State audit says film companies got millions they shouldn’t have

A new state audit says weak controls over Georgia’s politically popular but expensive film tax credit program have allowed some companies to receive credits they didn’t earn.

“While the state has granted billions in credits, it does not have an adequate system of controls to prevent the improper granting of credits,” auditors wrote.

“Despite granting more credits than any other state,” they wrote, “Georgia requires companies to provide less documentation than any of the 31 other states with a film tax incentive.”

Among other things, auditors found millions of dollars in ineligible expenditures by film companies that weren’t disallowed by the state for credits, including payments to workers or contractors for work performed outside Georgia. The way the state audits such projects gives companies an incentive to pad their numbers with ineligible expenses, the report said.

“Deficiencies in the credit’s administrative controls and the significant financial benefit provided by the credit create an environment ideal for fraud,” auditors wrote.

The audit comes at a time when some lawmakers have talked about making changes to the program because of rising costs and fiscal problems that have caused Gov. Brian Kemp to call for budget cuts.

The tax credits, which grew from $141 million in 2010 to an estimated $870 million in 2019, have been a policy mainstay over the course of two previous Republican administrations.

Georgia has grown its film industry by leaps and bounds by giving the nation’s most lucrative credits for film work, up to 30%. Roughly $4 billion in tax credits has been doled out in Georgia. Hundreds of projects annually receive the credits: The audit noted that 450 movies, TV shows and other projects were eligible for tax credits in fiscal 2016, for instance.

About 80% of the credits are sold by film companies that pay little in Georgia taxes to people or companies that do owe state taxes, the audit said.

Those credits become a sort of long-term debt for the state because they don’t have to be used right away. The audit said $1.1 billion in credits generated through 2016 had not been claimed by March of last year2019. Those credits will eventually be used by the person or company that bought them, a potential hit to state revenue that funds a budget that pays for, among other things, schools, public health, roads and prisons.

When he was governor, Nathan Deal treated the tax credits awarded to film and TV production companies that do business in Georgia as a prized legislative accomplishment, routinely warning lawmakers not to even consider a threat to the program. The state has said the industry has created and maintained tens of thousands of jobs in Georgia, although some researchers say boosters have exaggerated the impact of the tax credit.

Legislature could act

Kemp last week refused to rule out legislation that could seek changes to the lucrative credits. State Sen. Lindsey Tippins, R-Marietta, is one of several influential Republicans looking at reducing the credits this year to avoid steeper budget cuts.

Tippins said he’s concerned that each film receives a tax credit without any guarantee of stable, long-term jobs.

“There’s no expectation of continued employment in the state’s economy,” Tippins said. “There needs to be much more analysis on return on investment that any successful business would have.”

Before state employees lose jobs or teachers don’t receive raises, lawmakers should review programs such as the film credit that divert tax revenue, he added.

Georgia’s film and TV tax credit system has two unique features. First, there is no limit to how much companies can receive. Second, the tax credits are transferable.

So, for instance, if a film company spends $3,333,333.33 in Georgia and meets all the necessary state criteria, it can earn a 30% tax credit worth $1 million.

But since many companies aren’t based in Georgia, they owe little or no money in state taxes, so they sell the credit — for cash — to any entity that owes state taxes. Those entities — often other companies — buy the credits at a discount. They may pay $800,000 for a $1 million credit. The film company receives the $800,000, and the buyer — either a person or company — sees a $1 million reduction in taxes.

The Georgia Department of Economic Development is responsible for determining which films and TV projects are eligible for the credits, while the state Department of Revenue implements and administers the credits. The two agencies agreed with some of the findings, but not others. Both said policies and procedures should be tightened.

The audit recommended state lawmakers require an audit of each project that receives a film tax credit. The report contains dozens of other recommendations to the General Assembly, the Revenue Department and the Economic Development Department to improve credit administration.

Problems in system

Auditors said there are numerous flaws in how the program is administered by the two state agencies.

The audit said the economic development agency has certified projects with questionable eligibility. Companies that fail to submit even small amounts of required documentation still receive credits. If companies chose not to be audited, they probably won’t be, auditors said. Audits that are done do not identify all ineligible expenditures.

“Finally, (the Revenue Department) has not conducted a criminal fraud investigation related to the film tax credit despite granting significantly more tax credits than other states and fraud being uncovered in other states providing film incentives,” the audit said. The department said it has not found any cases of criminal fraud.

Auditors also questioned the extra tax credits that companies receive for promoting Georgia by including a logo in their finished product and a link to the state film office on the project’s homepage. They said the state doesn’t verify all the projects that receive the extra money meet those requirements, and auditors questioned the value of such promotion.

Streaming content typically skips credits, minimizing the chances anyone will see the Georgia logo, but the audit said the companies still receive millions of dollars in extra tax credits.

Auditors said both agencies would need more state resources — such as increased staffing — to improve controls on the tax credits. It would also likely mean changes in state law.

Some production companies pay for audits of tax credit expenditures to facilitate the sale of those credits by eliminating the possibility the Revenue Department might later contest the amount. The agency also has begun selecting projects to audit in recent years.

Auditors looked through a sample of Revenue Department reviews and found $4 million in likely ineligible expenditures that were allowed to be counted for tax credits involving eight projects from 2015 to 2017. One project included $54,000 for studio executive airfare, which the audit said is not eligible. About $16,000 was included for gifts and other perks for cast and crew members, which also are not eligible.

Revenue Department auditors disallowed $22 million in stated expenditures, leading to a reduction of $6.6 million in tax credits from film companies in 2018.

The economic value of such tax credits is often overstated, said Bruce Seaman, an associate economics professor at Georgia State University.

He said issues identified in the audit, such as payments for film work outside Georgia, reduce the benefits to the state from the movie tax credit.

“Economists in general are nervous about the ongoing use of tax credits, which can damage the overall tax base and may or may not improve the quality of life in the community,” said Seaman, who works on economic impact studies.

‘A huge success’

Over time, the film tax credit has brought more workers into Georgia, where they have bought houses, started businesses and contributed to the economy, he said.

“The tax credits have been a valuable component of expanding so significantly the size of the film industry in Georgia and making it a home-based industry, which it wasn’t originally,” Seaman said.

The film tax credit created Georgia's burgeoning movie industry, said state Sen. Frank Ginn, the chairman of the Economic Development and Tourism Committee. Before the credit began, there wasn't much filming in the state.

“The tax credit has been a huge success,” said Ginn, a Republican from Danielsville. “What we need to do is evaluate where we go moving forward.”

Peter Stathopoulos, who works in government relations for the Georgia Production Partnership, which lobbies for the film industry, said: “Because of this tax incentive, tens of thousands of Georgians and small businesses all over this state are working in the film industry.

“Georgians are working in production, post-production, special effects, props, set design, construction, marketing and more. This industry is thriving in Georgia and will continue to do so for years to come.”

Kelsey Moore, the executive director of the Georgia Screen Entertainment Coalition, said: “We’re committed to working with our state partners to make sure the right processes are in place so that the credit works as intended.

“We want to be a part of any conversation about ways to build good faith and understanding of the credit with our fellow Georgians.”

Film and TV tax credits

Georgia’s tax credit program helped feed explosive growth in the film and television industry by covering up to 30% of what’s spent on a production within the state. But a state audit has found some problems with how the program is administered. Here are some numbers from that report: