,200 Marylanders were hired as cast, crew or extras.
    “House of Cards,” Season 2: The production company could receive a tax credit of up to $15 million, as it spend more than $55.5 million in Maryland and had an estimated economic impact of $120.5 million. Nearly 2,000 Maryland businesses benefitted and more than 3,700 Marylanders were hired. The money for that tax credit will come from the fiscal year 2014 budget, which has a burst of extra funding for film tax credits.
    “House of Cards,” Season 3: The show has filed a letter of intent to film in the state and plans to spend about the same amount in production costs and have about the same economic impact as it did in Season 2. About 2,150 Marylanders would be hired. Under the current formula, the show would qualify for up to $15 million in tax credits, but so far the state can only guarantee $4 million.

    Oh, and “Veep”: The HBO show “Veep” — also set in D.C. but much more light-hearted than “House of Cards” — has also filmed in Maryland. For its first season, it received a tax credit of $3.4 million and was estimated to have an economic impact of $30.6 million with nearly 1,000 Marylanders hired.
    For the second season, the tax credit could be up to $5.5 million with an impact of $44 million and more than 1,000 jobs. For its third season, it could receive up to $6.5 million with an impact of nearly $52 million and more than 2,000 jobs. “Veep” has sent a letter of intent and an application to film Season 4 in Maryland, for which it has been promised $7.4 million in tax credits, slightly less than what state economic development officials hoped to give.

  • Barnadine_the_Pirate

    There should be an interstate compact on this sort of race-to-the-bottom enabling of rent-seekers.

  • Baltimore Shitty Resident

    i think we’re getting played. Spacey sightings and the “delight” of Annapolis “lawmakers” does not entice me as a tax-paying resident of Baltimore City.

  • Sean Tully

    I look at this two ways. The first is “F.U. Kevin Spacey”. Hell, it’s not like anyone outside of Baltimore and maybe D.C. even knows that is mostly Baltimore on the show. The second way I see it is, hey, if we can give away the bank to get an N.F.L. team here, we can give tax credits to keep soundstage people employed too. I guess I don’t really give a shit one way or the other. Whatever is best for Maryland I am for.

  • Populist

    I have worked in the industry, just a bit. Present is a very high concentration of people who are penny-pinchers down to the artificial dirt purchased to dirty costumes. They are very good at spotting a nickel to be saved. The accounting types really belong in the insurance industry- they are best at keeping people at bay for payment until desperate, then the amount is seriously negotiated down to the bone and usually there is very little profit for the local vendors- just ask some of them and see how they came out in their sales/rentals to the companies. The hype surrounding a production is like a car accident- something shows up that is more exciting than the norm and everybody wants a piece of the action. Normal thought goes out the door, until the bills need to get paid. Then, you often encounter a production office which was closed three weeks previous and NEVER a forwarding address to contact them. It is a legal ponzi scheme built on hope for some fame/fortune rubbing off on you. It doesn’t.

    Seriously- this was well researched. Research it more and take some time and talk to the contractors who did the work and see how they made out. It will be even more enlightening.

  • edward_ericson_jr

    Call me at the office, Populist. 443-452-1555. I would very much like to do what you suggest.