Watch clips from some of the movies and shows Kentucky taxpayers helped fund
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Kentucky’s tax problem
Kentucky’s legislature needs billions of dollars to pay down the state’s unfunded pension liabilities. As it happens, Kentucky essentially gives away billions of dollars every year through what are called “tax expenditures.” Will Kentucky lawmakers close some of these loopholes?
Editor’s note: This is the first in a series of stories about tax breaks and incentive programs that cost Kentucky billions of dollars each year, leaving lawmakers little money to fix Kentucky’s ailing pension systems.
Parents slaughter their helpless children during 24 hours of insane violence. An Army nurse falls in love in Amish country and solves a murder mystery. A mighty Thoroughbred claims the first Triple Crown in a quarter-century. The Turtleman pokes a hole in a ceiling, and out pours a torrent of rats.
These stories have one thing in common: Kentucky taxpayers opened their wallets to bring them to the screen through a financial gift called “film incentives.”
From 2009 through this summer, the Kentucky Tourism Development Finance Authority agreed to give away about $90 million in state money to subsidize more than 150 film productions, according to a Herald-Leader review of state records. Most were low-budget projects, often bound for a minor cable channel or a film festival where producers hoped to find a willing distributor.
Kentucky reimburses production companies for as much as 35 percent of the cost of making movies, television shows, documentaries and commercials inside the state. This isn’t to say that everyone on the finance authority enjoys reading the scripts submitted with the applications.
“[Name of movie redacted] may have been the hardest script I ever had to read. Wow. I feel like I need to take a shower now. YUK!” finance authority member Kim Huston of Nelson County wrote in an Aug. 9 email to Jay Hall, executive director of the Kentucky Office of Film and Tourism Development. The Herald-Leader obtained the email through the state’s open records law.
Most of the $90 million was greenlit at a swiftly accelerating pace over the past two years. In an average month in 2015, the finance authority approved just $354,561 in film incentives. That jumped to $3.8 million a month in 2016 and $5.4 million a month in the first half of this year. And state officials predict bigger numbers to come.
The rapid growth of Kentucky’s film incentives surprises even some of its original supporters.
“We were told it would be $3 to $5 million a year, not $50 million a year. That is far and above what we anticipated,” said state Rep. Rick Rand, D-Bedford. Rand sponsored a 2015 bill that expanded the film incentives program, making it easier for production companies to qualify and collect larger sums than they previously could.
Film incentives are meant “to help create jobs, generate tax revenue and promote tourism,” then-Gov. Steve Beshear, a Democrat, said in May 2015 as he signed the bill expanding the program. “Increased film production in Kentucky means a boost to local economies and an opportunity to highlight the Bluegrass State on both big and small screens across the world.”
Are film incentives working as intended? Nobody knows.
“Right now I can’t give you an economic impact study. We just don’t have that,” said Don Parkinson, secretary of the Tourism, Arts and Heritage Cabinet, speaking briefly to the Herald-Leader after a public event last month at Asbury University in Wilmore. Parkinson’s cabinet oversees the film incentives.
According to the state’s film office, production companies have reported spending $62 million on film projects in Kentucky since 2009, which, in turn, supported 744 Kentucky jobs on those projects. But there isn’t enough data yet to conduct an in-depth examination of the incentives program, state film officials have told lawmakers. Without such a study, it’s hard to know whether taxpayers are getting a fair return on their forfeited dollars.
Also, no outside authority, such as the state auditor or the legislature’s Program Review and Investigations Committee, has ever examined the film incentives program to see how effectively it’s being operated.
In emails obtained by the Herald-Leader, the Office of Film and Tourism Development acknowledged in March that “we cannot quantify” how many Kentuckians are qualified to work on movie or television sets when visiting producers send out the call for temporary labor. Kentucky does “not have a substantial pool of union members in the film industry,” the film office said.
Most projects subsidized by Kentucky are not box office blockbusters.
“Call of the Wildman,” for example, an Animal Planet reality series in which Ernie “Turtleman” Brown Jr. wrestled with ornery critters, was awarded $104,312 in incentives, according to the film office. (The show later suffered bad publicity after it was cited for repeated violations of the federal Animal Welfare Act.) “Secrets in Suburbia,” a Lifetime channel movie about a housewife whose husband and best friends plotted to murder her and steal her family fortune, was awarded $145,486. The state also pays for commercials for Kentucky companies including Valvoline, Heaven Hill Distillery and Appalachian Wireless.
