What made Georgia Hollywood of the South? The tax credits explained

Norman Reedus as Daryl Dixon - The Walking Dead _ Season 7, Episode 7 - Photo Credit: Gene Page/AMC

Credit: Rodney Ho

Credit: Rodney Ho

Norman Reedus as Daryl Dixon - The Walking Dead _ Season 7, Episode 7 - Photo Credit: Gene Page/AMC

This was posted Friday, October 6, 2017 by Rodney Ho/rho@ajc.com for his AJC Radio & TV Talk blog

Tax credits are not a sexy subject. But they are the exact reason why Georgia has become the Hollywood of the South.

Over the past decade, Georgia has handed out more than $1 billion in tax credits to movie and TV production companies like Sony and Disney in a program that is among the most generous in the world. It has made the state the third busiest  in terms of films and TV shows in the country behind only New York and California.

It's also hundreds of millions of tax dollars removed annually from Georgia's state coffers. In return, state officials have touted billions of dollars of direct and indirect economic activity. The state now draws movie franchises such as "Captain America," "Guardians of the Galaxy" and "Fast and Furious." Plus, there are now more than 70 TV productions in the state such as "The Walking Dead," "Stranger Things" and "MacGyver," to name a few.

Nonetheless, the state has not proven its case definitively that this is truly a net positive for Georgia. The Pew Charitable Trust, which recently did a study evaluating how states evaluate tax incentives, found Georgia falling short in terms of generating a rigorous cost-benefit analysis.

Without these tax credits, a vast majority of the 245 film and TV productions last year would not have happened here, save for perhaps a handful of hit reality shows ("Real Housewives of Atlanta," "Love and Hip Hop Atlanta") and Tyler Perry's productions. (That media mogul is deeply invested in Atlanta like nobody else.)

 Steve Rotschild, tax advisor who specializes in brokering the tax credits movie and TV production companies sell to companies and individuals seeking to defray their Georgia state taxes.

Credit: Rodney Ho

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Credit: Rodney Ho

But how do these tax credits even work?  I sat down with tax advisor Steve Rothschild. He is one of the largest brokers of tax credits in the state, helping take the state tax credits that major movie and TV studios accrue here and selling them to corporations and individuals who need them. That's because most studios are not based in Georgia and don't really need the credits themselves.

Rothschild said his clients are about 65 percent corporations, 35 percent high-wealth individuals, many through trusts.

Tax credits are simple in concept. Businesses have an array of tax credits to choose from in Georgia. For film and TV production companies, the state makes life easy. A vast array of production costs qualify for up to 30 percent in credits back, as long as they show the Georgia peach logo at the end of the film or TV show. (If they don't, it's only 20 percent. A film and TV company would be foolish not to display this logo below as a result.)

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Credit: Rodney Ho

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Credit: Rodney Ho

The Department of Revenue audits the production company's books and certifies how much tax credit they are to get. Those tax credits go to whoever funded the movie production, be it individual investors or a large corporation. If they have Georgia taxes to reduce, they can just take a deduction. But otherwise, they need someone like Rothschild to help them sell them since they are transferable.

Rothschild seeks buyers who want to defray their own Georgia state taxes.

He can help them sell, say, $100 million in tax credits for anywhere from $82 to $92 million. For people or corporations who want them, they can shave 8 to 18 percent off their taxes using the credits.

"I'd say for a taxpayer who has a liability of, say, $20,000 or less, it's probably not worth fooling with, it's not cost effective," said Rothschild in an interview.

Rothschild first offered tax credit services to investment advisors focused on low-income housing tax credit program. But he then jumped aboard with the juiced film and TV production tax credits when they passed in 2008. At first, he had to spend time convincing clients it was the real deal and "not a gimmick or fraud or scam." Today, it's now old hat: "Now everyone wants the tax credits. They know it's a safe investment."

As a broker, he makes a modest cut from each transaction so for him, it's a volume business. He said his "spread" was larger earlier this decade but the expansion of the business has meant a far larger supply of credits to sell, meaning smaller profits.

There is no limit to the credits, which is why big budget movie productions have flocked here as well as smaller TV shows. Most states have caps. And production companies are super sensitive if there is even a whiff of a chance they may not get the tax breaks.

When Texas waffled on its tax credits this past spring, for instance, Fox's "The Gifted" got right up and moved to Atlanta this past summer. The same thing happened two years ago when North Carolina limited its tax credits: Fox's "Sleepy Hollow" jumped ship to metro Atlanta as well.

Governor Nathan Deal and state House speaker David Ralston have been rock solid in support of the tax credits. And the state economy and budget is healthy, muting opposition. Plus, the longer the tax credits stick around, the deeper the infrastructure in the state. The more studios, production companies and ancillary businesses that plant themselves here, the harder it will be politically to pull out. (Supporters are watching the 2018 gubernatorial race with interest to see how the candidates stand on the credit.)

From a global standpoint, tax credits do not create additive business. This just means Georgia diverted business that would have otherwise been created in California, Canada and Europe, to name a few. "MacGyver" could have easily been shot elsewhere. Ditto "Fast & Furious 8" or hundreds of other film and TV productions.

What if the tax credits disappeared tomorrow? The movies, the TV shows and the economic activity attached to them would largely vanish in a year or two. Most studios built here would soon sit empty. Crews would move elsewhere. Sightings of Kevin Hart and Chris Pratt would dwindle. Sure, a handful of scripted shows with deep ties like "The Walking Dead" might stay a year or two (and it helps that AMC even purchased Raleigh Studios), but the economic pressures to save 25 to 30 percent in production costs would likely force them out as well.

Production companies may tout how much they love Atlanta and the people and the airport access and the food and what not, but the bottom line is starker: it's really all about the benjamins.

Accountants matter.