Dear New York State, Film tax credits aren’t that simple

I submitted the following open letter in response to New York State’s call for public comment on its film tax credit program.  I give permission to reproduce it in part or in full, so long as it is properly attributed, and not taken grossly out of context.

Dear New York State,

Film tax credits aren’t that simple.

This is an open letter, in response to NY State’s call for public comment on the state film tax credit program.

I am generally opposed to Film Tax Credits.  I believe them to be a trade-war, stoked by the very studios who then sell weapons to all sides.  I think the film\TV industry would be much better off without this trade-war.

The Wrap published my op/ed to that effect earlier this month.

However, the trade-war is on.  Even if I don’t like that.

Pragmatically you can’t ask people who have been conscripted into a trade-war, not to fight it.  They’re getting shot at.  So I will not tell you that you should just do-away with the program.  With Vancouver, the UK, New Zealand and Louisiana (for example) all offering huge amounts of subsides to the film studios, NYS must offer competitive subsidies, or our historically intrinsic industry will be wiped out.

However, I also cannot simply tell you I support the program as is.  Instead, I’d like you to consider the CVD effort being put forward by ADAPT in parallel with the film tax credit program.  Or, to consider any other ways in which NY State can assist such efforts.

In simpler terms:  I believe the following three positions to be amoral:

  • Position 1
    • Support State Tax Credits
    • Do not seek to end the trade-war
  • Position 2
    • Do Not Support Tax Credits
    • Seek to end the trade-war
  • Position 3
    • Do Not Support Tax Credits
    • Do not seek to end the trade-war

Position 1 is a race to the bottom, in which tax-payers inevitably lose money, and NYS film-workers are left to depend on legislators and executives to draw work to the area.  It may seem like a good thing to have the state support film\TV-workers through a tax-credit program.  But it also means there is less security for them.  Changes to the tax-credit program can result in sudden loss of work.  Other constituencies offering even more lucrative tax-credit programs, also can result in sudden loss of work.  These are very real concerns year to year.  The international film tax credit trade-war is a hot war.

Position 2 throws NYS film-workers to the wolves for the near term.  Without the tax credit program, the industry in NYS will immediately die.  The other constituencies that offer programs will have won the trade-war and taken NYS’s intrinsic film\TV-work away.  Supporting the end of the trade-war would eventually allow NYS’s intrinsic film\TV-work to return.  But it would hurt a lot of people in the interim before a natural state of equilibrium is reached.

Position 3 throws NYS film\TV-workers to the wolves both in the near term and the longer term

The moral position is as follows:

  • Position 4
    • Support State Tax Credits
    • Seek to end the trade-war

Position 4 accepts that the trade-war is on and that NYS has to fight it, while it’s on.  However it also acknowledges that the trade-war is not in the interests of NYS.

NYS’s historical intrinsic film\TV industry has always been strong for the right reasons.  NYS is a great location.  It’s a premium entertainment market with world-class talent.  If the trade-war is ended, NYS will be able to compete.  It always has.

The extreme market distortion of the trade-war has been raging for the past 5-10 years or so.  It is only that distortion that has made it imperative for NYS to compete with a re-targeted tax credit program.  The tax credit program is targeted to large-budget feature films and TV, produced by multi-national corporations.

However it does not do anything to keep their business in NYS.  The jobs are temporarily rented from a limited supply.  They are not created.  The tax credit program does little, if anything to create anything in NYS of permanence and value.  Therefore, NYS would be better off with an end to the trade-war, such that it can change the tax-credit program back into something that’s meant to create a permanent motion-picture entertainment industry in NY that is self sustaining.

Some have called for a 95:5 split in California.  The gist of it being: for every dollar to be spent in the budget for film\TV tax credits, put 95cents to the tax credits, and 5cents to paying for a program to end film\TV subsidies internationally and at the state level.  The tools being Countervailing Duties (CVDs) and any other methods that seem reasonable.

The 95:5 split may or may not be the right way to go about it.  In-fact, I would want legislators and executives who understand my general premise, to suggest ways in which they can have policies that enact the moral position stated above.

That being said, I’d like to better explain who I am.  Then I’d like to make some suggestions as to how to modify the NYS film tax credit program to better help NYS even with the trade-war still raging.

I am a citizen of the great state of New York.  I was born here.  I was educated in the public school systems in Larchmont\Mamaroneck NY.  I went to NYU Film School (Tisch). I got my graduate degree in Digital Imaging and Design from NYU’s CADA program.  My first production job was here in NY, in the late 90s, working at the Jim Henson Company on east 67th street. First as an intern and later as an employee.

I am also a Visual Effects (VFX) professional of some note, having been (personally) short-listed for the Academy Award for Best Visual Effects for my work on “The Tree of Life.”  The rest of my credentials are not worth going through in detail here.  But to be clear: Hollywood brought me into the feature-film making fold.  I moved to Los Angeles in the mid 2000s.  I lived in Austin Texas for two years, working for Terrence Malick.  I moved back to LA after that.  And finally, I moved back to NY a few years ago.

