A tax credit exchange that links private interests with public capital is influencing policy in Baton Rouge and stretching into other states.
By Jeremy Alford
The relatively short history of Louisiana's tax credit program for film and entertainment productions reads like a screenplay brimming with political intrigue, wrong turns and sleights of hand. The program was created by the Legislature about 11 years ago and has become a perennial whipping boy for rural and conservative lawmakers. They complain that the credits do not return enough money to the state, even though state economic development officials counter that the overall fiscal impact is nearly six times the amount of actual tax credits.
Photo by Travis Gauthier
Online Incentives Exchange consultant Roger Wilson
The numbers involved are big, roughly $1 billion in tax credits doled out since 2002. Controversy peppers the time line, beginning with former state film official Mark Smith, who went to prison for accepting bribes from a company seeking tax credits. There was also a high-profile case, among others, where Saints football players invested money with a New Orleans business for credits that never existed.
But every decent screenplay has a solid third act, which is always a good time to roll out a redemption storyline. If you believe the boosters, the Online Incentives Exchange, or OIX, is uniquely positioned to play an important role in this third act, complete with white hat. The OIX, launched by Louisiana entrepreneurs last October, is widely credited with being the nation's first online exchange for state tax credits. Rather than speculating as to the value of transferable tax credits, the OIX offers buyers and sellers a transparent vehicle for determining market value.
Roger Wilson of New Orleans, an OIX consultant, says the exchange was born of necessity. In an effort to compete with other states, Louisiana's transferable film and TV tax credits are so robust they often exceed a production company's tax liability. In these instances, those excess credits can be sold. On the other side of the equation, the Bayou State has always had wealthy executives and large corporations with more tax liability than they are comfortable with who are eager to find - or buy - a solution like a tax credit at a discounted price.
But that is easier said than done, or at least it used to be. Finding a buyer and a seller and figuring out a price were once primary hurdles, Wilson says. But on the OIX, based on demand, credits can sell as low as 80 cents on the dollar and can be easily tracked.
Members of the exchange and the credits are also thoroughly vetted by OIX. "This market has taken off very quickly," Wilson says. "There are now 45 different states with tax credit programs."
With a strong first quarter expected, due mainly to upcoming tax deadlines and taxpayers subsequently looking for relief, OIX is hoping to move into some of those other states in the spring, like Connecticut, Illinois, Florida, Massachusetts, Missouri, New Jersey and Pennsylvania. By the end of the second quarter, Wilson adds, the foundation should be set for entry into California and Georgia as well.
"If you are a company that has liability across several states, this will enable you to have a centralized place to sell and buy tax credits across many states," he says. "It's an open platform."
But the OIX is a Louisiana product right now, with 90 corporate institutions as members and nearly $3 million in exchanges so far. It is free to join and list a credit or buy one, but OIX does earn a 2 percent fee on the final sale price, which is always going to be lower than the actual credit. While Wilson says as much as 60 percent of the credits on the exchange are related to film and TV, Louisiana's other transferable tax credits are traded on the OIX as well.
Only 13 of Louisiana's more than 460 tax exemptions involve transferable tax credits, representing less than 5 percent of the $6.8 billion in tax exemptions granted in fiscal year 2011. These transferable tax credits incentivize not only entertainment, but also business investments; research and development; and other economic and community development activities.
As a way to further build upon its base in Louisiana, OIX CEO and co-founder Danny Bigel addressed a mid-January tax credit symposium at LITE and met with investors and others during a gathering at the City Club. Bigel's involvement was comforting for early supporters, given his background as an independent film producer and more than 15 years of experiences as a member of the New York Stock Exchange.
Attorney Clay Allen, managing partner with Allen and Gooch, says he helped host the event because the OIX is bringing "transparency and price competency" to a developing market that is proving attractive to many different types of firms. "Tax credits offer a unique way for businesses to generate capital without sacrificing equity," he says. "Whether you are a start-up firm trying to get your product off the ground, an established local business looking to expand, or an out-of- state company considering a relocation, Louisiana tax credits are a powerful economic tool to help reach your goals."
The idea is right for the times, says Allen, and his firm recently became an OIX member to both help clients sell credits and aid others with their tax liability. Plus, Allen says he saw an opportunity to get in on the front-end of a burgeoning market. "Louisiana really has an opportunity to lead here," Allen says.
On the horizon, the Department of Revenue and Louisiana Economic Development have united forces to create a credit registry to "enhance the security and transparency of transfers of state tax credits." With lawmakers set to debate the concept during the regular session that convenes April 8, LDR executive counsel Tim Barfield says the registry would add a new layer of oversight. "Most transferable tax credits are transferred in a safe and lawful manner," Barfield says. "However, we want to further ensure that the state of Louisiana receives all the revenue to which it's entitled and to ensure that taxpayer money is protected at all times."
To be certain, companies like OIX are driving the state reforms. Among other safeguards, the proposed state registry would confirm when tax credits have been used and are no longer valid. Therefore, the public would have access to records documenting the amount of credits issued, transferred and claimed, and the dates and identities of the parties involved in these transactions. "This is a common-sense mechanism to provide taxpayers and the state with transparency and security when dealing with tax credit transfers," says LED Secretary Stephen Moret.
Wilson and Allen say they support the idea, especially since accounting firms, banks, chief financial officers, investment firms and others are inquiring about the marketplace with greater frequency. And while the new efforts at transparency and integrity, the third act of Louisiana's film tax credits, are welcomed, Wilson says, the math will continue to be the real hero of the story for buyers and sellers. "It's very hard to get yield today," Wilson says. "So if you can get yield on tax dollars, it can be very attractive. You get a warm reception for that."