New Film Office Report Misleads and Shows Undercounting

Bureaucrats cannot be expected to offer an objective analysis of the programs that they administer. The recently released annual report of the Michigan Film Office confirms this. It shows that the office had been undercounting film incentives in previous reports. And as the cheerleaders for the program it administers, it does not report on the negative consequences of its programs.

The Michigan film office administers a subsidy program that gives filmmakers up to 42 cents on the dollar for every expense made in Michigan, even for the time of out-of-state directors and actors. These incentives come directly from state taxpayers since the tax liabilities generated by the film productions never exceed the credit. It also offers infrastructure credits for companies interested in building film studios.

• Undercounting

An individual’s tax returns are confidential, so policymakers rely on the film office to report on the subsidy’s financial impact. The 2010 report indicates that the film office has been undercounting credits for the past few years. It shows that there were 62 percent more expenses in the incentive’s first two years than reported.

The original 2008 report showed that the state gave out $47.9 million in incentives. The 2009 report showed an additional $68.7 million. The latest report indicated $115.0 million for a total expense of $231.8 million.

But there is a difference between approving a credit an awarding it — approving is authorizing that a film will get credits and the awarding is actually sending those credits out. The new report shows that previous years reports only included the awarded credits for companies approved in that year. Since the entire process of being approved credits, filming, and being awarded credits can take over a year, the reports did not include credits approved but not yet awarded for their fiscal years.

The new report included three-year overview and showed that the office approved $361.1 million in tax credits since its inception. The office clarifies that it $57.4 million worth of credit certificates has yet to be awarded from the credits approved in 2010, but this still leaves $71.9 million not mentioned at all in previous reports.

• Infrastructure credits

This report also shows that the 2010 was the first year that film infrastructure incentives have been claimed. But it also deceives the reader in describing the program. It writes, “These credits are not refundable, and must be used against any Michigan Business Tax liability.”  While it’s true that the credits are not refundable, they can also be sold to the highest bidder. This offers a company a benefit outside their tax liability and opens the door for mischief.

Politicians and companies have already attempted to abuse this incentive. Hangar42 studios inflated the value of its property in order to be eligible for a larger tax incentive that the studios backers planned to sell. The scheme resulted in criminal charges against some involved businessmen and the resignation of a politician’s staffer who may have been involved in the deal.

To their credit, the office is getting better with transparency. The original report contained two pages of little detail. The 2009 report had a better spreadsheet but also contained anecdotal “success stories” about people that benefited from the program. A law increasing reporting requirements was signed last year and the new 2010 report eliminated those stories and included more detail about individual project expenditures. The new report also included some pieces of information that were not statutorily-required.

But by inflating figures, omitting key pieces of information and only looking at the positives, this report is not an objective analysis of the program. One of the principles of sound public policy is to consider long-run effects and all people, not simply short-run effects and a few people. The report is only evidence of the former and Governor Snyder may be considering the latter by asking to reign in the credit.