Relativity Media Using Hollywood Accounting to Sell Hawaii Film Incentive

From Stop Runaway Productions April 22, 2012

In 2005, the German government closed a tax loophole Hollywood had been exploiting to subsidize much of its production costs. In 2003, Paramount was the beneficiary of between $70-$90 million, which one Paramount executive said was literally “money for nothing.” One person saw an opportunity with the demise of the German tax shelter: Relativity Media founder Ryan Kavanaugh. Check out what Kavanaugh says about this opportunity in the first several minutes of the following video: LINK

(more on tax loopholes later)

Last year, I posted an article that was highly critical of Relativity Media’s lobbying efforts to push a very generous and extremely costly film incentive bill through the Hawaii State Legislature. I argued that it’s one thing to take advantage of a film incentive, but quite another to lobby for them in an effort to play governments off each other:

Relativity does more than simply take advantage of government film incentives, its business model, based on the information above, depends on them. It’s little wonder, then, why Relativity is so eager not only to get different states and nations to create incentives, but also play them off one another in order to have them increased.

It’s not fair to blame Relativity for causing runaway production when it takes advantage of film incentives or for making smart business decisions. But is it another story when they are instrumental in creating the incentives and spurring the costly race to the bottom that has damaged California’s industry and economy so severely?

Fortunately, Relativity’s efforts failed last year. But now they are back. They have a new presentation, and it’s a SPECTACULAR work of fiction. Hawaii taxpayers better pray the numbers in Relativity’s presentation are fictional, because if they are accurate, the cost of the proposed film incentive would be a staggering $2.38 billion (with a B) in just six years! And I thought Arizona’s new $2.1 billion film incentive legislation bill was costly! Let’s go down the Relativity Rabbit Hole….

Cherry Picking Data:

Relativity’s presentation calls film incentive tax credit “soft money” that helps reduce “production costs” (read: by paying for the budget) which “helps local governments” with taxable revenue:

Soft Money:
– Helps films by reducing film production costs and
– Helps local governments by generating significant taxable economic activity

In slide after slide, Relativity’s presentation cherry picks from various economic impact reports by highlighting impressive sounding job numbers and huge increases in production spending. Conveniently missing is any mention of CO$T. For example, Relativity cites some impressive sounding statistics from The Arrowhead Center Report prepared for New Mexico’s film incentive:

– Motion picture and video production industry businesses increased by over 50% in 5 years
– Jobs and wages in the motion picture and video production industry increased nearly 10x in 5 years

These statistics are much less impressive, however, when compared to the cost. The same Arrowhead Center report found New Mexico taxpayers recouped just 14-cents for each dollar spent:

During fiscal year 2008 the NM government granted $38.195 million in rebates. The resulting increase in economic activity generated $5.518 million in revenues. The implied return is 14.44 cents on the dollar. This means that for every one dollar in rebate, the state only received 14.44 cents in return.

Similarly, Relativity cited the ERA reports prepared for Louisiana and the huge increases in spending, jobs and wages. Again missing is any mention of costs also contained in those reports. From 2002-2010, the film incentive cost Louisiana over $795 million and returned just $106 million in new taxes from the increased production activity.

Is Relativity Lying About the Budget on “A Perfect Getaway”?:

In last year’s post, I mentioned Relativity was using their forgettable film “A Perfect Getaway” to prove to Hawaiian lawmakers that a film set in Hawaii could be filmed someplace else, like Puerto Rico. However, by shooting in Puerto Rico, Relativity had to spend money on special effects and post production to make Puerto Rico look like Hawaii. This being the case, it seems odd the VFX and post production costs listed for Hawaii (left column) would have been higher than Puerto Rico (right column):

In fact, it seems highly unlikely Relativity would have done any of the post production or VFX work in either Hawaii or Puerto Rico, but rather someplace like Los Angeles. Is there even a single VFX house in Hawaii or Puerto Rico? Worth noting is that if you add the $5 million Relativity saved because of Puerto Rico’s 40% tax credit to the total above, the costs would be almost identical.

And since I can’t think of another film that tried to shoot another tropical island for Hawaii, it seems to me like the actual reason Relativity shot the film in Puerto Rico was so they could use it as a scare tactic to force a larger incentive in Hawaii. Why would I be so suspicious? Well, compare the numbers above from the March 2012 presentation to the total numbers for the same movie presented in their February 2011 presentation to Hawaii lawmakers:

Wow! In just one year, a movie that had already been completed before either of Relativity’s presentations somehow got cheaper to make in Puerto Rico and more expensive to film in Hawaii. Since last year’s data did not sway Hawaii lawmakers, Relativity called for a script change to make the plot they are weaving scarier.

Messed Up on Multipliers:

Given the data inconsistencies, it was surprising to see Relativity criticize the Hawaii Film Commission for the economic multiplier they allegedly use in reports they put out (I could not find these reports). According to Relativity, the film commission incorrectly uses a multiplier of 1.7 and the “method” the they use to “calculate” the multiplier is “inaccurate and inconsistent with how every other state and government body” calculates value.

