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Divergent and the Illinois Film Tax Credit

by Jeff Steele

The Illinois Watchdog interviewed me earlier this week regarding what role the Illinois Tax Credit played in bringing “Divergent, a $40-million teen action/romance sci-fi feature film, to shoot in Chicago for 60 days.  You should read the interview, but I’m also going to elaborate on it, so you get the full picture.

Divergent (based the novel/trilogy) takes place in a futuristic dystopian Chicago, so fan appeasement and the intrinsic savings from not having to fake Chicago are already heavily-factored into where the producers’ would shoot.  If Chicago did not have the IL tax credit, then the producers (Red Wagon) would undoubtedly shoot elsewhere: NYC, L.A. and Toronto are all viable production cities with healthy tax credits (or other savings) that can reasonably fake Chicago (they have in the past and continue to do so.)

That said, my point in this interview is that, if the story was set in Anytown, USA, then the production would not come to Chicago, because the Illinois tax credit does not attract (and is not conducive to) mainstream independent feature films (i.e. budgets over $2-million).  The IL tax credit, however well-meaning, was ill-conceived; it was crafted to attract out-of-state productions, but rather than appealing to the financiers who fund movies, it sought to promote and protect the in-state, resident, below-the-line crews.  In short:

  • Productions get a 30% transferable tax credit on their qualifying in-state spending (most production spending qualifies, but wages only qualify for cast and crew who are Illinois residents).
  • Productions can only earn credits for the first $100k in wages, per person.

That’s a great credit, BUT FOR the resident restriction and wage cap.  Those two restrictions are what make the IL credit only conducive to low-budget films under $2m (whose entire cast/crew are predominantly locals) and large studio size films (like Divergent) that swoop-in because they just need the location, fan-base credibility, or major talent appeasement (like Chris Nolan for Batman), after which, the tax credit is a necessary box that their finance department can check-off.  Don’t get me wrong, studio films collect very large tax credits from Illinois, but nothing for their out of state cast, directors, writers, producers, or key department heads (i.e. Costume Designer, Production Designer, DP, UPM, Make-up, etc.).

According to a ReelChicago.com, Divergent is bringing in at least 20 department heads from Los Angeles, none of whom will qualify for the IL tax credit, even though they’re working in IL and paying IL taxes.  I want to make something very clear: Chicago has world class crews, but it does not have A-list, bondable, department heads – they are required by the bond company to be flown in from L.A. or NYC and put-up in a hotel (plus per diem).  It’s incredibly expensive to put-up crew for a 30-60 day production shoot, and to not get earn tax credits for their wages (which are significantly higher than the rest of the crew) is a loss that large studio films can begrudgingly bear, but is untenable to producers and financiers of mainstream independent films (i.e. $2m – $20m budgets).  Nevertheless, the completion guarantor (bond company) on any given film is going to require that key department heads come from L.A. or NYC, which means that mainstream independent films (which comprise the vast majority of film productions in the USA) are forced to shoot in locations more amenable to out of state productions, like Georgia, Louisiana, and others.

The Illinois tax credit was designed (with great fanfare) to attract out-of-state productions, but then penalized those productions for having to bring in the out-of-state resources that aren’t available in the state (but are necessary to get the film made), i.e. above the line talent and below the line department heads.  The result being that the credit, in its current incarnation, actually disincentives and deters mainstream independent films from shooting in Illinois AND deprives the Illinois crews the mentorship opportunity to work with and learn from world class department heads.

