Whose Incentive Is It Anyway?
We are experiencing the Procurement Age of advertising – an age where everything is “purchased in process,” an age where the feeling is that there is always a better system, and everything can “be had” for less–some how, some way. In production, no matter how many natural efficiencies exist with a competitive multi-bid system, and how much production has already been managed down to a low single digit margin business, there always has to be more to squeeze. This is a time when cost consultants acting as the procurement foot soldiers are taking advantage of this thinking to actively look for new and innovative ways to consult clients regarding new areas for newfound efficiencies in production. One of the recent trends has been to encourage clients to reap the State tax incentives and credits meant to act as revenue generators for the States as one such “efficiency.”
As an example, On APR’s website they list their Top 10 Ad Production initiatives for clients in 2011. Number #7 is:
Put Money Back in Your Pocket with Production Incentives. By taking advantage ofstate‐sponsored production incentives, you could receive up to 30% back on shoot and post‐production costs. A number of states like Illinois, New Mexico and Louisiana offer varying levels of rebates, re‐sellable tax credits and other incentive programs to commercial producers. Not every project is appropriate for shooting in an incentives state, but each project should at least be evaluated for incentives potential during the pre‐production phase.
Hmmm. Doesn’t that say that states offer “incentive programs to commercial producers?” It doesn’t say “to clients who commission producers.” And there is a reason for that. Production companies make production decisions based on budget, creative approach and various other factors .
So now the big idea is “take these credits” and call it efficiency. The question becomes: “whose incentive is it anyway?”
Back in 2002 on the heels of the great exodus of production – when one out of every four shoot days by American production companies was shot outside of the United States – AICP got involved in an effort in Louisiana, spearheaded by AICP member HSI, to create the first state tax incentive program. At the time, the studios and networks were focused on trying to get a Federal tax credit, which in my opinion seemed highly unlikely in light of the national agenda.
Knowing that the states compete as fiercely as they do for low impact, high yield economic benefit — looking to attract industries that support local labor and local businesses – AICP felt it was more likely that state governments would invest in incentive programs for film production, which directly employs several (relatively) high paying positions from a local pool and would lead to further investments in production infrastructure for states (like Louisiana) that didn’t have much film production.
This endeavor also seemed integral to saving the ailing infrastructures of the American production centers, as commercials weren’t the only media leaving the country. Movies of the Week had all but disappeared from U.S. soil. Additionally, feature films and episodic television were taking advantage of many of the tax incentives being offered abroad—especially in Canada – and were fleeing in droves. Many called this a stage of “runaway production.” AICP never used that term as we just saw it as the beginnings of global competition—and that this (incentives) was just one of the aspects taken into account during preproduction financial considerations.
In our segment of the industry, we were all still licking our wounds from the six-month labor dispute with the Screen Actors Guild. Clients had become quite comfortable with the notion of their commercials being shot overseas as more of our companies had developed the relationships and ability to execute complex projects that previously would have only been done outside the country if there was no other choice. But one thing that we understood was that when producing abroad there where many more risk elements, less control, and less of an understanding of the American style of production. And while overseas companies were learning to work with our members, and jobs were being pulled off, it was with much more difficulty – and it was taking a toll on the American business.
Overall, this was starting to drive down the price point in client’s expectations of production values. After all, while production risks were high in many foreign countries, production companies were shouldering that risk, and labor costs were cheap. We started to see a real movement to “meet this price” or “reverse” bidding. “We have $400K, can you do it?” even if the board was pricing out at $600K.
With the current dominant system of “meet this number bidding” (in the most recent AICP Members Survey, 65% of respondents said they were usually asked to meet a specific dollar amount) and the grind for “efficiency,” producers many times weigh in the factor of the incentive as a place to potentially recoup some of the monies that have already been removed from the budget during the bid negotiating process in deciding whether it is worth doing a job. This is a process where the seller and the buyer are negotiating to find an acceptable price. Once determined, the buyer CANNOT come back and ask for considerations that have been weighed in to determine what makes the negotiated price acceptable in the first place.
The States have earmarked incentive and tax credit money for the production companies, who they know make various decisions, trying to make budgets work and trying to compete on their costs and still give the most effective creative solutions and put them on the screen. The State legislators have earmarked these funds to be spent locally – engaging local businesses, employing local labor, and getting producers to consider their locale while figuring out how to best meet their production needs.
Incentives and tax credits are meant to help American companies compete on a very grassroots level, helping small and midsized businesses keep their work at home whenever possible, not to further enhance multinational corporate balance sheets.