NS Film Tax Credit: A rational analysis

sdfsdfsdfsdf By evan on Apr 09, 2015

Edit: I’m told this isn’t an proper analysis by one of the writers of the Ivany Report. He went to Harvard. I know this because he told me so. He never did get back to me with a list of issues.

It’s a blog post. Take it as you will.

The Preamble

I have been fairly vocal against the NS Film Tax credit for the past few weeks. I am happy to reconsider my position given evidence; but as of now I am firmly of the opinion that if everyone understood whats going on there would be outrage.

If you read anything; let it be this: We were losing $5M a year. After changing the tax credit it’s not only sustainable, the refundable portion is is still 12.5% to 16.3% of salary. For scale, the RBC payroll rebate is only 5%-10%.

The Debate

Invariably I’m met with one of two responses. “Save Sunnyvale” (an appeal to emotion)
and “But it brings in $140M” (a straw man.) I hope to address both of these and the underlying issues here.

Taxes and finances are a difficult topic to cover in 140 characters. To understand this issue you need a basic knowledge of accounting and refundable / non refundable tax credits.
I’ve been attempting to simplify it down to 140 characters and basic math but I feel that is adversely affecting my position at this point.

The truth is; it’s ignorance. I can assure you the industry is well aware of their sweet deal
and wants to hold on to it by any means necessary. If people understood the issue they’d be less likely to rally under the banner of a fictional trailer park. I’m not saying people are ignorant in general, but there are only so many times I can hear “Economics have nothing to do with a provincial budget.” before losing my mind.

The Economics

I’ve been told “it’s not black and white.” Hate to rain on your parade but it’s discrete math. It’s literally black and white. What is being discussed isn’t by definition a handout. It’s not a subsidy. It’s a tax credit.

As such, I believe we should talk about it in financial and accounting terms. If we want to discuss it on its merits, and look at the social implications of subsidizing film in Nova Scotia, we can and should stop treating it as a tax refund and treat it as a subsidy. We would still need to discuss whether or not we can afford a subsidy, but at least then we can have a fair and transparent discussion on the matter.

The Straw Man

For reference, a straw man argument is when one sets up a lesser argument then knocks the lesser argument down.

In the discussions around the film tax credit a common theme is that the province is spending $20M and generating $135M. On its face it’s really easy to look at that and say “Well obviously its bringing in $115M” and that’s where most people stop. While true, this is not the issue with the tax credit. This fallacy makes discussion difficult.

The issue is that the province is arguably losing money on the tax credit. The province spends $20M, which results in $135M in sales. The provinces return, in the form of tax revenues, is only about $15M. That’s a much less rosy picture. The province spends $20M and only makes $15M back? That means we’re losing $5M per year!

That’s right.

Think about it this way (coming back to basic math here.) If Walmart has a TV in stock, on sale for $550, and sells 100 of them that’s a lot of sales ($55000). But what is the return on that investment? We know what was spent; was it worth it? Did they see a return?

To know that we have to go further. What did Walmart spend on the TV? Say Walmart spent $600 per TV, sold them each for $550, and had $55000 in sales. Was that a good investment?

No. While they had spent $60000 ($20M) they sold them for $55000 ($15M)in sales losing $5000 ($-5M) in the process. That $15M is a fair estimate based on data available. In a perfect world with optimistic assumptions it still falls under $20M. If any industry or government representatives have figures on tax revenues, please send it to me.

My position all along has been that the tax credit is effectively a cash payment which has been rebuked by a few prominent members so I want to go over the actual differences between a cash payment and a tax credit.

To do so requires some differentiation. There are two types of tax credits. The first is a “nonrefundable” and the second is a “refundable”. The biggest difference is that the former cannot lower your taxes owed below zero. The latter can. A refundable tax credit can and often does push taxes owed below zero. When someone owes -$500 in taxes, they recieve a cheque for the difference.

