The V.I. Legislature is considering a set of tax breaks and direct cash payments in the form of "rebates" from the V.I. treasury for filmmaking incentives that former Gov. John deJongh Jr. vetoed in January just before leaving office.
Bill 31-0009 sponsored by Sen. Clifford Graham would repeal and replace the STARS Act, which was enacted in 2011 and gave large tax breaks to encourage video and film production. (See Related Links below) The proposed legislation has some changes to definitions but is otherwise nearly identical to Bill 30-0417 Graham proposed and deJongh vetoed last year.
Introducing the measure to the Economic Development, Agriculture and Planning Committee, Graham said film industry representatives had expressed a desire to have benefits that were more comparable to those offered by a number of states. His bill also ties some benefit levels directly to the employment and spending on the project, so that larger productions get more generous benefits.
Graham’s bill gives tax credits of 10 to 17 percent of the wages and salaries of Virgin Islands residents employed on the project, which the company can then sell to any other V.I. taxpaying business, if they owe less than the credit.
It also would give a break on the territory’s hotel occupancy tax, based on the number of rooms booked and for how many nights. The bill would create a new division within the Economic Development Authority to handle the film and video industry. And it gives cash "rebates" based on the amount of spending in the territory.
In his letter to the Legislature explaining his veto of the first version of the bill in January, deJongh said the legislation "seems to have sacrificed our local music and audio production industry in an attempt to appeal to the worldwide film industry."
"Although music and audio production companies are eligible for benefits through the Economic Development Commission, these smaller artists and companies cannot absorb the cost of entry or regulatory requirements to make it a viable option. This is in fact an emerging area that appeals to our younger generation and requires our careful nurturing," deJongh said.
DeJongh also objected to the fact that the bill created "an entirely separate department within the Economic Development Authority … without providing the necessary funding to support its operation."
Several private attorneys and officials with companies who provide services to video production companies testified in favor of the bill, saying most states recently began offering incentives and that the territory will miss out if it does not follow suit.
Introducing the new version of the bill, Graham outlined the governor’s concerns, and said the new version of the bill tightens up several definitions and makes it more effective. It does not include local businesses or fund the EDA’s new office as deJongh mentioned.
Economic Development Authority Executive Director Percival Clouden testified in support of incentives in general, but raised a number of concerns about the wording of the bill and suggested an array of amendments. In particular, he urged that the bill eliminate direct cash payments or "rebates" and focus instead on tax credits to avoid any risk of being unable to pay up.
St. Croix music producer Laurent "Tippy" Alfred testified, saying the bill would take away existing tax breaks for local audio production. He asked for some amendment to help both music and audio production and to help locally based productions that are not large enough to take full advantage of the bill’s benefits. He did not oppose the bill overall.
As with last year’s bill, several testifiers suggested the bill was structured so that the V.I. government would always make more money from a project than it gave away in credits and rebates.
Asked about Clouden’s concern on rebates, attorney David Bornn, who helped write the bill, said Puerto Rico got into trouble with a rebate program because they were unable to pay the cash rebates. But Bornn testified the V.I. subsidies only come after the territory receives its cash "so it is self-financed."
Sen. Nereida "Nellie" Rivera-O’Reilly asked Clouden if the bill was self-funded. "The EDA would need funding to carry out its responsibilities" under the bill, he said. "But there is economic benefit provided from the program and that goes into the government coffers, so indirectly I think EDA would benefit from the revenues generated from the program," Clouden said.
As the bill is presently written, a company that comes to St. Croix to shoot a several million dollar video that spends just more than $2 million on local film production wages, another $1 million on other production costs of any kind that take place in the territory, and also rents 50 hotel rooms for 20 days could get a tax credit of up to 17 percent of the $2 million – or $240,000. According to the Tax Policy Center, the average U.S. individual tax rate is 17.6 percent, so the tax credit is roughly equal to all the income tax generated by all employees of the project for the territory.
Local businesses that supply the production company would pay up to 4 percent gross receipts tax on the $1 million in local expenditures, if none of the local businesses are small enough for the V.I. law’s several exemptions – or up to a maximum of $400,000. The company would be eligible for a reduced hotel tax rate of 1.5 percent. Room tax on 1,000 nights at $300 per night would generate $4,500 in taxes at that rate.
Along with the tax, the bill also says companies that get tax credits are also "allowed a cash rebate" where the V.I. Government pays a direct cash rebate of a portion of the video or other company’s expenses. The bill, as written, says a production company is allowed three separate, cumulative rebates: 1: a 9 percent rebate of all qualified expenses, up to half a million dollars; 2: an additional 10 percent rebate, with no cap, if the production "makes any reference to identification of the Virgin Islands" and 3: an additional 10 percent of qualified expenses, with no cap, if the production is on St. Croix.
The hypothetical $1 million production costs above would be eligible for all three rebates, totaling 29 percent of qualified expenses, by shooting on St. Croix and mentioning something in the territory, such as Cane Bay. If so, the V.I. Government would appear to be obligated to pay them some $290,000 in rebates – a little less than the taxes generated by the project.
Smaller projects would get proportionally smaller breaks, so that they would pay more in taxes and receive smaller benefits.
While the bill may generate more tax revenue than it gives away, it does not separate the payments into a separate fund. The government’s ability to pay the rebates would depend on the general ability of the V.I. government to pay its debts.
The committee voted to hold the bill for amendments and reconsider it with additional testimony on March 2. Voting to hold the bill were Graham, Sens. Novelle Francis, Myron Jackson, Neville James, Tregenza Roach and Janette Millin Young. Absent were Sens. Almando "Rocky" Liburd and Kurt Vialet.
Afterwards the committee took testimony on a draft new zoning plan for the territory, recently completed by the Department of Planning and Natural Resources.
The plan clarifies the definitions and allowed uses of a number of zoning classifications, according to acting DPNR Commissioner Jean-Pierre Oriol. It also adds a number of helpful illustrations and diagrams, he said. No one’s existing zoning classification, nor any existing allowed uses, are changed by the new system, he said.