For a while I was consulting for the VFX industry here. The NYC VFX industry was endeavoring to expand to the kind of large-scale and stable VFX work required to do feature-films.  Also, I was hoping to be able to get involved in education for VFX and digital filmmaking.

I find myself now, in an almost incomprehensible state.  I am one of the most credentialed and capable individuals in the state for doing feature film VFX, but cannot actually work in it.  The simplest explanation I can give is as follows:  While I could build and run a world-class VFX facility, I could not make money doing it.  No one can really.  Certainly not with the current market distortions being so large.

VFX vendor companies generally lose money doing feature films.  The better ones stabilize their loses such that they can continue to work reliably.  They acquire new financial backers and investors regularly, who have stars in their eyes, and continue their stable losses.  Some of them eventually declare bankruptcy.  Sometimes, an individual company may seem to have a string of successes.  But in aggregate, the vendors lose money project after project steadily.  This is a problem in and of itself, separate from the subsidy market distortion.  But this is the starting point.  If you rise to the level that you are supposed to be in charge, this is the default state of competition.  If you want to win, you need to innovate and find a way to be valuable to the studios in ways your competition can’t.  Otherwise, you can never justify actually breaking-even.  Why should they pay if everyone else is willing to take losses?  New vendors spring up like weeds to replace the dead ones.  As long as projects get delivered, there is no value in a vendor being long lived, to a studio.

Since the trade-war is feeding Hollywood’s bottom-line, the studios feel even less natural market pressure to seek out vendors that can innovate.  Studio investors are happily drinking up tax-dollars.  Therefore, there’s very little merit left to the market.  Someone like me, who is ready to innovate and build real value as a NYS vendor, knows better than to try to do so while the market is so horribly distorted.

I would not be fighting other vendors.  I’d be fighting governments.  What I can bring to the table is not valuable to them compared to the obscene size of government subsidies.  Currently, competition is based on the ability to best maximize international tax-credits and subsidy programs.  Ideally, a vendor can stretch work across multiple regions, each with their own tax-credit programs, and aggregate them for the studios.  And while they’re doing that, the VFX get done well enough to release the movies

In a broader sense, the NYS tax credits help a lot of below-the-line people get temporary work (maybe a year per gig for a feature) at established companies.  But they don’t help create or foster new companies that actually have a long term stake in NYS.  To the extent that vendors develop in NYS, they are simply thin shell companies designed to get all the money to the studios.  And in the case of VFX, they’re also places for investors to be suckered into padding the studio’s bottom line even further.

Writer\Director Kevin Smith (A NJ native, but we’ll let that slide) famously made the observation that in “Hollywood, you fail upward.”  When VFX vendor companies lose money, if one is purely a financial backer, they fail downward.  But the management and senior staff fails upward.  If the vendor goes bankrupt, those in charge are not held responsible by the studios.  What matters to the studios is that the work is finished while the vendor goes bankrupt in an orderly fashion.  They rightly realize, that as long as the work gets done, the bankruptcy is proof that they got a really good deal.

Those that fail upwards just sign on to another company with new and gullible financial backers (with stars in their eyes) in the right subsidized area.  The studios award them contracts.  That’s great for the studios because it means VFX company backers subsidize their budgets time and time again.  But it’s terrible for people who actually intend to do responsible business.

This is why I say NYS is renting jobs, rather than growing its own domestic film\TV industry.  The idea that vendor companies and staff positions at those vendor companies actually represent some kind of permanence or investment of significance to NYS is foolish.  That’s not how the movie business works.

NYS has to make an effort to actually build a sustainable business model in film\TV in the state.  It can’t just be renting jobs from multi-national studios and their various levels of shell corporations and suckers.

Right now, the trade-war is making all the real decisions in the market.  My only choice to start-up in the VFX vendor market would be to build a company meant to nimbly collect tax credits off the NYS tax payer and the Vancouver tax payer and the UK tax payer etc, to help the studios subsidize their profits.  And further, it would need to be built to slowly and stably hemorrhage cash to the studios contract by contract, while steadily bringing in new investors when necessary.  It would also need to be able to declare bankruptcy in an orderly fashion while it finished out its remaining contracts if necessary.  I’d be fine.  The studios would love me for doing it.  I’d fail upward out of that one.  And it’s not illegal if done right.

Also I would need to finish the VFX for the studios while its doing all that.  But that’s not hard to do. With all the government money, I can bring the people in to do the work on a contract for contract basis and dump them when I’m done.  There’s no need to provide them permanence or housing costs.  There’s no need to even make sure they’re NYS tax-payers.  They’ll fall all over one-another to get the work.

