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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?
Kentucky committed itself in January to pay film companies $421 million in incentives, just ahead of the Feb. 1 deadline when Gov. Matt Bevin ordered the program suspended because he believes it costs the state too much money, the Tourism, Arts and Heritage Cabinet said Wednesday.
The January total is more than twice the $162 million the state had approved for film incentives from the program’s inception in 2009 through last December. The program reimburses companies for up to 35 percent of their approved costs when they film movies, television shows and commercials inside Kentucky.
If every one of the 212 film projects approved so far this year gets made, the resulting bill to taxpayers would be enough to wipe out almost all of the $500 million in new revenue the state expects to collect over the next two years from a tax overhaul plan lawmakers approved last week to help balance Kentucky’s budget.
Tourism Cabinet officials declined to be interviewed on the record this week about the film incentive program, which lawmakers decided to continue against the governor’s wishes in the budget bill they approved last week.
In a prepared statement, the cabinet said production companies are allowed two years after their credits are approved to start a project, so it’s unknown how much of that money Kentucky ultimately will have to pay. Not every project is likely to be completed. Even if Kentucky does end up paying the full $421 million in tax credits, that would mean $1.3 billion had been spent on film production inside the state to justify it, the statement said.
However, a critic said the exploding numbers show the program is out of control. Even if only a fraction of those projects get made, taxpayers will be on the hook for many tens of millions of dollars over the next few years, said Pam Thomas, a senior fellow at the Kentucky Center for Economic Policy in Berea.
The fact that Kentucky is promising so much money from the state treasury and doesn’t know how much it eventually will have to pay is “pretty scary,” Thomas said.
“This is a truly incredible sum when you think about the fact that we were told there was no money available in the state budget for school textbooks, and that was going to be $17 million, and there was no money available for professional development for teachers, and that was going to be $12 million, and you can go down the list like that,” Thomas said.
“They don’t like to think about it in terms of tradeoffs in the budget, but that’s what it really is,” Thomas said. “It’s all a matter of where we choose to dedicate our money.”
State officials have said the film tax credit costs the state’s General Fund more than it produces in revenue, so Bevin ordered its closure in the two-year state budget proposal he submitted to the legislature in January. The Herald-Leader first reported on the program and its unknown returns for the state treasury last October, when just $90 million had been approved.
“The problem is, we’re spending more than we’re receiving in tax revenue. That’s the bottom line to us,” Tourism Secretary Don Parkinson told a House budget subcommittee. “Right now, given the situation with the pensions, we just can’t justify it.”
The House and Senate initially went along with Bevin and kept the film tax credit out of their own budget bills in the weeks that followed.
But on April 2, when lawmakers unveiled their final compromise budget bill, they tucked the film tax credit back into the bill — with a few new restrictions. There would be a $100 million annual cap. (If the budget bill takes effect July 1, no additional projects could be approved until next January, because the cap already has been exceeded.) Commercials no longer would be allowed among the approved projects, because some lawmakers objected to what they saw as a public subsidy for business’ advertising.
And the credits would be nontransferable and nonrefundable, so they only would apply to companies with Kentucky tax liabilities. To qualify in the future, production companies either would have to be based in Kentucky or they would have to create a new subsidiary registered inside the state, as some out-of-state production companies already have.
George Maranville, a Louisville film producer with two projects already approved by the state, said he is grateful to lawmakers for sticking with the film tax incentive. Many bright Kentuckians are landing jobs in film production or want to, and the tax credits are helping the state’s embryonic film industry to grow, Maranville said.
Kentucky should be able to attract a film studio in the not-too-distant future, which will be a game-changer, he added.
“I know it’s tempting when the state is in bad financial shape to get the ax out,” Maranville said. “But I do think patience helps with an incentive like this. It doesn’t reap the immediate benefit that a Toyota plant does. You don’t see the impact right away. But it is building an infrastructure.”
The new restrictions mostly look like a good idea, the producer added. While he doesn’t agree with excluding commercials from the tax credit, because he believes the production jobs they create are as valuable as any other, he said an annual cap on the program is overdue.
“I think the cap is a super-smart idea,” Maranville said. “I know that not having a cap on it, if I were an elected official, that would raise a red flag to me.”