The state’s attempts to land a professional film studio, which would bring permanent jobs with benefits, so far have fallen flat. Most recently it tried to recruit Pinewood Group, a British studio company with offices around the world, including 18 sound stages on 700 acres outside Atlanta.
More than a dozen states have moved away from subsidizing movies and television shows as experts concluded that film incentives chiefly benefit the nomadic film industry, with production crews parachuting into communities to offer a handful of short-term and relatively low-wage jobs.
“The best evidence shows that film incentives cost the treasury more than they recoup from taxes on induced economic activity,” the Tax Foundation, a conservative Washington think tank, said in a 2013 report.
“Arizona’s Department of Commerce calculated 28 cents on the dollar,” the Tax Foundation wrote. “Connecticut’s Department of Economic Development found a 7 cent return on every dollar spent. Two studies in Louisiana found between 13 cents and 18 cents on the dollar. Massachusetts’ Department of Revenue found it got 16 cents on the dollar. Michigan’s Senate Fiscal Agency found 11 cents on the dollar. New Mexico’s Legislative Finance Office found 14 cents on the dollar. Pennsylvania’s Legislative Budget and Finance Committee found 24 cents on the dollar.”
Only anecdotal evidence
There is at least anecdotal reason to be optimistic about film incentives, said Parkinson, Kentucky’s tourism secretary.
“Over time, I think we’re going to have a good industry,” Parkinson said, speaking at the recent Wilmore event. “There’s a big economic impact when you go into a town and you see a movie being made. You get everyone involved there, from hotels to restaurants to hairdressers to costume people.”
“I was on the set of one movie just six weeks ago down in Horse Cave,” he said, “You’d be surprised just how many people do get drawn into this thing. There’s a guy who is gonna have to, you know, pick up the talent, take them from the set to the restaurant. That’s his one little job. That one set outside Horse Cave had 30 people. Twenty of them were Western Kentucky students. So it gave them a great experience.”
Other than that one impromptu interview, officials in Republican Gov. Matt Bevin’s administration refused multiple requests this summer to be interviewed about the film incentives program they inherited from Beshear and have overseen for the past two years. That includes Parkinson; Jay Hall, executive director of the film office; and Keith Williams, chairman of the finance authority that approves the incentives.
When Hall was asked at the Wilmore event last month why the state’s film office won’t discuss the state’s film incentives, he simply shrugged.
“That’s our response,” Hall said, and then he walked away.
Rand, past chairman of the House budget committee, said the Bevin administration must be more transparent with so much public money at stake.
“I don’t think anyone has ever looked at these incentives to see what we’re getting from them in terms of economic activity, which is a shame, because we need to be,” Rand said. “Unfortunately, that’s often what happens with these tax incentives. We never do enough to determine if we’re getting as much from them as we’re giving away.”
A national expert also said Kentucky should be more skeptical.
Michael Thom, an assistant professor who studies public finance at the University of Southern California, has published two papers critical of film incentives. Thom concluded that the incentives usually have little effect on wage and job growth in states that offer them. That’s why — after years of wooing Hollywood — some states have started eliminating the tax giveaways, he said.
“The Kentucky Film Office and the film tax incentives should not receive another dime until taxpayers are assured — by an independent auditor, not the film office, a supportive politician or the motion picture industry — that funds are spent legally and have yielded a positive return on investment,” Thom said. “That ought to be the case for all incentives, not just those for the motion picture industry.”
Only $12 million in incentives had been claimed as of June 30. State officials estimate that half of the productions that win approval will never be made, often because producers can’t raise the necessary capital. And there is a time lag in moviemaking: Production companies are given four and a half years under the law to complete their projects, submit the necessary receipts and collect their money.
So incentives approved this year are good until 2021. For budgeting purposes, state officials have to assume that every producer will return to claim the promised sum until the deadline expires.