I won’t build that kind of company.  Though many existing companies operate this way.  They may not own up to it.  They may not even understand that it’s what they are doing.  I have some damn pride though.  I won’t do it.  So I’m trying to build a new career doing something else.  And that’s pathetic.

Bill Gates observed that “content is king.”  Content is one important reason why the studios have their power and why they’re where the value is.  Ideally, if NYS wants to truly foster sustainable business models in film\TV in NYS, they need to focus on NYS residents and companies that BOTH create and own film\TV content in NYS, and lay down actual infrastructure here that’s not easily transient.  If the NYS tax credit program is to foster that kind of business development, there are changes to be made to the tax-credit program in that interest.

On the website, the tax credit program is targeted to, “increase the film production and post-production industry presence and overall positive impact on the State’s economy.”  Then it goes on to say it accomplishes that by providing tax credits to, “qualified production companies that produce feature films, television series, relocated television series, television pilots and television movies, and/or incur post-production costs associated with the original creation of these film productions.”

Firstly, the target is explicitly the “film” industry.  Yet it’s doing that by providing the credits to both film and TV companies.  I have to assume that what is really meant, is that the program wishes to target the motion-picture entertainment industry. This isn’t quibbling about vocabulary or sentence structure.  Motion-picture entertainment is in flux.  But it’s real money and real jobs when people work in it, no matter the exact distribution technology behind it.

What about direct-digital-distribution?  What if I’m making content that’s to be distributed via Netflix, Hulu, YouTube or even directly by myself?  If I’m a NYS based content company distributing digital motion pictures through alternative means, NYS should be thrilled.  If I’m spending money, creating content, hiring people and paying taxes, and just happen to use alternative distribution models, NYS still benefits.  Basically, what I’m saying here, is the definition of what constitutes motion-picture production and content in the tax credit program is lazy.

This is the time that NYS should be most interested in growing the industry beyond it’s traditional definition.  That’s what “growth” in the motion-picture industry actually looks like.  Facebook and Google have claimed and monetized new advertising space that wasn’t attainable before.  That was/is growth.  Claiming motion-picture entertainment space that either wasn’t attainable before, or is being ignored, is actual growth.  Conversely, making sure that the summer block-busters this year are made in NYS rather than California, is not net growth.  It’s just moving GDP from state to state, and spending tax-dollars to force it to move.  That’s not good for the country or the state in the long run.

Remember, “content is king.”  What NYS cares about, is that commerce, based on motion-picture content created and owned in NYS, is happening in NYS.  And NYS shouldn’t limit that commerce foolishly.  Instead, the legislation actually seems to make it a point to carve out “webisodes” made to seem like a TV show, as something that doesn’t qualify.  Who even makes “webisodes” anymore?  What year is this?  I understand the need to cut out “anthologies.”  But digitally distributed motion-pictures are important for the near future.

I shouldn’t need to say this: but yes, the exclusions in the law to keep state funds from subsidizing pornography are good.  Lets not fund pornography.  There is probably a little space in there to fund direct-digitally-distributed content, and still keep the pornographers out.

Clearly, you need to find a way to discriminate between any-kid making videos with his/her phone on YouTube, versus those that seek a higher production value and a sustainable business-model.  That is the legislative challenge here.  But it’s a challenge you should be taking on, to better serve NYS’s interests in the long run.  You want innovative digital content makers doing business in NYS.

Another issue with the program as it is outlined, is that the $420million pot of money available doesn’t appear to be divided up in such a way as to favor small business or truly profitable content owning business that have actual roots in NYS.

Once the eligibility rules cull the crop, it’s a pot of money that treats each application the same, regardless of size and type when it comes time to award the pot.  Therefore it actually favors entities that aggregate larger productions.  Like the studios.

The film production tax credit defines three tiers of projects.  I’ll term them small, medium and large for simplicity’s sake.

The initial application process isn’t where the credits are awarded.  Instead, the credits are awarded based on the submission of the final application at the end of production, on a first come-first-serve basis.

Therefore, since everyone wants their piece of the limited pot, the best strategy would be to finish up your film within the 60 days before Jan 1.  Then you’d (have an associate producer) sacrifice your (their) new years eve to be there the moment the government office opens on Jan 1.  Like a line outside an Apple store, but for government money.

This strategy is more easily enacted by larger productions, aggregated under a small number of corporations… such as the studios.  And should some smaller productions get in the mix, they do minimal damage to the larger strategy because the pot is a fixed size.  The slightest bit of collusion makes it possible for the big fish to take up nearly the whole pot, and not find themselves having accidentally gone over it by any significant amount.

It’s clearly a system designed to make sure the studios get in at the right time to get their money, while giving some lip-service to being “first come first serve” as a false synonym for being fair.