In that way, a refundable tax credit and a cash payment have the exact same effect on a balance sheet. The province has less revenue, the business has less expenses. To claim that the tax credit is a credit, not a payment, is a semantic difference at best.

The Appeal to Emotion

As if one logical fallacy wasn’t enough, there’s another in play. The “appeal to emotion.” This is when someone uses emotions to win an argument without debating relevant facts. This happened in two ways. Save Sunnyvale, and threats to leave.

The film industry are masters of manipulating emotions. It’s their day job, to act and convince the viewer of the story. They got big names like Snoop Dogg, Carrot Top and Axl Rose to show support. They’re performers. They performed.

It’s a smart move. Honestly people like the trailer park boys more than bankers or ferry crews. It doesn’t mean they’re right. What do they do though? Threaten to leave. No one likes lost jobs. No one likes unemployment. We need to keep young people in NS. This isn’t what the Ivany Report suggested though. Young people shouldn’t threaten to leave, to create The Sudbury Park Boys, if they aren’t being paid to stay.

As soon as the tax credit cuts were preliminarily announced a concerted social media campaign was begun by industry leaders. The Trailer Park boys being some of the most vocal and even being interviewed in character.

Responsible journalism was found shuddering in a wrecked Trans Am when the CBC literally put fictional drug dealers on TV to discuss the merits of a tax credit.

The Cut

The actual budget was released today, with a film tax credit.

The industry is still threatening to leave.

Here’s the thing; It’s not the exact same tax credit but very similar. It’s still worth 50%-65%. The difference is it’s 75% non-refundable.

Remember those negative tax payments from earlier? Now only 25% of the 50%-65% can be paid out as (effectively) cash.

Lets run some numbers again.

Say a film company brought in $100,000 and paid $90,000 in salaries. As of yesterday they’d owe $3,000 in tax, and get a refund of $45,000 for a total negative tax payment of -$42,000.

In the new budget, that same company would bring in $100,000, pay $90,000 in salaries, owe $3,000 in tax. Only $11250 of the credit is now refundable. The difference that will “kill the industry” and they are threatening to leave over is now that 75% of a negative tax payment.
Granted, their books aren’t as rosy. But they are for profit businesses, and we were losing money subsidizing them. It wasn’t sustainable. Now, it actually is. The province should break even or slightly better which makes the credit worth it.

The Reality

An inevitable response to dissent regarding the tax credit is “But we gave RBC money”

OK. Two wrongs doesn’t make a right, but was that even wrong? Looking at it, again as a financial investment, not a subsidy, what is the return on that investment? Lets look at how much we’re giving RBC and compare it to the post-change film tax refunds.

The RBC credit is up to $22M over 10 years for up to 500 employees. Do the math.

$5M / 500 people / 10y means a refund of $4400 per person. To put that in perspective the NSBI business plan says that payroll rebates are between 5% and 10%.

The NS Film credit is 25% refundable of 50-65%. That’s 12.5% to 16.3%

Lets reiterate those numbers. The RBC credit is between 5% and 10%, the Film credit after the reduction is 12.5% to 16.3%.

The film industry is planning on leaving because we’re only giving them twice as much as it took to coax RBC to come here. After cuts.

The Conclusion

The response scares me. It means we need to either spend more money on education, or at least spend it more wisely (As we all know, mirochondria are the powerhouse of the cell.)

Even today, after the cuts were revealed to be reasonable, people responded with “I’ll never vote again!” Since when did ignoring an issue resolve it?!

We can afford the tax credit now. It’s still a very good return for the film companies. It’s certainly more than most industries. If you feel my analysis was wrong, I encourage you to show me otherwise. I really do welcome rational and reasonable debate.

As it was we were losing money. We were spending $20M a year to get $15M which is a fairly poor investment. Debt can be a good thing. But not without the means to pay it back. By doing so we are borrowing from our future.

But most of all, we need to start thinking rationally. We’re living in the aftermath of the boomers borrowing from us, and if we do the same there will be nothing left.