As you settle down around the television this holiday season, you might see a few familiar locations on your screen. Six different holiday movies were shot in Connecticut in 2021, including The Noel Diary, a Netflix Christmas film that premiered this past Thanksgiving.
Those six Christmas movies were only a small part of the 20 feature film projects made here in the Nutmeg state last year. Some of those projects pulled in award-winning star-power, like The Good Nurse — starring Oscar winners Jessica Chastain and Eddie Redmayne – Sigourney Weaver’s Call Jane, and Mr. Harrigan’s Phone, the latest Stephen King adaptation starring Donald Sutherland and Jaeden Martell.
These productions came to Connecticut in part because of the state’s highly competitive tax credit program which helps producers offset the cost of making a movie, TV show, and other digital media projects. The tax credits offer millions in savings for production companies every year, however, they are not without controversy.
Supporters of the program say that the film and television industry provides much-needed local spending and perhaps even more badly needed jobs to workers in the state.
Opponents, and even the state’s own number crunchers, have long questioned whether the boost to the local economy is worth the burden the program places on taxpayers, which can amount to well over $100 million per year, and is often claimed, not by film companies who sell the tax credits, but by Connecticut’s insurance industry.
How do CT’s subsidies work?
Connecticut’s film tax incentive program was established in 2006 and has undergone several changes in the 16 years since. Connecticut is one of 31 states with active incentive programs and is among the top five state programs in terms of overall in-state expenditure.
All 31 states with active programs utilize one of three models. These include cash rebates, tax credits, and a mix of both. Connecticut’s program is tax credit based, providing a sliding scale of monetary credits based on the amount of money a production spends in the state.
To qualify for the state tax credit, a production must shoot at least 50% of their project inside the state, spend at least 50% of their post-production costs in the state, or spend at least $1 million on post-production costs in the state.
Connecticut splits its tax incentive program into three categories with different benefit amounts depending on the type of production or production expenditure taking place. These include the Digital Media and Motion Picture Tax Credit, the Digital Animation and Production Company Tax Credit, and the Film Infrastructure Tax Credit.
The Digital Media and Motion Picture Tax Credit (or Production Credit) accounts for much of both production expenditure inside the state of Connecticut and the largest amount spent by the state in qualifying tax credits to those companies. In Fiscal Year 2021, the Production Credit accounted for all of the claimed credits by the entire film and television industry in the state. In previous years, the amount of incentives awarded for this category has ranged from a high of $154 million in FY 2019, to a low of $33.9 million in FY 2013.
These credits can be claimed for television shows, documentaries, feature films, music videos, commercials, interactive websites, video games, and others. During the 2017 Fiscal Year, the state removed theatrical films – feature productions that are released in theaters rather than streaming or television – from eligibility.
Productions must spend a minimum of $100,000 in the state to qualify for the lowest tax incentive. Productions spending between $100,000 and $500,000 can claim up to 10% of their eligible expenditures as tax credits. Productions spending more than $500,000 but less than $1 million can claim up to 15% of qualifying expenses. Spending over $1 million in the state nets a 30% credit, heavily incentivizing larger productions.
There is no cap on the amount of money that can be claimed so long as the expenses qualify.
The Digital Animation Production Company Tax Credit (Animation Credit) functions in much the same way as the standard Production Credit, except that it is specific to animation projects and includes a cap of $15 million per year.
The Animation Credit allows for the same percentage in tax credits based on expenditures as the Production Credit – 10% for $100,000-$500,00; 15% for $500,000-$1 million; 30% for more than $1 million – but it includes other qualifying criteria. Companies must utilize studio space within the state and must have at least 200 full-time employees working in Connecticut.
What makes Connecticut’s program unique compared to other states is the Film Infrastructure Tax Credit (Infrastructure Credit). The stated goal of the program is to incentivize companies to invest in Connecticut’s film and television industry long-term by building studios, offices, and other infrastructure.
The program provides a 20% tax credit for “capital expenditures” of at least $3 million and there are several options for qualifying expenditures. These include larger projects like buildings and other facilities, as well as building leases, equipment purchases, and consulting fees.
Effect on Connecticut Film
There is evidence that Connecticut’s film industry owes its continued existence to these tax credits. Though producers and directors have been quoted in media reports saying that Connecticut provided the New England charm they wanted for their project, the real draw seems to be the bottom line.
In a report examining the economic impact of the state’s tax credit program published by Olsberg SPI (SPI), a London-based creative arts consulting firm, in February of this year, a survey of producers found that most production would not have occurred in the state without those tax credits. A conservative estimate based on a small sample size concluded that about 27% of the production over an eight-year period would still have happened even if the credits did not exist.
The SPI study was commissioned by the state, but at least one film tax credit researcher questioned whether SPI was too closely tied to the motion-picture industry in comments made to CT Mirror. Olsberg-SPI’s executive chairman, Jonathan Olsberg, was formerly a film producer and executive producer, and is a member of the British Academy of Film and Television Arts.
