American Greed

Multibillion-dollar tax breaks for movie production are getting bad reviews, and some states are walking out

How to invest in Hollywood without all the drama

The glamour of the movies — not to mention the big money behind them — has turned the industry into a big, glitzy, sought-after prize for economic development officials across the country. But lately, more and more states and municipalities are giving up on their Hollywood dreams — or at least the tax incentives they were offering in hopes of becoming movie meccas.

According to the National Conference of State Legislators, 13 states have eliminated their film production subsidies in the past 10 years, while several others have scaled back their programs.

The league said that as of last year, 31 states along with the District of Columbia, Puerto Rico and the U.S. Virgin Islands offered some form of film or television production incentives. That is down from 44 states in 2009, as states deal with budget pressures and officials view less-than-stellar reviews on the programs' effectiveness.

"Sometimes these credits work for a while, then they don't work and then they're withdrawn and then they're reinstated," author and industry researcher Robert Marich said in an interview with CNBC's "American Greed." "It also depends on the stomach of the voters to essentially subsidize an industry and lower taxes for a certain select industry, which means essentially raising taxes for everyone else."

Of course, this is not just any industry. Movies are glamorous. Productions offer locals the prospect of rubbing elbows with stars. And the studios spend millions of dollars on every production, creating a potential windfall for the local economy. (One of those studios, Universal Pictures, is a unit of Comcast subsidiary NBCUniversal, which also owns CNBC.)

The subsidies take multiple forms, but typically include tax credits, cash rebates on qualifying production expenses, or a combination of both. Production companies love the cost savings, and states and municipalities love the high-profile economic boost. State subsidy programs typically require an audit of the production's expenses before any taxpayer money is spent.

Plot twist

While the subsidy programs have built-in protections, using movie production as an economic development tool is hardly foolproof. In one extreme case, a Northern California con artist played on half a dozen communities' fascination with the film business to pull off an elaborate scam lasting nearly 20 years.

Carissa Carpenter, a Sacramento-area businesswoman, claimed she had been a child star and casting agent and had the wherewithal to bring a major studio to town. Not just for a single production, but permanently, leveraging supposed Hollywood connections like filmmaker George Lucas. Investors put up millions of dollars to help finance the development, and the communities waited for their ships to come in.

But in the end, there was no studio and Carpenter had no connections — to Lucas, or just about anyone else. Prosecutors said she spent most of the investors' money on herself. Carpenter is serving a 6½-year prison sentence after pleading guilty in 2018 to three felony counts including mail fraud and making false statements to a government agent. A judge ordered her to pay $3.6 million in restitution.

Carissa Carpenter
Source: CNBC

"What was revealed is she's just a charlatan who really had no substance but was all about selling a dream and getting lots of people's money to fund her out-of-control lifestyle," former Assistant U.S. Attorney Todd Pickles told "American Greed."

Risky business

Even legitimate productions carry risks for the states and municipalities that host them — namely that the economic benefit will not be worth the cost to the taxpayers. That helps explain why politicians and policymakers are rethinking the subsidies.

A study published by the University of Southern California in September analyzed the five largest state motion picture incentive programs — in New York, Louisiana, Georgia, Connecticut and Massachusetts. It found that despite nearly $10 billion in spending since 2002, the incentives have for the most part had "no statistically significant effects" on employment. The study's author, USC public policy professor Michael Thom, said the findings "should lead policymakers to question the wisdom of targeted incentives conferred on creative industries."

In a statement, the film industry's trade group, the Motion Picture Association, called the study "fundamentally flawed" and said Thom failed to consider the positive effects of incentives such as maintaining the current level of employment in a state, and diversifying state economies. The organization also noted that the study was funded in part by the conservative Koch Foundation, which the MPA says is biased against film production incentives.

But long before the USC study, many states were already relying on their own analyses and deciding to end the credits or scale them back. Even Louisiana, which in 1992 became the first state to offer film subsidies, put a $150 million cap on incentives per production beginning in 2018, citing budget pressures.

However, other states are not giving up on their Hollywood dreams just yet. Legislators in Arkansas, whose program was scheduled to expire last June, decided to extend it for 10 years. North Carolina, Utah and Virginia recently increased their incentives. Even California, which once upon a time did not have to offer tax incentives to lure movie producers to Hollywood, recently raised its credit to a maximum of $330 million per year. The program is scheduled to expire in 2025 unless the governor and legislature renew it.

For the communities in California that bought Carpenter's studio pitch — including Vallejo, Lathrop, El Dorado Hills and Dixon — the actual monetary losses from the scam were minimal, according to court filings, and no state subsidies were involved. But some private landowners were pushed to sell their property to make way for the nonexistent studio, and local economic development officials spent precious time and resources trying to land a project that was never more than a work of fiction.

The lesson is clear for states and municipalities looking for a piece of the $102 billion per year U.S. film and television entertainment industry to boost their economies. Proceed carefully. In the movies, not everything is what it seems to be.

See how Carissa Carpenter's promises of movie magic flopped in her $5 million scam. Catch an all new episode of "American Greed," Monday, Feb. 3 at 10 pm ET only on CNBC.

Correction: An earlier version of this story misstated the amount and expiration date for California's film and television tax credit.