A better solution would be to set-aside portions of the $420million and reserve them for small projects and the kinds of companies that are actually situated in NYS in meaningful ways, rather than those that just shift short-term existing work here temporarily.

Further it might make sense to award the prioritized set-asside on a quarterly basis.  And even further, do so via lottery, at least.

Ideally, the pots might just be awarded proportionally by the claims, if the claims exceed the pot’s overall value.  That way, larger projects can’t crowd out smaller projects.  A roll-over mechanism might be worth keeping in, to avoid quantization problems.  And transparency as to claims is also important to production planning and projected tax-credit awards.

There’s just no reason to jam up the yearly production schedule such that everyone, no matter their size is finishing at exactly the same time at the end of the year, and competing in a way where larger budgets make you more likely to lock out the smaller competition.  At least try and make sure that small business has some kind of chance here.

Yet another issue arrises when considering what constitutes a qualified production or post-production facility.

Production facilities seem to be defined by their physical size (7,000 sq ft.) and specific kinds of infrastructure, such as electric lighting grids and enough sound-proofing to meet sound recording capabilities.  That’s all well and good.  Except that I’ve worked in plenty of spaces and stages that didn’t meet those guidelines.  The specs are just too big.  And they’re completely biased toward large-scale live-action filmmaking.

What if I’m doing motion capture work?  I own a small mocap system.  I’d love to set it up in a small stage/theater space like you’d find at local colleges and municipal cable-access programs.  I’d love to be able to provide some revenue to those kinds of places.  I’d love to be able to consider making a business of owning and managing those kinds of spaces.  Good profitable and innovative work can be done in spaces that fall well below the threshold in the proposed law.  I believe the threshold in the law is meant to keep smaller and more nimble companies and projects from qualifying for tax credits in a way that is anti-competitive in nature.

What if I’m doing fully animated work?  All I really need is to record sound.  I really don’t need a 7,000 sq ft. soundstage for that.  In film-school, we recorded dialogue in closets.  The coats made great sound-baffles.  Not that I want to go back to using closets.  But perhaps there’s a happy medium between the 7,000 sq ft stage, and my closet that the state could get behind?

To the program’s credit, only the large and medium sized projects need to use a stage.  But the small projects need to shoot at least 75% of their “principal photography shooting days.” in the state.  Principal photography is defined as “filming of the major and significant portions of a qualified film that involves the [lead] principal actors/actresses.”  So motion capture and dialog recording for animation doesn’t count then.  Also, we don’t use film as much as you’d think anymore.  We often shoot computer files.  Which are not film.  And really, recording sound for animated work should qualify here.  You might need to link it with the animation work somehow, to make sure that stays in the state.

Post-production facilities don’t even seem to be defined in the law.  I can’t find a proper definition of what a qualified post-production facility is.  But I do my own post production.  I do my own VFX.  I do my own mastering.  Because, you can do that these days.

Rather, I believe that requiring the use of an approved post-production vendor is just an anti-competitive component of the program, made to keep existing post-production companies serving large clients, with government money as the sweetener.  Without a clear definition of what an approved post-production vendor is, the only thing I can be sure of, is that I’m not one.  And I need to hire one to get tax credits.  Even though I can do that work better and cheaper directly by paying the same NYS freelancers to do it.

The post-production tax-credit needs to be written in a way that does not favor vendors over people.  Also, it probably needs to consider that animation work for fully animated content isn’t really post-production work.  It’s production work.  And the carve-out in the existing law for post-production is strange in this way.  Or do we not care about computer people’s jobs?

Take a step back and think about this scenario:  If I wrote an animated film, and recorded actors for the dialogue at a local recording studio, and hired a whole bunch of animators to animate it in some co-working space in mid-town (or Buffalo.  You guys really seem to want me to do it in Buffalo,) and did some limited motion capture work for it, and finished\mastered it with freelancers and in-house hardware, and released it online, and monetized it via ads and interstitials, and paid taxes on that profit… I wouldn’t qualify for one red cent of NYS production tax-credit.  And I’d be doing everything NYS ever wanted out of the program.  The same people would be hired the same way to do the same work for the same rates.  Even better, the profits would be coming back to NYS.  But no.  Not one tax-credit.  Tax credits are for multi-nationals and their investors.

Alternatively, if I did make a more traditional live-action feature on an offset schedule, to get better rates on capacity, on a stage and posted it at a qualified facility… I’d risk being squeezed out of the tax-credit pool because I finished it in say, May.

That’s why it’s not doing what’s right for NYS tax-payers and NYS motion-picture workers.  It’s not giving NYS the chance to innovate and make a strong and stable motion-picture industry for itself.  I think the program\law needs to be re-written with new priorities in mind.  I don’t think the current structure does what is needed.  It plays into the studios trade-war, but doesn’t take a real opportunity to build a stable motion-picture industry in the state.


Bradley Friedman