“I’m very well aware from my own experience and from the experience of folks that I’m currently working with, that if you cannot point to some type of a tax incentive as part of your film’s budget makeup, it’s very, very difficult for it to become greenlit by a major studio,” says Connecticut Office of Film, TV, and Digital Media Director George Norfleet.
This isn’t entirely surprising. Film tax credits, historically, have existed for the purpose of enticing producers away from Hollywood and into other states. In several cases, including here in Connecticut, this has worked but the programs are not without their detractors.
Georgia’s program has had arguably the greatest success and, as a result, has come under the greatest fire. With no cap on how much money a production can claim in credits, the industry has boomed. Currently, Atlanta and the surrounding areas are home to some of the biggest film and television projects in the country, including much of the Marvel Cinematic Universe. In 2020, the state issued $1.2 billion in tax credits to various productions.
As a result of those credits, critics have called on the state’s legislature to alter the rules of the program, asking the state to consider capping the amount offered or to at least stop subsidizing certain types of expenses, like portions of actor salaries.
Connecticut’s program, while larger than the one in neighboring Massachusetts, has avoided ballooning to the size of Georgia’s despite also having no cap on qualifying expenditures and allowing credits for above-the-line expenses like salaries.
Breaking It Down
According to the SPI report, as well as a review of annual reports from the Department of Economic and Community Development, spending in the state’s film industry has increased on average over the last decade. As a result, the amount provided in tax credits has also increased proportionally to that spending.
In Fiscal Year 2021, companies spent a reported $400,545,435 on expenses that qualified for the Production Credit. As a result, the state paid out $119,894,531 in 30 separate tax credits. Since the amount paid was around 30%, it stands to reason that most or all of the qualifying productions in the state spent at least $1 million and claimed the full credit.
The $400 million spent last year comes in just below the amount spent during the previous three years, following a program high of $514 million in expenditures in FY2019. A survey of spending over the long term shows that while the total amount spent each year is highly irregular, it has increased on average since 2012.
While the Production Credit has seen a steady increase in use over the last 10 years, the same cannot be said of either the Animation or Infrastructure Credits.
The Infrastructure Credit, in particular, has gone unused in three separate years since 2009, including FY 2021. In that time, qualifying infrastructure expenditures have been below $50 million in six other years and under $20 million in four of those. FY2014 saw the greatest expenditure, totaling more than $220 million and amounting in $46 million in tax credits.
“I think that the infrastructure is really when you’re talking about building a studio or building a company, and those types of expenditures are pretty significant,” says Norfleet. “So they don’t happen as readily and as frequently as sort of someone that is doing a television show or a film or something along those lines.”
Norfleet argues that, even if it isn’t used as often or as robustly as the Production Credit, the Infrastructure Credit plays an important role in the overall makeup of the state’s film industry.
“We think that the infrastructure tax credit is an important part of our suite of incentives because it is what does encourage people like NBC Sports to come here,” he says. “It is what encourages people like ITV America to come here and build and situate themselves and put hundreds of people to work in our state.”
Norfleet admits that not all the jobs created by the state’s film industry are actually held by Connecticut residents, but argues there is a benefit to the mostly union positions held by residents of the Connecticut, New York, and New Jersey tri-state area.
“A lot of folks that are working in the industry work for some brick-and-mortar companies, which is unique to Connecticut,” he says. “We have NBC Sports here. We have ESPN here. We have ITV America here. These are all companies where people are coming to work specifically in Connecticut.”
On the animation side, recent paradigm shifts in the industry at large have meant a hit to the state’s standing. In 2009, Blue Sky Studios, a major animation company behind films like Ice Age, Rio, and Spies in Disguise, moved its headquarters to Bridgeport. The company was the animation hub of 20th Century Fox films.
In 2019, the Walt Disney Company purchased 20th Century Fox, including its Blue Sky animation studios. Disney then announced major structural changes, absorbing the companies production houses, canceling projects, and closing down portions of the long-standing film studio. That included closing down Blue Sky Studios.
Here in Connecticut, that meant some job losses, though reports say that 70% of the 500-person workforce were from out of state, as well as losses in production spending. According to the SPI report, Blue Sky accounted for the total amount of expenditures that qualified under the Animation Credit on a total of 10 projects since 2012.
Since FY2018, no expenditures have been claimed under the Animation Credit. After years of qualifying for and receiving the maximum credit of $15 million through the Animation Credit program, Blue Sky shifted its strategy to claiming credits under the more flexible Production Credit. A report from the state auditor’s office argued that the company had wrongly received more than $60 million in tax credits by utilizing the Production Credit rather than the Animation Credit when the legislature had not intended for companies to qualify for both.
