Netflix and other companies receive $9 million in tax credits. How do film tax credits work in Pennsylvania?

Harrisburg is rolling out the red carpet for Hollywood, offering millions in tax breaks to film and television productions.

The state’s film commissioner, Gino Anthony Pesi, announced Thursday that $9.2 million in tax credits have been awarded to a dozen projects, including the second season of Netflix’s Tires, created by Mechanicsburg comedian Shane Gillis. The productions are expected to create nearly 2,200 jobs and inject almost $37 million into the local economy, according to the Department of Community and Economic Development (DCED).

“We’re taking a dual approach, both supporting big budget, high-profile projects and also independent Pennsylvania producer projects,” Pesi said. “These projects help make the state a better place to live, work, and play not only because it brings job opportunities but raises the quality of life due to the arts, culture, and entertainment created from it.”

Among the recipients, Netflix received $5.5 million for Tires, which is filming in Philadelphia. Sight & Sound Productions was awarded $2.6 million for A Great Awakening, a film about George Whitefield currently in production in Philadelphia and Lancaster. The remaining $1 million was allocated to smaller projects through the Pennsylvania Film Producer Reserve, a program supporting independent filmmakers.

This round of the state’s film tax credit program follows previous rounds which saw $16 million go to the production of Creed II and $5 million for M. Night Shyamalan’s Knock at the Cabin, among other productions.

Film tax credits offer film and TV production companies a 25% tax credit if they spend at least 60% of their total budget in Pennsylvania.

For example, on a $1 million production, at least $600,000 must be spent on in-state expenses such as payroll, travel, or postproduction costs. The 25% tax break only applies to the in-state expenditures, not the total budget.

If a production company wants to outsource portions of production, like postproduction and editing, to New York or LA-based postproduction houses, it requires these companies to budget accordingly, Pesi said.

Filmmakers don’t receive the tax credit until after the film is finished and the budget is audited. At that time, the recipient will receive their tax credit certificate. However, according to local filmmaker and former mayoral candidate, Sam Katz, whose projects have received these credits in the past, most of the time, filmmakers end up selling their tax credit to recoup the costs of production.

“I have to sell the credit to a Pennsylvania taxpayer, mostly corporate but it could be in individual, who expects to get a slight discount,” Katz said. “If I’m a corporation and I have a $100,000 tax liability, I can give a filmmaker $93,000 for their $100,000 tax credit from the state, and save $7,000 on my corporate taxes.”

Katz said he and others who have received the film tax credits went on to sell it on the open market through brokers and middlemen who take a few percentage points for themselves. Selling the film tax credits is the most common way recipients use their tax credits, Pesi said.

The economic impact of film tax credits remains a point of debate.

In a 2019 performance evaluation on the state’s film tax credits, Pennsylvania’s Independent Fiscal Office (IFO), found that for every tax credit dollar handed out, only 13.1 cents is returned in state tax revenue. If certain thresholds of in-state expenditures aren’t met by production companies, “then the tax credit has no material net economic impact.”

The IFO confirmed these findings and noted their most recent analysis lines up with other reports produced by state agencies.

However, Pesi pushes back on those findings pointing to other indirect economic impacts of film and TV, like Philadelphia’s very own Rocky Balboa which brings 4 million people (more than double the amount that visit the Liberty Bell) to the steps of the Philadelphia Museum of Art each year to pose with a 10-foot bronze statue of Sylvester Stallone’s iconic character — now there’s an entire holiday and gift shop in honor of the movie.

People choose to move to Philly because of the Rocky films as Haseeb Payab detailed in a 2021 Inquirer article on his move from Afghanistan.

Similarly, a Montana report found that during a five-month production of Yellowstone, residents’ income rose by $25 million, with $85 million in gross receipts for local businesses.

While many states often lose state tax revenue by awarding film tax credits, Pesi argues that without them, high-profile movies would simply not be made in Pennsylvania. “In the current state of the industry, production goes where the incentives grow,” he said.

Pesi said productions make up for that tax revenue deficit in other ways. Not only by spurring tourism through programs like HBO’s Mare of Easttown and M. Night Shyamalan’s illustrious film career but by incubating the next generation of talent.

“A big part of this is making sure that the next generation of Pennsylvania filmmakers does not have to do what I did, which was move 3,000 miles away from my closest friends and family to have a sustainable career,” Pesi said of local filmmakers moving to LA to “make it” in the industry. “There’s homegrown talent all over Pennsylvania and when you’re helping Pa. producers make films, you could be nurturing the next M. Night Shyamalan.”

Katz suggested the state explore alternative economic incentives, such as requiring high-profile productions to establish facilities in Pennsylvania.

“There are alternative ways we are looking at in the future and exploring proposals to make incentives more independent friendly as well,” Pesi said.