Really? Then why did Relativity use a multiplier of 2.12 in their February 2011 presentation (see page 21 of presentation, p. 31 of the PDF)? Relativity’s new presentation has some other whoppers about the multiplier issue:

• Relativity worked with the University of Hawaii and confirmed this with DOTAX and DBEDT (the two finance bodies of the government).

• Relativity recalculated the actual economic multiplier (ie, how much actual value Hawaii is receiving) and that number is 1.29. See next few pages.

The bullshit is really piling up at this point. If Relativity confirmed the actual multiplier was 1.29 with the DBEDT, then why did the DBEDT inform the Honolulu Film Office the proper multiplier was 1.55 in October 2011? As for Relativity’s claim they “recalculated the actual economic multiplier”? Recalculated my ass. The economic multiplier of 1.29 was not “recalculated”, it was PROVIDED by UH Professor Lawrence Boyd back in 2009 (see pg. 23 of the PDF). Moreover, the formula Relativity claims is the proper one used throughout the world is, once again, total bullshit:

Why is the formula above total crap? See my arrows and notes in red above. In order to calculate the “indirect and induced economic activity”, you need to know the multiplier. Hence, you cannot add the “direct economic activity” to the “indirect and induced economic activity” and divide it by the direct spent to determine the multiplier, because you would have already needed the multiplier to determine the indirect and induced activity. Apparently, Relativity thinks Hawaiians are total idiots. I pray they prove Relativity wrong.

Is Kavanaugh Looped Over Loopholes?:

So what is Relativity trying to talk Hawaii into? A HUGE increase in the amount of free money given away as a refundable cash rebate of 35% of all spending on Oahu and 40% of all spending on the other islands with no cap in place. This will send the cost to Hawaii’s taxpayers SKYROCKETING.

Perhaps the most offensive change Relativity wants is to allow for money paid to out-of-state businesses for things like rentals to qualify for the incentive by using a pass-through entity. For example, if a movie pays $1,000 to rent props from a California business not available in Hawaii, that spending does not currently qualify for the incentive, which makes sense. Why should Hawaii pay for a credit on money that goes to California? If a Hawaii pass-through were allowed, it would pay the $1,000 to rent props from California and then re-rent them for a slight markup (maybe 10%) to a production in Hawaii. The benefit of the $1,000 spent, however, still goes to the California business, not Hawaii.

In short, Relativity wants to create a huge loophole that would benefit the economy of someplace else. Hmmm. That sounds familiar. What did Kavanaugh say in the interview above?

It doesn’t take a rocket scientist to take a look at something and say, ‘if a government creates a program to fuel their own economy and someone finds a loophole to get it all out to another country’s economy, they’re gonna stop it’.

Apparently, Kavanaugh not only thinks Hawaii would not be smart enough to “stop” a loophole, he also thinks they will be dumb enough to create one by allowing for pass-through entities. Got balls?

How Many Jobs? How Many Projects? How Much Spending? How High Are You?:

Relativity’s projections of future growth are pretty ridiculous (click on the picture for a larger image):

Based on the information above, Relativity’s March 2012 presentation concludes with the following slide:

Since New York City, the second largest film industry cluster in the US and home to an infrastructure built up over 100 years, set a record this year with 23 television series filming, Relativity’s claim that 49 network and cable TV series will be shooting in Hawaii by 2016 is ridiculous. Also ridiculous is their claim that 94 movies, all with $50 million budgets, will shoot and spend the entirety of their budgets in Hawaii over five years. Give me a break.

The bullet point about 175,000 direct and indirect jobs is an artificially inflated fiction that was created by adding up the number of jobs in any given year adding them all together over the entire period. But most, if not all, of the same people will work those jobs year to year: the same 11,000 people working in 2015 will make up 11,000 of the 13,000 jobs in 2016. The construction jobs will be short-term and temporary, and they will only exist assuming four major movie studios are built on the Hawaiian Islands. That’s one hell of an assumption. I would be surprised if just the Maui studio gets built. If there are four studios on four islands in five years, it will be snowing in Hell.

So how many actual jobs? Several of the more reputable economic studies from Canada find that each $1 million in production spending supports 18-20 direct AND indirect jobs; in 2011, the LAEDC said each $1 million in production spending supported 21 direct and indirect jobs. Generously applying the same formula the LAEDC found for California (which has the most concentrated and closed film economy on earth) to Hawaii and also generously assuming all production spending would happen entirely in Hawaii, the actual number of direct and indirect jobs from the $1.66 billion in film and TV production spending in 2016 (the peak year) would be 34,902 total jobs. This is over 5,000 less than Relativity projected.

Finally, the very last bullet point in Relativity’s presentation tells Hawaii lawmakers the state will benefit from $1 billion in new tax revenue over five years from production spending! Again missing is any mention of cost. I will be conservative and assume all $6.8 billion in production spending would happen only on Oahu, where the proposed credit is 35% (vs. 40% on the other islands). Total cost ($6.8 billion x 35% cash refund) for Hawaii taxpayers: $2.38 billion!! Even with the new revenue, Hawaii would still be in the hole for over $1.3 billion!

Aloha.