The “fiscal note” provided to Kentucky lawmakers in 2015 as they expanded the film incentives program warned that costs could spiral out of control if the state promised too much money to too many people. Just one big-budget movie could cost taxpayers $30 million, wrote the legislative staff economists who prepared the fiscal analysis.
“The larger — and perhaps more significant — negative fiscal impact is likely to come from Kentucky becoming more competitive in vying for film projects as a result of increased incentives,” the economists cautioned.
“Unlike the majority of other states, which have placed an annual cap on the amount of credits awarded, Kentucky does not have a cap,” they wrote. “Nor does House Bill 340 establish a cap. To the extent Kentucky is successful in attracting new film production to the state, an uncapped program could have a significant and serious detrimental fiscal impact.”
Bringing buzz to town
Hundreds of people, most young and smartly dressed, poured into Lexington’s Kentucky Theatre on a recent evening for a screening of “Neat: The Story of Bourbon.” This new documentary celebrating the bourbon industry was one of the first projects approved by state officials in 2015 after Kentucky expanded its film incentives program.
“Neat” was authorized to claim as much as $52,500 — not much compared to a Hollywood blockbuster. But knowing that those incentives were coming made it feasible to hire more Kentuckians on the crew and book hotel rooms for them around the Bluegrass region, rather than make them sleep on friends’ floors and couches, said the producer, A.J. Hochhalter. The local economy benefited from this additional spending, he said.
“The making of this film definitely would have happened either way,” said Hochhalter, an experienced film composer who lives in Lexington. “It just would have been a different project without the incentives.”
Within Kentucky’s nascent film industry, where there is strong support for the incentives, people urge patience.
“We’re not getting Tom Cruise, but we are getting a lot in the under-$10 million market, the low-budget and independent films,” said Louisville producer Gill Holland, whose 2014 film, “Where Hope Grows,” collected $163,726 in incentives. “We’ve had quite a few Hallmark Channel movies, Lifetime movies, faith-based films. Those are the types of projects you can shoot here, because they’re about everyday people in everyday places.”
Movie producers generate buzz when they come to town, especially small towns. Ann Stewart of the Barren County Chamber of Commerce said she has witnessed five movie and television productions in her area since 2016, starting with “An Uncommon Grace,” an Amish romance that was produced for the Hallmark Channel. It later was awarded $363,251 in incentives, according to the film office.
Stewart credits the state’s film incentives with the excitement her rural southern Kentucky community is now enjoying.
“When they’re shooting here, they rent rooms in our hotels,” Stewart said. “They have caterers on call to provide them with meals — and I mean super-big meals every day. They rent local locations to film in. I can’t give you a total number for the economic impact, but I can tell you they spend a lot. They don’t bring hardly anything with them, so whatever they need while they’re here, they have to buy it or rent it from one of us.”
One of the largest incentive approvals so far, for nearly $3.85 million, went last year to Thomas “T.H.” Johnson, a business consultant in suburban Dallas.
Johnson wrote a script 20 years ago for a movie about the Minneapolis music scene that spawned singer and songwriter Prince. It’s a subject that long has fascinated him. But Johnson stuck his script in a safe deposit box until Prince died last year. Then he dusted it off and began the slow, laborious process of raising the necessary cash to produce a movie.
“I cast about to see what states would offer us incentives, and Kentucky reached out to us. They were very helpful,” Johnson said.
If Johnson can find his money — there is still three-quarters left to secure, he said — he intends to start filming as soon as possible, using urban neighborhoods in either Louisville or Northern Kentucky as a stand-in for the Minneapolis of yesteryear.
Much of the money that he is raising for his movie, currently dubbed “The Music Maker,” would end up being spent during production in whichever city he chooses, he said. Locations must be rented, carpenters and painters must be hired to build sets, extras must be recruited to flesh out the cast.
Kentucky is smart to recruit such movies, even if it costs the state a few million dollars, Johnson said.
“You’ve gotta look at this business like any other business,” Johnson said. “Other states figured out that it’s good business if you can cut into Hollywood. Georgia and New Mexico, they figured that out. They were offering film incentives, people started filming a lot of stuff there. Now Kentucky is doing it, too. If you can get an industry into your state, then why wouldn’t you want to? It puts a lot of people to work, I’ll tell you that.”