Here is how I would fix the Illinois Tax Credit, to develop a self-sustaining film industry:

  • Allow wages for out-of-state department heads to qualify for the credit.  This helps everybody.
  • Allow wages for out-of-state above-line-talent talent (who are working in the state and paying state taxes) to qualify for the credit.  If a wage cap on non-resident ATL is necessary, then cap it at $1-million.
  • Completely remove the wage caps on Illinois resident cast and crew.  This is how you keep your aspiring talent from leaving the state, and how you entice successful talent to stay or move here (especially TV series stars).  More than anything else, the wage caps penalize home-grown talent for becoming successful, especially when they’re the ones who will eventually have the clout to lure productions to film here.
  • To bolster a feature and television post-production industry, allow productions to file twice for their tax credit certification (but only if they’re posting in Chicago).
    • This allows productions to apply for certification after they wrap physical production (which is where the majority of spending is).  This affords producers the opportunity to pay down the majority of their tax credit loans, which usually have an interest clock running.
    • Then file a second time to capture the credits generated from IL post-production spending, which can take months to complete (the second filing is usually a smaller credit, but one that takes take a long time to claim.)
    • Louisiana has been doing this for years and they have a vibrant post-production industry across multiple cities.

The conventional wisdom in the Chicago film community is to never speak-of or tamper with the Film Tax Credit.  There is a deep-seeded fear that any attempt to do so, will create an opportunity for legislators to kill it, dilute it, or hold it hostage.  So it’s better to have a credit that deters more business than it brings in?  That might be the case if there were no other reasonable alternative, but this can and should be corrected, possibly on the Executive level.

It’s sad and frustrating, because Chicago has world-class crews, great supporting actors, it has all the stages and equipment you could need… and access to plenty of capital.  It’s a one-stop shop that has almost everything it needs to be a self-sustaining production hub (like L.A., NYC, Louisiana, and Georgia), yet, it’s only a “location city” (when you need a certain look, like London or Las Vegas).  A big studio film every few years is not sustainable.  It’s time for Illinois to acknowledge the resources it lacks and modify the credit to be inclusive, not exclusive, to the global industry.  Everybody wins.

12 Responses leave one →
  1. January 17, 2013

    What are your thoughts on the MI film tax incentive now that the cap has been lifted. Did Gov. Snyder snub the industry too much with is former negative remarks about the tax incentive?

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    • January 18, 2013

      At this point, Gov. Synder’s remarks are par for the course and help remind us why we shouldn’t shoot in Michigan (regardless of how juicy that tax credit percentage looks on the surface.)

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      • January 19, 2013

        Jeff you covered this issue perfectly. This is exactly what needs to happen. The economic barriers facing producers need to be removed and as soon as we see legislative action we will see a dramatic increase in productions based in Illinois, leading to job growth and the further development of a sustainable pre/post production industry in our state.

        Chicago is one of the most inherently cinematic cities in the world and plenty of films would love to shoot here but at the end of the day it simply comes down to dollars and cents . When you’re administering the allocation of investor capital to film productions you have a fiduciary responsibility to base your production in shooting locations that offer the most competitive tax advantages, and right now we have a world class city with a subpar incentive program. The people of this state deserve better

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  2. January 18, 2013

    Update: A colleague in New Orleans said Divergent was supposed to shoot in Louisiana, but moved to Chicago.

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    • January 20, 2013

      Or just film 90% in Louisana, and do two weeks in Chicago. Most movies could probabbly get away with that-or less. but I could see why they whouldn’t, if they got big scenes they want to do practically or something like that.

      Your saying that at 40 million this is a big A list project-and yes..but no.

      If this was a 100 million dollar project they could have done the avengers thing, or something similar film it all in new mexico and then do a couple of weeks in New York..

      If this was 15 million dollar film, they whould have probabbly written around it such that they could film some establishing shots or just in chicago but do all the action in the big easy..

      In short from what i know of the Illinois credit, it sounds to me such a werid conflux to do it. I would agree that if they want films to get there i would do ,especially becuse i kind of personally think your not going to see a lot of 40 million dollar pictures in general-let alone where this could possibly happen.

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  3. February 6, 2013

    It’s staggering that you would start your argument with the false premise that the primary role of state film incentives should be to serve the needs of film producers. State film incentives serve two primary functions: Job creation for state residents, and economic activity that is going to return an investment for the state that’s putting up the cash. Unless incentive programs demand those two goals from producers, they aren’t serving the state, and they aren’t a good use of tax payer resources.

