I’ve been talking to folks over the last little while about the Film Tax Credit and what insights and improvements it might offer for other creative industries, manufacturing and other industrial tax incentive models such as the payroll rebate system.
This is a brief analysis of how and where tax credits work along with a short case study.
Lot’s of folks have been talking for a while about how to harness the great sustainable success of Film Industry Tax Credits in other creative industries. Though it’s been discussed for years, it’s been difficult to get consensus on how Tax Credits could be applied, particularly to the music business which some people see as analogous. This is a discussion paper outlining issues and ideas.
How The Film Tax Credit Works
A film tax credit is a regionally structured, labour-based tax credit. If a Producer employs creative folks in the film and TV business that attracts external investments, particularly TV licences, Federal funding, industry funding and distribution guarantees, he can have that expenditure audited, verified and checked over and if all is good he can claim a tax credit equal to roughly the amount the people he employed paid in taxes (including an economic impact multiplier). In this sense tax credits are Revenue Neutral. That is to say that the source of their financing comes from the tax paid by the people who work on the project whose jobs would not have existed without the project. At very worst it’s a wash, but in reality the people, the jobs, the ideas and the economic activity make a huge positive impact on Nova Scotia.
The simplest explanation for this is that government is using taxes collected on high-paying, skill rich, creative work that would not have come to the region under any other circumstances to buy those jobs. Put even more simply, they are buying money. And it’s on sale! They’re getting it for about thirty cents on the dollar.
The difficulties and alternatives
So how can this successful industrial development tool by applied to other types of creative manufacture?
Good analogies in other creative industries are not easy to come by. Few businesses have the scale, the finite schedule, the detailed accountability and the verifiability of a TV or film production. Few other creative industries so plainly draw in investment capital as part of their basic business model that would not come to Nova Scotia under any other circumstances.
Over at NSBI they work the same model to draw industry investment to Nova Scotia but they call it a Payroll Rebate and they pick and choose specific businesses to qualify instead of simply opening it up to all businesses in a certain sector or area like the Film Tax Credit. There’s lots wrong with the pick-a-winner style of economic development, mostly it’s just discouraging to all the people and businesses that don’t get picked, and the payroll rebate has not been nearly as successful as the Film Tax Credit.
What makes a good tax credit candidate?
1/ Is it a clean, low impact, industry that positively affects Nova Scotia at home and our reputation in the world?
2/ Does it draw in investment that would not come to Nova Scotia under any other circumstances?
3/ Does it require a variety of highly skilled labour positions and offer rich, meaningful, good paying jobs?
4/ Are the companies and projects of such a scale and professional quality that they can handle the administrative responsibility of financing their own business and then auditing the results and proving they have done everything they promised to do before getting any tax credit benefit?
5/ Is it a consistent or growing sustainable industry with promise for future development?
It’s pretty simple. We want to support ideas that are positives for the community, that attract and keep creative, positive, skill rich work in Nova Scotia. We want to attract investment. We want to keep our risk at zero by only committing and paying out after the project has verified through audit that it has done everything it said it would do.
A good analogous business - Shipbuilding
Shipbuilding would be a good candidate for a tax credit system. It’s interesting creative work. It’s a proud part of our heritage and our future. It a positive part of our story at home and abroad. The companies are of a professional scale, even small boat builders, that they can deal with the financing and reporting requirements needed to responsibly account for the people’s tax money. Boats are built on project schedules with clear beginnings and ends that lend themselves to clear accounting and labour billings. A new ship or boat is commissioned. The investment money comes to Nova Scotia. The ship is built and delivered. The builder reports to government, is subject to a detailed audit and then is given a tax credit based on the Nova Scotia labour he employed in the ship production. Instead of the loans, gifts and gobbly gook given away for the Irving navy shipbuilding project, they could have structured a highly accountable, performance and success-based labour tax credit that would have been a lot more responsible and transparent to the tax payers. Importantly, it could have been a shipbuilding tax credit available to all builders – new companies and old, big and small alike - not just the Irvings.
To find other types of industries that might be a fit for a tax credit some compromises may have to be made. If the tax credit is a fit for TV and film or shipbuilding why not the music business? Looking at the desirable requirements:
1/ Is it a good clean and desirable industry?
2/ Do they draw in money from away that would not come otherwise?
Well, sometimes, but not as part of the basic business model structure. In the old days when their were record companies it might have been possible to induce them with a tax credit, but their decisions are talent based and no amount of money will get someone to back, buy or listen to music they don’t like. Web development, interactive or otherwise can sometimes draw in money from away, but that’s not the core of the industry and tax credits would not likely make a difference in most financing cases.
So, generally no, industries like this, though they have successes, don’t have the attraction of investment capital as a core foundation stone of their productions.
3/ Do they create great quality interesting work?
4/ Are they of such a scale, schedule and structure to handle interim financing and make transparent, verifiable, accountable audits on which to base labour tax credits?
Again, no, some, maybe a few, are, but it’s generally not a hallmark of either industry.
