Cut! Michigan’s Film and Video Game Startups Fear Loss of Popular Tax Credits

3/2/11Follow @xconomy

[Corrected, 3/4/11, 3:44 p.m.]When Republican Gov. Rick Snyder recently proposed eliminating generous tax breaks that have made Michigan a top destination for Hollywood-produced film and TV shows, heads started to roll. Pity the poor politician who would deny voters the chance to see George Clooney in the flesh!

But beyond robbing screaming fans of the chance to encounter handsome movie stars, some say Snyder’s plan risks upending a promising segment of Michigan’s high tech economy that attracts young talent to fast growing fields like digital media, visual effects, and video games.

Michigan offers a refundable tax credit that covers up to 42 percent of expenditures accrued by “eligible production companies…in the business of producing qualified productions” in the state.

The credit does not only apply to movies. Last November, Michigan awarded a 40 percent tax credit to BH Golfing Game Productions LLC, which hired PixoFactor Entertainment in Royal Oak, MI to develop a  Ben Hogan video game for the Nintendo Wii, mobile application, and DVD.[An earlier version implied PixoFactor applied for the tax credit.]

While films attract the most attention, video games could offer a more lasting economic impact on the state, which is struggling to develop high tech industries beyond the automobile industry, some say.

“That’s the future,” says Janet Lockwood, who led the Michigan Film Office for 19 years before retiring last summer. “There’s more money spent on games than the movies. We also didn’t want our young [talent] to leave Michigan.”

PixoFactor CEO Sean Hurwitz says the tax credits really jump-started the gaming industry in Michigan.

Though PixoFactor is the only gaming firm so far to receive the credit, the program really put Michigan “on everyone’s radar,” Hurwitz says. “I doubt [the gaming community] would give Michigan a shot if there were no incentives.”

Last month, Snyder, who formerly worked as a venture capitalist in Ann Arbor, unveiled a plan to close the state’s nearly $2 billion budget gap while finding ways to lower Michigan’s stubbornly high unemployment rate, currently around 11 percent.

Key to Snyder’s budget is a plan to establish a flat corporate tax rate and eliminate the state’s hodgepodge of tax credits targeting specific industries like medical devices, clean energy, and computers. In its place, Snyder proposes adding $50 million to the state’s $75 million 21st Century Jobs Fund and cap film incentives at $25 million.

Under current law, there’s no cap on how much film companies can claim through the 42 percent tax credit. Last year, Michigan spent $60 million on incentives to lure filmmakers.

Supporters of Snyder say the state shouldn’t pick winners and losers but rather promote a friendly tax climate for all companies. Many of those credits, they argue, waste taxpayers’ money.

But in many ways the film credit has already brought tangible economic benefits to the state, long after studios finish shooting their movies.

Backed by Envy Capital in Farmington Hills, MI, PixoFactor currently employs 30 people at its new 6,500 square foot facility. The company has added 10 more jobs since last summer. And it is currently discussing a with a major video game publisher that would generate even more jobs in Michigan, Hurwitz says. [An earlier version mistakenly referred to PixoFactor's investor as Envoy Capital. We regret the error.]

“The incentive really does create permanent, long-term jobs,” Hurwitz says. “I don’t understand why no one [in the governor's office] really looked at this. It seems to be working. It’s like someone walked in and said ‘let’s take it away.’”

In July 2010, Maxsar Digital Studios opened a 60,000 square foot state-of-the-art special effects facility outside of Detroit.

The company, founded by veteran producer Phillipe Martinez, specializes in producing computer-generated imagery (CGI) for independent film companies who may also want to expand into video games and merchandising. Maxsar is currently working on a film called Scar23, a mix of live action and digital effects.

Over the past year, Maxsar has more than tripled its workforce to 50 employees and has plans to double that in the near future. The company offers a training program for graduates of local universities and design schools to help produce CGI feature films.

With the tax credit, Michigan could “build a digital media infrastructure,” that rivals Vancouver, says Maxsar president Eric Bruneau. “Within digital media we use 100 percent Michigan people. We bring a lot of new talent into the pool.”

Last year, Wayne State University’s TechTown and Unity Studios of Allen Park, MI, and its affiliated Lifton Institute for Media Skills launched a partnership under which the institute will teach aspiring film crews how to make movies and TechTown will teach them how to become entrepreneurs to sell their services.

Other relatively new media companies to hit the Detroit area in recent years include Parliament Studios, which specializes in web videos, animation, and documentaries, First Element Entertainment, and Stunt3 Multimedia.

“We saw the Michigan film industry taking off,” Parliament president David London told the website Southeast Michigan Startup. “Thanks to the tax credits it had more room for growth than any other industry.”

Hurwitz of PixoFactor hopes the tax credit can still be salvaged, even if it’s less generous than 42 percent. Perhaps the state can break up the credit into one for films and the other for video games, he suggested.

The proposed $25 million cap will create additional uncertainty for businesses because that number will likely fluctuate in future budget years, Hurwitz says.

Already, the uncertainty “is creating a bit of havoc for us,” he says.

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