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Part 3-In the Land of Plenty there isn't much help for independent animation producers

Remember the old commercials for an investment house where John Houseman would declare, "We make money the old fashioned way, we earn it!"? American animation producers could stand proudly and declare almost the same thing - 'We don't need any stinking subsidies! We're American!' Whether you're proud as punch or crying in your beer - that's the way it is here in the USOFA.

Stateside - subsidies, tax credits and other inducements – Part 3

Up to now I’ve concentrated on what the rest of the world is doing to entice productions to their shores and to offer producers options on how to raise money for their projects.  Now it’s time to take a look at the home front and see what is being offered here in the United States.

The starting and ending point is simple – think regional not national.   The numerous schemes and plans offered by other countries are spearheaded by national governments and often are augmented by provincial regions or states within the country.  This is true in Canada, Australia and to some degree in Asia and Europe as well.  In the U.S. you must look at the individual states if you are shopping for subsidies to assist in completing the funding for your production.  In other words you may be able to figure a way for New Mexico or Michigan or Hawaii or Louisiana or Pennsylvania to pick up the tab for your coffee and dessert but don’t look for Uncle Sam to cover the steak and potatoes.  If you were dining in Canada or Europe there are possibilities for that situation to be reversed.

So what can you hope for if you want to stay in the good old U.S.A.?

First understand that most States programs are not geared to animation but more to live action.  This is not to say that animation does not qualify for these programs but that there are certain problems that will soon become apparent.

By the end of 2010 there were 43 states offering subsidies to producers.  They all have/had slightly different programs but at the end of the day they pretty much come down to offering tax credits to a production of 20 to 25 percent of the funds spent in the state, with each state defining what qualifies as a spend (labor, equipment, overhead etc.).   States have at times offered higher percentages but have lowered them the following year.  Michigan was once at a high of 42% but has come down appreciably.  The point is simply to entice the producer to bring his or her project to their state, hire their citizens and to pay states taxes while visiting.  The producers tax credit will be applied to any tax that is owed and the balance will be remitted by check or direct deposit to the production account.

So here’s the math, real simple.

You take your 2 million dollar film to a state offering subsidies.

You apply and qualify 1.2 million dollars for the subsidy program.

You complete the film following all the rules and you apply for the tax credit.

You receive 300K back from the state less any state taxes owed.

This doesn’t sound too bad, does it?  I mean it’s not like Europe and Canada and the others but you have a lot less rules and regulations and the co-production grief, don’t you?  Well yes, but your soft money (remember we talked about the joy of soft money) is less than 20% so you or you will need to find around 1.6-1.7 million (hard money) to produce your film unless you can bring in advances against sales to help out.  Also, you will need to find many of your key creative staff in the state you are working in….

Another problem.  In most states you will not have a guarantee that the subsidy will be granted until you actually complete the film and submit it to the designated functionaries.  This means that if you need that money to complete the film you will have to arrange for Gap Financing or a Bridge Loan.  The problem here is that many states will not give you or your lenders any assurance that the tax credit will go through or how long the audit will take before the subsidy is approved and the funds remitted.  Depending on when you file for the subsidy and when you complete and submit the film for approval, when you complete all of your accounting and then the size of your budget, you could receive your payment within months or even the following year.

As most of the money in the budget will need to come from equity or debt, your initial revenues will need to first be applied to debt.  This means that your equity investors will need to wait until they recoup and go into profit, which may or may not be a factor in their decision to invest in the first place.

Currently many states are competing for producers’ work but at the end of the day it still may not be enough to entice a production to Albuquerque or Flint or Baton Rouge.

At the end of the day the producer must balance the savings brought about by the subsidy against the additional costs of working in a different state and the difficulties that can be encountered working with an unfamiliar crew.  The larger the budget the more tempting the subsidies become and particularly if a sizable portion is required for huge stages and sets.  This doesn’t help animation producers much but if you a major action film, for example, and need 20 to 30 million in your budget for several months of shooting on hanger size stages and all sorts of sets that need to be built, the 25% subsidy can bring back anywhere from 5 to 7 million on that segment if the budget alone.  Now it may be worth moving your cast and a select key crew there (pick a state), if they can offer the professional facilities and enough qualified local crew (salaries subsided 25%) to do the job.  If you plan carefully and are a little lucky you may end up saving 15-20 million on a hundred million dollar production.  Nothing to sneeze at and as you can see a good many producers are shooting their films in states that offer these kind of deals, but again this does little for animation productions.

Moving on we need to close the US subsidy question - The long and short of it is, none of these enticements really work for animation.  

So then, what does the future hold?  Unfortunately not much change regarding national subsidies.  You may have noticed that ‘entitlement’ has become a dirty word in the U.S. and subsidies are little less than entitlements wrapped up as stimulus packages.  And, it is hard to argue the need when American Media companies are billions of dollars in the black each year and no country in the world has an animation industry that can rival America’s.   In fact many of the subsidy programs around the world were intended to help offset the juggernaut strength of American animation.

Gazing into my crystal ball I do see that labor costs are rising in India and China and there may come a point when countries like Canada may be able to keep more of their work at home with a careful use if their subsidy programs.

Say a studio in China would charge 80K for animation on a TV episode.  Now say that the same work could be done in Canada for 130K.  By the time you qualify for 65% of your Canadian spend (84.5K) you can receive up to 70% high – 55% low of that number as a subsidy (60K to 46.5K).  Keep following me here:  Now -you have a labor spend in Canada of 70K to 83.5K compared to spending 80K in China.

Interesting.  Even if my numbers are a bit optimistic you can see where this is going.  Eventually if labor (experienced and highly qualified artists and technicians) keeps inflating in these offshore countries as the demand climbs – the lines running between their costs and home market costs will close.  This closing of the gap will depend on local labor costs remaining relatively stable which will allow the subsidy schemes to effect the margins between offshore animation and local product, doing exactly the job for which they were created.

There are a million moving parts in all this so my projections and analysis may end up being no better than my picks at Santa Anita…. Glue Bucket didn’t run in the money!

Anyway, if you are an American and also work in animation you can pretty much forget about all this stuff – in fact I am surprised that you read this far.  Get a job or pitch a show to one of our mega studios and prosper the old fashioned way through hard work, dedication and a trust fund.

If you want subsidies and tax credits move to Australia, Canada, New Zealand, Europe or parts of Asia.   You don’t have to be a socialist to love subsidies and tax credits and grants and free money but you do need to move…..