    As we’ve seen throughout the two decade history of state film incentives, states engaging in a battle of give-aways has resulted in a race to the bottom for both the states putting up the cash, and for our nation’s film crews. This failed system of incentives that you continue to champion has resulted in a hugely inefficient system with a massive amount of taxpayer waste. The average return on investment is currently a 30% loss. This is not sustainable for the states. Something needs to change.

    Unfocused giveaways return little of lasting value to the states. Producers such as yourself make out like bandits, because the resultant bidding war between states results in a buyer’s market, while the film workers and the states see their bargaining power and their incomes reduced. The only way for long-standing film communities such as Chicago to stay economically competitive is to enter into a bidding war with newcomers that have far less of value to offer to offer film makers, but who buy their way into the film job marketplace anyway with cash bribes.

    Talent level and efficiency of crews used to be big marketing tools for the states, but with the spread of film incentives, talent pools have largely ceased to be much of a consideration for many producers. They bring in a few of their own people as department heads (as they did with Divergent), and hold them accountable to get the job done. As a result, many producers would literally hire trained monkeys for most positions on their films if it would save them 2% of their budgets.
    •••••••••••••••••••••••••••

    Let’s use Louisiana and Michigan as examples of how film incentives work:

    Louisiana’s program isn’t succeeding for the reasons you claim, it’s succeeding because it caught on early to the false promises of the trickle-down economics, and sought to limit the potential for greed and waste with the film projects that they fund. Louisiana’s film program demands that their funding considers the goals of the state on par with the goals of producers. You are arguing for a wide-open, no-holds-barred model that fosters inefficiencies.

    Lousiana’s model does exactly the opposite, requiring up-front that producers return something of lasting value to the community. If they want to maximize their incentives, projects filming in Louisiana have to either put down permanent roots, or agree to multiple projects, or use local labor, or act in other ways that demonstrate that they are returning permanent value to the state, and not just taking the money and running.

    The goal of any state film incentive program should be consistency and permanence of jobs. The system you argue for accomplishes exactly the opposite, turning film workers across the nation into permanent nomads, as we follow the work from state to state as the flow of incentive dollars shifts to whichever state is offering the most incentives that year.

    We can’t judge incentive success by the number of films being made in a given state. All that proves is that greed will find a way. Instead, we need to gauge efficiency and sustainability for the money being spent: What long term goals of the state are being achieved?

    Comparing incentive size to number of jobs created, Illinois’ incentive program is currently over seven times as efficient as Michigan’s. During the height of Michigan’s film incentive give-aways, it was over twelve times as efficient. While this math may not matter to you, it damn well matters to the states and to their local film workers, whose bottom lines are being negatively impacted by other states buying their jobs out from underneath them.

    At the height of Michigan’s incentive give-aways, the unlimited pool of cash attracted far more work than Michigan’s crews could staff, pulling that work away from other established film centers such as LA and Chicago. That reality kills those of us trying to help you get your films made. If you do that to us for long enough, there won’t be any of us left to service your projects. After a certain point, it just stops being worth it.

    Over 90% of all department heads for those Michigan projects needed to be brought in from out of state because Michigan simply didn’t have the talent level to support their level of giveaways. By contrast, during the height of Illinois’ incentives, the majority of our film workers are employed at home, rather than having to be on the road. There is no worker shortfall, there is no waste in the level of incentives being offered. Every dollar spent serves the needs of the local film workers, and returns value to the state.

    While Illinois’ model could use some tweaking to help attract a steadier stream of work, to its credit it is one of the most efficient film incentive programs in the US, dollar for dollar. As a result, Chicago has been able to maintain its world-class talent base, despite the model of film incentives that you prefer decimating other film communities across our nation.

