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April 15, 2024

Here’s why insurers like CT’s film production tax credit

PHOTO | CONTRIBUTED 'Christmas on Honeysuckle Lane,' produced by Rocky Hill-based Synthetic Cinema, was filmed in Old Wethersfield and aired on the Hallmark Channel. Synthetic Cinema CEO Andrew Gernhard recently testified against a bill that would repeal the state’s film production tax credit.

In addition to major pushback from sports media giant ESPN and other film industry representatives, a proposal to eliminate Connecticut’s film production tax credit has also drawn opposition from one of the incentive’s main beneficiaries: insurance companies that purchase the credits to offset their own state tax liabilities.

House Bill 5110, which was introduced by the Finance, Revenue and Bonding Committee, proposes to repeal the state’s digital media and motion picture tax credit, which offers tax credits to production companies that spend at least $100,000 in Connecticut. The proposal didn’t move out of committee before deadline, but could still be included in another bill being considered by lawmakers.

The tax credit has been repeatedly targeted by advocacy groups and some legislators who say its economic benefits aren’t worth the cost.

Connecticut’s film production tax credit has awarded over $1.5 billion to production companies since its 2007 inception. According to one estimate from House Majority Leader Jason Rojas (D-East Hartford), the tax credit has had a negative net impact of more than $500 million on the state budget since it began, including an $11.5 million loss in fiscal 2023.

Rojas is among the lawmakers pushing for the tax credit’s repeal.

But the incentive has many supporters, including insurers that do business in the state.

Both the Insurance Association of Connecticut and National Association of Mutual Insurance Companies voiced opposition to the repeal, noting that the film production tax credit is one of the most popular tax credits insurers purchase to offset their state tax liability.

In 2022, for example, insurers claimed 40 film production tax credits worth $40.4 million to offset their insurance premiums tax, which is assessed on insurance policies sold in Connecticut, according to recent data from the state Department of Revenue Services (DRS).

Over a 10-year period ending in 2022, insurers claimed 454 film production tax credits worth $396.4 million to offset their insurance premiums taxes, DRS data shows.

Film production tax credits can also be used against the state’s corporation business tax. In fiscal 2021, companies claimed 34 film production tax credits worth $55.4 million to offset their corporate business tax obligations, according to DRS data.

On an annual basis, companies can use film tax credits to offset up to 50% of their total corporate tax liability, and up to 55% of their insurance premiums tax liability.

“Like all businesses and taxpayers, insurance carriers are keenly aware of the financial burden that state tax liability can have on the business operations of their organization and their affiliates,” the insurance associations wrote in joint testimony supporting the film production tax credit. “State tax liability is not an insignificant factor in the cost of doing business, and insurance carriers, like many taxpayers, seek methods to manage their state tax liability,” including by purchasing tax credits.

They added that eliminating the film tax credit would be “detrimental and harmful for these insurance carriers.”

Hartford, of course, is still known as a dominant center of the global insurance industry, and is home to major insurers including The Hartford, Travelers Cos. and Aetna.

Over 1,300 insurers paid $254.3 million in premium taxes in fiscal 2023, which ended June 30, DRS data shows.

Transferring credits

Connecticut has three separate film tax credits. Insurers have also purchased film infrastructure tax credits, which incentivize the construction of facilities used by digital media and motion picture companies.

However, the film production tax credit is much more widely used. It offers credits to production companies that spend at least $100,000 on motion pictures, documentaries, TV series, music videos, commercials, miniseries, video games or other forms of media.

Eligible companies must conduct at least 50% of principal photography days within the state, and expend at least 50% of post-production costs within Connecticut.

Bristol-based sports media giant ESPN is a major beneficiary of the state’s film production tax credit.

Productions that have between $100,000 and $500,000 in expenses qualify for an up to 10% tax credit; $500,000 to $1 million in expenses qualify for a 15% tax credit; and $1 million or more in expenses qualify for a 30% tax credit.

Connecticut awarded 36 film production tax credits worth more than $103.9 million in fiscal year 2023, according to the state Department of Economic and Community Development (DECD), which administers the program. Companies that were granted the credits spent more than $335.3 million on qualified projects.

A key part of the incentive program is the ability of film production companies to sell or transfer the tax credits.

John Lanza

John Lanza is a partner at CohnReznick, who leads the accounting and consulting firm’s business tax credits and incentives group in Stamford. He said that since film production companies often aren’t structured in ways to utilize the tax credits — mainly because they’re not set up as C-corps that pay corporate business taxes — they sell the credits, typically through brokers, to other companies that can benefit from them.

“In a lot of instances, film tax credits that are generated in the state of Connecticut are transferred to insurance companies in the state of Connecticut,” Lanza said. “It’s going from one Connecticut entity that doesn’t pay any corporate tax or insurance premiums tax, and then it’s transferred, because the law allows that, to another entity that does pay that tax.”

Peter Downing, a national principal-in-charge of tax credits and incentives at accounting and advisory firm Marcum, said there are exchange marketplaces where film production tax credits can be sold for cash.

“It reduces their investment,” Downing said of film production companies. “We’re dealing with millions of dollars here of spent costs (for a production), so if I can get $300,000 or $400,000 back in the sale of credits, then that helps the production company, because they go on, sell the movie off to an investor group … and then these guys run their next sprint.”

Downing said the film tax credit has been a positive for film production companies and insurers, but he also acknowledged it’s costing the state roughly $100 million a year.

“$100 million is a big number, and if you’re having budget issues or you’ve got to balance a budget, these programs can get chopped,” Downing said.

Tax credit’s benefits

Lawmakers have been debating adjustments to the state’s two-year, $26 billion budget that was passed last June. And their ability to spend more money is constrained by spending and borrowing caps that were adopted in 2017.

That’s led some lawmakers to target the film production tax credit for elimination, so more money can be funneled to other areas like education and health care.

But Downing said that, because the state is home to major media production companies, getting rid of the tax credit isn’t simple.

A 2022 study published by the DECD concluded that the state’s three film incentive programs have led to job and personal income growth, as well as a rise in the state’s economic output.

Sports media giant ESPN, which employs thousands of people at its main campus in Bristol, received more than $15.3 million in film tax credits in fiscal year 2023, according to DECD. The company ranks behind NBC’s four subsidiaries that were issued $38.7 million in credits last year, and just ahead of the $15 million collected by Stamford-based World Wrestling Entertainment.

Downing said that while companies such as ESPN probably wouldn’t fully leave the state if production tax credits were eliminated, they would likely be more reluctant to expand in Connecticut in the future.

Downing and CohnReznick’s Lanza also said that without these film tax credits, insurance companies would have to search for other eligible tax credits to buy, or simply pay more in state taxes, hurting Connecticut’s economic competitiveness.

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