DECD argued in turn that the company was able to apply for the Production Credit because it also did work on live-action features like Tron. Further, the agency argued that without tax incentives Blue Sky would never have moved back to Bridgeport in the first place.
Who Really Benefits?
Connecticut’s tax credits provide an incentive for companies to bring their productions to the state, and, as discussed above, amount to millions in spending that wouldn’t otherwise happen without them. Yet there is still a question as to whether they are entirely beneficial to the state and to taxpayers.
Because of the size of the state’s tax credits, those credits regularly amount to more than a production’s real tax liability. Connecticut’s program allows the excess credits to be transferred and sold to other companies that pay taxes in the state, usually at a discount. Those companies can then use the purchased credits to offset their own tax liability. By that metric, taxpayer funds are being used not just to subsidize the film and television industry but other industries as well.
In a 2021 report for Yankee Institute for Public Policy, of which CII is an independently managed program, CII reporter Marc Fitch discovered that the insurance industry benefits greatly from the state’s film tax incentive programs. In a ten-year period, insurance companies claimed more than $581 million in tax credits from the program which had been purchased from qualifying productions.
According to DECD’s own reporting, the film tax credit program amounts to a net loss of nearly $60 million in total state tax revenue each year. Speaking to members of the state legislature earlier this year, DECD Commissioner David Lehman argued that lawmakers might want to trim back the program to reduce the burden on taxpayers.
“When you think about the cost of taxpayers versus the benefit of taxpayers, I think there is an open question,” he said during his address. “Does the cost exceed the benefit here? I think that’s something that General Assembly should explore.”
Lehman suggested capping the amount of eligible expenditures for the Production Credit or lowering the percentage of expenditures eligible for tax credits as ways of reining in the program. But lowering those incentives would make Connecticut less competitive in the market and could lead to fewer projects, less local spending, and a loss in job opportunities.
In a September 2019 study from the University of Southern California, researcher Michael Thom found that state tax credit programs don’t provide meaningful revenue or job growth. Since its publication, the study has been heavily criticized by film industry professionals, including the Motion Picture Association (MPA), who called it “fundamentally flawed” and “biased.”
Despite the arguments against it, state lawmakers expanded the program in 2021 and introduced a bill in early 2022 that would further expand it, allowing for a larger percentage of the awarded tax credits to be used against the state’s sales tax in certain circumstances.
During a public hearing on the 2022 bill, Angela Miele, Vice President, State Government Affairs and Tax Policy for the Motion Picture Association, supported the measure, citing Olsberg-SPI’s study. “Today, cost and certainty are the most important factors in the production location decision making process, therefore, studios look at states with competitive credits, which includes opportunities to efficiently monetize those credits,” Miele said in written testimony.
The bill was also supported by Chair 10 Productions, LLC, a film production company based in Connecticut, and NBC Universal, whose tax counsel, Brian O’Leary, argued that the change would result in fewer tax credits sold to insurance companies and more savings for the state.
That sentiment was not shared, however, by other organizations who feel the tax dollars could be put to better use, among them Connecticut Voices for Children, a progressive tax policy nonprofit, and the Connecticut Legal Rights Project, which advocates for those facing mental illness.
Both organizations felt the money could be better spent meeting the needs of people in the community. “CT Voices believe that a better use of this money is to invest it in Connecticut’s working- and middle-class families by increasing the CT EITC and establishing the CT CTC,” wrote Patrick O’Brien, CT Voices’ research and policy fellow.
O’Brien also said they had “serious questions” the discrepancy in findings between the DECD’s own studies and the “consultant-written” Olsberg SPI study.
CT Voices published a proposal in December 2022, criticizing several high-expense tax programs in the state, including the film tax incentives. The 66-page report outline what the organization believes are large programs that can be trimmed to improve “Connecticut’s fiscal year 2024 and fiscal year 2025 biennial budget so that it provides more support for low- and middle-income families.”
The report once again calls into question the efficacy of the SPI study, pointing out that it avoids the question of the actual cost to the state while focusing on the more vague issue of “gross value added.” It then goes on to suggest capping the program “at some amount below $82 million a year (the estimated current annual cost), and/or cap the total film production infrastructure credit at some amount below $11 million a year (the estimated current annual cost).”
Although the bill was passed out of the Finance, Revenue and Bonding Committee, it was ultimately not taken up by the General Assembly, which has been tinkering with the film tax credit program off and on since its inception.
“Film, television, and digital media production puts people to work, and those dollars turn over in the economy,” says Norfleet, when asked why Connecticut should want to compete in this market. “For instance, when people rent equipment, if they rent vehicles, if they are renting locations to film at, purchasing gasoline, insurance, you name it, it is a business that is like many others, and there’s advantageous monies being spent when productions are being executed in a city or in a state.”
Ultimately, it is Connecticut’s taxpayers who must decide whether increased local spending in production hubs like Bridgeport and Stamford is enough to offset state spending on these tax incentives.
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