5/ Are they consistent, sustainable or growing industries or sectors?
Sooo… 3 out of 5.
We can give up here or we can consider how and why we could make tax credits work for these kinds of industries that don’t perfectly fit the economic model yet there is considerable will to encourage them.
Applying Labour Tax Credits to the Music Industry
Music is a great cultural product close to the heart of Nova Scotia. We currently have a mishmash of agencies, grants and organizations, heavily bureaucratic and often elitist, funding ad hoc musicians, bands, events and other arts organizations and projects in a piecemeal pick-a-winner style. It would be great to find a better way.
Some of the great things about Tax Credits: they blend cultural and industrial mandates; there are no deadline dates, they can be qualified any time; they’re sustainable and don’t need to be funded by a pool – the more tax creditable projects, the more tax credit money is available; industry interim finances and thereby holds all the risk; they are relatively low in bureaucratic overhead, easy to administrate and fairly available to anyone and everyone who qualifies. It’s clear Tax Credits would be a huge improvement over the current systems.
The problem is how to argue that they are drawing in investment to Nova Scotia and how the verification and accountability process would work on a reasonable schedule.
If musicians and the attendant technicians and talent are the labour, who is analogous to the producer in the TV and Film business? Where does their financing come from?
The employers of musicians and technicians are: clubs, festivals, events and ultimately the public who buys their services and products. Their financing doesn’t obviously come from away but it is capital that if not spent on regional labour would spin-off and out of the region much quicker. Clubs, venues, festivals, events and even consumers also have, in their own way, good tax accountability and verifiability through their auditable tax returns.
If we offered venues and clubs a tax credit based on the Nova Scotia creative labour they employed, and if we broke the “not for profit” mind-set that the grant-based bureaucracy has instilled in festival and event organizers, a music and arts creative tax credit would be a powerful tool to encourage employment. If consumers were given a tax credit for music and art purchases it would likewise encourage cultural economic activity to develop a stronger and more well-founded local market that could build better exports.
One way to mitigate the “cost” factor because investment isn’t coming in from away to justify the economic multiplier, is to make the tax credit simple and not fully refundable, meaning it’s a reduction of taxes otherwise payable not a credit that must potentially be paid out from general revenue.
At what rate would a music tax credit really make a difference? What would the cost be? Though impressive economic impact numbers have been generated by music industry lobby groups, the truth is that very little hard cash, relative to GDP, is being spent by Nova Scotia companies on Nova Scotian music, arts and culture. If the conservative view were taken, a 17% tax credit would match the nominal tax rate of those employed and create a sustainable system. But it likely would not encourage employers to do more and perhaps not make any difference because of the administrative burden and interim financing. At the other end of the scale a 100% tax credit, where employers can credit taxes otherwise payable by the full amount they spend on Nova Scotian music, arts and culture would certainly have a huge impact on the ability to employ, present and promote Nova Scotian talent. Would it be sustainable? Government would simply be collecting less in taxes from business and that money would circulate at least one more time in economic activity than it otherwise would, attracting taxes at each cycle. Also, there would be cost savings in the reduction of other, now redundant, music, arts and culture pick-a-winner type funds. The market would be freed to decide – all other things equal – which talent got the most work and money.
Artists Get The Benefits – Not The Paperwork
All the reporting, audit, and verification would be handled by industry in year-end corporate tax returns. All benefits would ultimately be received by artists. The system would create more competition, more demand for talent and a more entrepreneurial mindset among all the players involved with less bureaucratic involvement.
A slightly more complex model, especially for venues and clubs, would be to tie other benefits from other levels of government to the tax creditable talent labour. For example, HRM could have a uniform closing time but allow clubs to stay open later based on the amount they spend on NS talent. In this sense the tax credit, employing NS talent, could be valued at far over 100% without any out of pocket costs for municipal government’s partnership.
The key is to structure the tax credit so the benefit is increased employment and the incentive to take on the accounting responsibilities of the system rest with business entity that have the capacity and business cycle schedule to be accountable in a timely and professional manner.
Systems are already in place at finance to handle such a tax credit. There would be significant savings in other bureaucratic areas. The tax credit would encourage a new competitive free market, open to all with the talent and effort, that would find a sustainable balance. It would serve both cultural and industrials goals. The total cost in reduced business taxes would likely be less than $1m in year one and balance out at less than $10m per year in a robust local industry. (if a typical performance paid $2500 that would be a minimum of 4000 performances per year – numbers and order of magnitude bigger than what is supported now.) And artists would invest that money as they saw fit in recording, training, media, export development and equity.
Other Creative Industries
Once the tax credit was up and running in this way in music and arts, it would be possible to review and consider how the tax credit could be considered even more widely for all businesses employing Nova Scotian cultural workers, which could be defined widely to include everything from boat builders to web designers.
Ultimately, all manufacturing work is creative and the system might be applied and opened to all industries that meet the basic benefits while creating products and services that put Nova Scotia in business with the world.
Writing about life, citizenship, and Nova Scotia.