Kentucky is the exception
Unlike Kentucky, some other states have examined the economic impact of their film incentives and found it to be unimpressive.
Michigan ended its ambitious program in 2015 under the orders of Republican Gov. Rick Snyder after having to pay for the expensive mega-hits “Batman v. Superman: Dawn of Justice” and the “Transformers” franchise. Louisiana, which gave more than $1.5 billion in film incentives from 1998 to 2015, opted this year to cap them on a yearly basis and earmark some for producers who establish permanent locations and jobs in the state. Studies showed that Louisiana taxpayers were getting a disappointing return by simply subsidizing out-of-state film crews.
Iowa shuttered its film incentives in 2009 once the state’s auditor learned that sloppy oversight allowed $26 million to be wrongly awarded, leading to felony prosecutions.
Of the 45 states that collectively spent billions on film incentives just a few years ago, fewer than 30 states say they continue to finance them, said Thom, the USC assistant professor who studies incentives. Kentucky is unusual because it’s doubling down, Thom said.
“Kentucky is an outlier. It’s the outlier,” Thom said.
“The incentives are a bad investment,” he said. “States were pouring millions of dollars into programs that offered little return. We looked at job growth, wage growth, states’ share of the motion picture industry and the industry’s output in each state. On average, the only benefits were short-term wage gains, mostly to people who already work in the industry. Job growth was almost non-existent. Market share and industry output didn’t budge.”
Such criticism is reflected across the political spectrum. The liberal Kentucky Center for Economic Policy and the conservative Americans for Prosperity both say they oppose film incentives.
“Money spent on handouts, for projects that benefit a select few, should not take funding priority over paying for the core functions of government, like paying down Kentucky’s pension liabilities, road funding or schools,” said Julia Crigler, Kentucky state director of Americans for Prosperity.
Kentucky filmmakers, on the other hand, point south to Georgia as a state they say is reaping rewards from incentives.
Georgia offers production companies 30 percent of expenses, including the hefty salaries of superstar actors and directors. It has no cap on tax credits, and companies can sell their unused credits to other companies that have a greater tax liability. In 2016, Georgia taxpayers approved $606 million in tax credits to filmmakers, up from $504 million in 2015.
In return for this largesse, the Peach State gets several hundred movies and TV shows annually, which comes with $2 billion in direct spending, 25,700 film-related jobs and $6 billion in total economic impact, according to the Georgia Department of Economic Development. (The Atlanta Journal-Constitution has taken issue with how the state calculates the film industry’s economic impact, rating it “half true.” Georgia “can’t explain why it uses a multiplier that is almost double the standard economic model for that calculation,” the paper wrote in 2015.)
Film industry boosters say Georgia won the incentives contest by steadily pursuing its goal while competitor states threw in the towel. By last year, Georgia was a bigger movie-maker than California, the United Kingdom and Canada.
“In the states where this has worked, it’s because those states stuck with it. Other states have pulled back, and that was their decision,” said film producer Stu Pollard, who splits his time between his native Louisville and Santa Monica, Calif.
“Now, in Kentucky, we have taken the plunge to give this a shot,” Pollard said. “It would be disappointing if we didn’t see it through. It’s only been two years since we’ve really had the program going. Two years is not enough time. It takes three years to make a movie.”
In response, some Kentucky lawmakers say the Bluegrass state cannot compete for films with Georgia, which has metropolitan Atlanta, home to 5.8 million people; the nation’s busiest airport; and a $22 billion state budget, twice the size of Kentucky’s.
State Rep. Arnold Simpson, a member of the House budget committee who questioned the film incentives expansion two years ago, said the Kentucky legislature faces painful spending decisions in coming months. No tax giveaway should get a free pass anymore, Simpson said.
“We need hard evidence that we’re getting an economic benefit from these film incentives that is equal to or better than the amount of money that we’re giving away,” said Simpson, D-Covington, an attorney by trade.
“If we’ve approved $90 million in film incentives,” he said, “then I want to see exactly where we’re getting $90 million or more back for our local economies. We’ve got serious problems. We need to find money for pensions. We need to find money for Medicaid. We can’t just be handing it away unless someone can show us a reason why.”