There’s a reality show in here somewhere. In case you have been in a coma for the past few weeks, Netflix’s (NASDAQ: NFLX) breakout hit "House of Cards," is involved in a real-life game of “chicken” with the state of Maryland.
House of Cards is about the unscrupulous and power-hungry Francis Underwood and his equally cutthoroat wife, Claire. In just two seasons, Francis has maneuvered himself from controlling the House of Representatives as Congressional “whip” to president of the United States. Murder, back-stabbing, lying, sexual intrigue and blackmail are among the means that justify his end.
It's dramatic. But there's some off-screen drama happening off camera.
The series is produced by Media Rights Capital (MRC) and stars Kevin Spacey, who also happens to own a piece of the action as a co-producer. After two seasons of filming in Baltimore, MRC wrote Maryland officials saying that unless the state granted the production company a larger share of tax credits, it would pull up stakes and head elsewhere.
Recently, Maryland’s House of Delegates responded by threatening to seize MRC’s production studios under its “eminent domain” powers if it attempted to re-locate.
But if House of Cards moves its production facilities to, say, Virginia, should Maryland residents care?
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States dole out hundreds of millions of dollars each year to lure Hollywood production companies to set up shop. They largely justify spending public money on this for two reasons: it creates good jobs for state residents and it drives tourism.
Politicians argue that the tax incentives will pay for themselves and yield a return to the state. In other words, they’re supposedly economically beneficial for state residents.
“We don’t have evidence for that,” says Lyman Stone, economist with the Tax Foundation’s Center for State Tax Policy. In fact, he says, the tax credits that states give to production companies end up generating a net loss.
A Boon[doggle] for State Job Creation
Film production only creates temporary jobs. And while some locals might get hired as “extras” or for catering services, this kind of work doesn't tend to be be high-paying. Plus, as Maryland residents, the 2,000 individuals who have received some income from the production were already paying property tax, rent, buying groceries and clothing. So there’s no real increase in revenue in these areas.
Moreover, if these individuals did not have those jobs, it’s likely a good number of them would have found work elsewhere. The upshot is the state is not seeing much--if any--increase in income tax.
What about the money spent by out-of-state Hollywood types-cast and crewmembers-who are paying for such things as temporary housing, restaurants, dry cleaning, etc...? “This could be a gain for Maryland,” says Stone. “But not the ‘extra’ jobs.”
The Tax Foundation’s research suggests that when the potential additional income tax collected from Maryland residents and the extra money spent by cast members and MRC’s staff is taken into consideration, the total will not come close to covering the $15 million in tax breaks the state has given the production company so far.
In addition, Stone points out that when a state provides certain businesses with tax incentives, “it makes it easier for them to hire employees because all of their costs are lower. Whatever their corporate tax liability would be, they’re not paying it. If the state of Maryland thinks reducing taxes will drive economic growth, then cut taxes for everyone, not just for one company.”
Moreover, narrowly-focused tax breaks give certain companies an unfair advantage over other firms in the state. Because of its tax break, the production company can afford to pay slightly higher- albeit it temporary- wages. As a result, this drives up labor costs for non-subsidized businesses.
The bottom line is that film incentives are paid out of taxes collected from all state residents, but they benefit only a tiny number of the individuals for a short period of time. "The state gave away $10-15 million in revenue. They could have used this instead to cut taxes across-the-board for all state residents,” says Stone.
Viewers Will Flock to Our State!
The idea that tourists will flock to where the show is shot only works if people know where filming takes place. With all the special effects used in film production these days, it’s hard to tell whether the scenery is real or digitized. Turns out, Baltimore can look a lot like our nation's capital.
Take “The Dark Knight Rises,” for instance. When you left the theater did you declare, “I can’t wait to visit Pittsburgh!”?
The idea that granting millions-in some cases hundreds of millions-of dollars a year in state tax credits to Hollywood producers boosts tourism is simply “ridiculous,” according to Stone. “The reason politicians grant tax breaks to filmmakers is because it’s publically popular. Legislators like saying ‘This was made in our state. Hey, isn’t that cool?’” (1)
Not in this case. Because House of Cards is shot to make it appear to take place in the nation’s capital, if there is any “tourism” urge generated among viewers, it’s to visit Washington, D.C. Ironically, the state of Maryland is paying for the publicity!
The only time it’s been clear that a scene is taking place in Maryland is the reference to “Joppa,” which is a take on the real town of Joppatowne. Unfortunately, the reference is not very flattering. “Joppa” is portrayed as kind of a backwards, hicks-ville place. Not exactly a location that would make you pack up the kids for a summer vacation or rank high on your bucket list.
Give Me More Or I’m Moving My Sandbox!
What about Media Rights Capital’s threat to move to a state offering bigger tax incentives? Will Maryland follow through on its counter-threat to seize the production company’s assets if it tries to pull out?
This isn’t without precedence.
Football fans will recall that the state threatened to do the same thing back in 1984 when the then-Baltimore Colts threatened to leave town unless the state coughed up more dough. Rather than waiting until the sheriff arrived, the team packed up all of its equipment and drove out of town in the middle of the night, leaving behind an empty stadium.
This time, authorities are not likely to wait until the last minute. The last thing they want is for “President” Underwood to pull the same trick.
In the view of Mark Graber, an attorney who teaches law and government at the University of Maryland’s Francis King Carey School of Law, “Most of what we have here is maneuvering. People are making statements designed to encourage negotiations. It’s hard to take this seriously.”
When asked how state officials might justify seizing production studios in the interest of “eminent domain” Graber’s says he "has no idea!”
In the unlikely event Maryland does end up seizing MRC’s the production studios, the production would likely file a lawsuit. In that case, Graber says the court will look at three factors to determine if the seizure is lawful:
1) Was there, in fact, a seizure of property?
2) Was adequate compensation paid to the owner(s)?
3) Was the seizure necessary for a more important public use of the property?
Apparently questions No.1 and No.3 are not something members of Maryland’s House of Delegates need to worry about. Maryland’s eminent domain law is more lenient than that of other states.
According to Graber, historically, if the state seizes private property, the court presumes that the government officials who made the decision genuinely believe it can be put to a better use for the public good.
The tough hurdle for Maryland leaders will be to prove that they paid “just compensation” for the property. That’s when the court would get involved. “It prevents the state from doing anything really silly,” says, Graber.
It’s A Card Game. Why Not Fold ‘em?
The question Maryland residents--and others living in states that give tax dollars to out-of-state filmmakers--should be asking their representatives is, “Why?” Other than bragging rights, there is nothing to lose and possibly other things to gain if a state stops giving tax incentives to Hollywood. According to The Tax Foundation, Maryland is actually losing money on its arrangement with House of Cards.
“I don’t think if there were no tax incentives for movies that they would stop making them,” says Stone. The problem with film incentives is that they are hard to get rid of. “They build political constituencies and it’s hard to stop them [even though] there’s no evidence that [residents] are getting any value for their state.”
“A California production company rolls into town, gets a big tax deal, stays a couple of months and leaves. And what do you have to show for it in the end? Not much.”
1. According to the Tax Foundation, New York State’s annual budget for tax credits to filmmakers is $400,000,000.
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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