    •••••••••••••••••••••••••••

    The moral of the story is that states and film producers need to stop playing these self-serving financial games with each other, because it destroys, instead of fosters, film communities. We need to sit down at the table to define what we can, and should, be doing for each other in return for the hundreds of millions of dollars that are passing hands. Producers such as yourself need to step away from your spreadsheets for a moment and consider experience and efficiency of local crews as tools to help you make a quality product while bringing your projects in on time and on budget. We need to work together to find the formula that will allow you to bring work to our communities, and allow us to help you make the best product possible.

    The PERMANENCE and QUALITY of work brought into a state needs to be given far more credence than QUANTITY. Michigan is a case in point. For three years it offered the largest film giveaways in the nation, yet the state is no further down the road toward having a sustainable film community today than they were before they threw away half a billion dollars trying. Their incentive program was an unfocused greed fest that utterly failed to fulfill its promises. Despite the massive amount of temporary work that the giveaways created, nothing good came of it for those that were providing the cash and the talent pool.

    Producers, on the other hand, had an endless pot of 42% rebates available to them, and would often choose the “savings” that Michigan was offering them, even though they were 4th or 5th in line to film in the state, and knew upfront that they would be working with local crews that had often never been on a film set before. The big losers were the state, who saw a huge negative return on their investment, local permanent film workers who saw their jobs disappear as soon as the incentive largesse was reduced, and national film workers who had to abandon their families and travel to Michigan to fill the glut of jobs that were stolen from their own states to begin with. To what end??

    We don’t do that in Chicago. If you film on a union project here, you’re going to have crews who know what they are doing and who have been time tested. If we don’t have the crew to attract a 7th or 8th project, we’re not going to bullshit you into filming here. We’re going to tell you up front, because we want every project to get our best effort, so film makers will choose to come back again and again. That’s how film incentives should work, value returned for value.

    Bottom line, the old-school model of “serve-the-producers” at all costs is on its way out because the math simply doesn’t add up for either the states or for film communities across the US. The new models that are evolving will need to quickly prove that they are both more efficient and more sustainable for the states than the old models. The days of free lunch for producers is over. If these partnerships are going to continue, we’re all going to have to ask ourselves what we can do to assure a fair return on each other’s investment. More and bigger giveaways is not the answer.

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    A couple other brief notes:

    – Funding workers from out-of-state serves nobody’s interests EXCEPT producers. The same is true of ATL talent. This is especially true in film communities that maintain a large, across-the-board base of world-class talent such as Chicago. Why should Illinois pay for the right to have a given actor working in our community? Where’s the return to the local talent base or to the state taxpayers for that senseless give-away? What you are proposing doubles or triples the cost of providing the same local jobs. When states agree to pay that bribery, film communities start falling apart.

    – Your assertion that bond companies require department heads to be flown into Chicago from L.A. or NYC is grade-A bullshit. I cannot tell you the number of times that the talent level of department heads that were brought in from out of state failed to meet the standards we hold ourselves to in Chicago. The decision to hire out-of-state is made by producers alone, who consider using people whose talents are known to them to be a worthwhile investment when facing extremely tight budgets and time-lines. It’s a trust issue.

    Chicago is not unique in this respect. It happens across the nation, regardless of available local talent. It even happens when projects developed in LA film in NY, and vice-versa. The ONLY people which require bonding is select above-the-line staff: high-cost actors, a director, and perhaps a DP or Designer who would endanger completion of the film if they became incapacitated. To claim that a production would be held up because one of 30 or 40 department heads became ill, shows just how far you will go to stretch the truth, and just how severely you underestimate Chicago’s world-class crews. Ask around, and you’ll find that there is no comparison to Chicago’s crew capabilities. Other cities may have larger overall bases of staff, but none with a staff depth 4 or 5 shows deep has an average training or skill level comparable to Chicago.

    – Your claims that local film workers could improve their skill levels from the types of project you could bring to our city brought quite the smile to my colleagues in Chicago. The reality is that while working on the types of projects that you attach yourself to, we spend much of our time teaching the producers how to get their films made efficiently. I don’t say this condescendingly. A huge part of our role is to use our experience gained making films for decades at the top levels, to assist relatively green producers such as yourself in getting your films made far more efficiently than you possibly could hope to do with less experienced crews.

