US film-makers board tax-break bandwagon

[David Allen Grove]

US film-makers board tax-break bandwagon

By Edward Alden

Published: May 6 2004 5:00 | Last Updated: May 6 2004 5:00

http://news.ft.com/servlet/ContentServer?p...d=1083180307281

 

 

For adecade, the Hollywood film industry has beentrying to rein in what it calls "runaway film production"-the shooting of US movies in cheaper locations abroad, particularly Canada. But its pleas for help from Washington have fallen on deaf ears.

 

 

"They always focus on the actress making $20m a picture and not on everybody else who works in the industry," says Leron Gubler, president of the Hollywood Chamber of Commerce.

 

This year, however, the film industry and dozens of other companies wanting aid from Washington may have finally found what they are looking for.

 

The US is facing escalating trade sanctions from the European Union over a World Trade Organisation ruling that it must eliminate a $4bn (£2.3bn, ?3.3bn) annual tax break for US exporters. The sanctions, which hit 7 per cent this month on about $4bn worth of US imports, will top out next year at 17 per cent, or an annual penalty of more than $660m.

 

In an effort to lift those sanctions, the US Congress is trying to pass tax legislation that would end what is known as the Foreign Sales Corporation (FSC) scheme and replace it with other tax breaks for US companies.

 

But in the face of intense lobbying, the effort has mushroomed into a huge corporate tax bill with more than $170bn in tax cuts for business sprinkled over the next decade.

 

Big companies which stand to lose millions of dollars in FSC tax benefits that went directly to their bottom line have fought tenaciously to recover the loss in the form of new tax breaks. But companies that were never beneficiaries of the original tax scheme are also getting in on the game.

 

At a time when election-year criticisms have grown over the influence of corporate lobbying in Washington, the FSC bill has become a kind of perfect storm that illustrates the problem.

 

Both the House and Senate committees responsible for tax legislation had originally proposed bills that were aimed rationally at the problem at hand - how to help US companies compete without a $4bn tax scheme that was intended to offset the tax advantage enjoyed by European companies.

 

The House committee wanted to use the money to reform US taxation of international corporate income, while the Senate committee favoured reducing taxes on domestic manufacturing and cracking down on abusive corporate tax shelters.

 

But neither approach has had broad support in Congress. As a result, Republican leaders in both the Senate and House of Representatives have been forced to pick up votes one by one, by adding tax breaks sought by individual members of Congress, most acting at the behest of companies in their districts. While the bill's prospects are still uncertain, the rising European sanctions are a strong incentive to get it passed this year.

 

John McCain, the Senate Republican who often crosses the party's leaders, said last month the bill was "becoming a vehicle for wasteful spending and tax breaks for special interests and the super rich".

 

Among the provisions that have drawn his ire are a new tax write-off for the purchase of private aircraft, $1bn in tax credits for uneconomical passenger and small freight railroads, and an extension of tax credits to help develop electricity from chicken manure. Even the makers of bows and arrows have managed to squeeze an $8m tax deduction into the bill.

 

The film industry's piece could be worth several billion dollars over the next decade if the bill is finally passed into law. While motion pictures are generally classified as a "service" under international trade rules, the industry persuaded Congress that it should be treated in the bill as a"manufacturer". That will make it eligible for the bill's cut in the corporate tax rate for manufacturers.

 

The industry will also receive accelerated depreciation of its expenses for making films in the US, a provision that could help offset what it says is the 15-20 per cent cost advantage enjoyed by Canada. At the behest of Senator Blanche Lincoln, an Arkansas Democrat, the industry will enjoy even greater tax write-offs if it makes the films in economically depressed southern states, including Arkansas.

 

The legislation, not surprisingly, has also been a windfall for Washington lobbyists, who reaped at least $6m in fees last year for lobbying on the bill.

 

The Federal Policy Group, headed by Ken Kies, the former chief of staff of the congressional joint tax committee, earned more than $3m in FSC-related lobbying revenue. Hollywood film interests spent nearly $600,000 for the company's services, while the makers of bows and arrows spent $120,000.