    Give us a shot. We’ll do your film proud, and save you money in the process.

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  4. February 15, 2013

    You guys crack me up: You complain about how Illinois’ film incentives are broken because they don’t serve your own narrow needs, and then fail to mention that there are currently 8 major studio and network projects in town, which is exactly what the incentives are supposed to attract. Illinois film incentives are wildly successful, and over ten times more efficient at both creating jobs and returning income to state tax coffers as neighboring Michigan, for instance.

    The low-budget projects you are championing play a vital role in Chicago’s film community, as long as they employ local talent and create well-paying local jobs. When they serve as an excuse to bring in high-ticket talent from out of town, and pay the locals next to nothing, then they may be serving producers and financiers, but they aren’t serving the best interests of the state, or of Chicago’s film workers.

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    • October 21, 2013

      I’m not sure who the “we” is, but what I proposed is a well thought-out, thoroughly researched modification to the tax credit that does not take anything away from what it currently generates; but actually enhances it to create a self-sustaining industry across low-budget and mainstream independent films, studio features and television series.

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      • JGISD permalink
        October 21, 2013

        What you propose is an expansion of a system of attracting film projects that needs to instead be scrapped and replaced. State film incentives don’t create jobs, they steal them from other states, which means they can and will be stolen back eventually, destabilizing in the process any film community that comes to depend on them, and turning state film workers across the nation into perpetual nomads. Why should Chicago pay bribes to producers who have no intention of putting down roots, and who switch beds after one drink, provided the price is right? Shouldn’t we instead focus on consistency of level of work from year-to-year, and ask for a little more permanence and commitment from the producers and ATL staff who come to Illinois just to feed at the public trough?

        You’re looking at the equation strictly from a producer’s standpoint. For producers, the new incentives you propose make perfect sense: They open new markets and allow you to reduce your costs greatly by introducing new tiers that pay far lower wages than any that currently exist in Illinois. While that influx of low-income jobs could seem a boon at first glance, it has the net effect of significantly lowering the average net wage and crowds out the mainstream projects that serve as the bread and butter for Chicago’s film workers.

        If your proposal were to come into being, Chicago media production would run the very real risk of becoming another Louisiana, where wages are 30-40% less than they are in Chicago, where major concessions are demanded by producers, and where a predominance of ill-funded, low-budget projects exhausts and burns out the crews.

        There is room for all levels of film making in our city, and Illinois’ film incentives certainly lack the right combination of elements at the moment to attract lower-budget films. What you are suggesting however, is designed specifically to upset the apple cart and swing the pendulum so far to to the benefit of producers that it stops making sense to local film workers. Instead, the focus needs to be on maintaining and slowly growing what we have, while slowly bringing those smaller projects into the fold in a controlled and deliberate manner.

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  5. April 28, 2013

    Jeff –

    You state, “Allow wages for out-of-state department heads to qualify for the credit. This helps everybody.”

    How so?

    In Louisiana, we have a 5% bump to the overall production/tax incentive from 30% to 35% for hiring locally. The common thought process being productions have an incentive to hire locals over out-of-state crew talent.

    I don’t believe the 5% bump is the correct approach. I believe allowing all wages with state income taxes being taken out to qualify.

    “Allow wages for out-of-state above-line-talent talent (who are working in the state and paying state taxes) to qualify for the credit. If a wage cap on non-resident ATL is necessary, then cap it at $1-million.”

    Currently, there are bills in the Louisiana legislature which want to cap ATL at $1M. And, there are following arguments stating if this ATL cap is put in-place, the entire Louisiana film industry – Hollywood South – will collapse.

    I’m still on the fence with this one requirement. Your thoughts?

    – Stan

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  6. November 15, 2013

    Check out my update to this post:
    http://filmclosings.com/2013/11/illinois-updates-film-tax-credit-for-non-resident-stars/

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