Posted 30 September, 2007 in NJ News
Cost concerns stall digital media tax break
Sunday, September 23, 2007
By HUGH R. MORLEY
STAFF WRITER
Compared with the often glacial pace of the New Jersey Legislature, the digital media bill moved like a speeding bullet.
Introduced in February, the bill — which would grant tax breaks to digital media companies that spend $2 million in the state — cleared both legislative houses on June 21.
It was guided by Sen. Paul Sarlo, D-Wood-Ridge, who said NBC provided the “impetus” for the bill, approaching him for help in creating a digital media center in the Englewood Cliffs offices of CNBC.
Today, the legislation sits on Governor Corzine’s desk, stalled by his concern that the state can’t afford the $20 million-a-year price tag.
Yet the bill’s swift passage reflects both a vigorous lobbying effort by the digital media industry to secure a tax break, and the industry’s attraction to states trying to lure new companies and create jobs.
A fast-growing industry
What is digital media?
It generally refers to information stored or produced in digital form and includes CDs, DVDs, video games, e-books and other documents, Web pages, video for the Web.
What sectors are included?
Film, TV and video production companies, makers of animation and games, e-learning companies
What are the jobs?
Web design, video editing and production, scriptwriting, software development, computer graphics and animation design, multimedia design
Where is it based?
There is no industry center, but there are pockets in Silicon Valley, Hollywood, Calif., Florida, Texas and elsewhere.
How big is it?
PriceWaterhouseCoopers estimates the value of the global industry at $945 billion in 2004, and growing at 10 percent a year.
How big is the digital media workforce in New Jersey?
Ernst & Young estimates there are 1,045 digital media workers in 2007.
Sources: PriceWaterhouseCoopers; Ernst & Young; various industry sources
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The digital media bill
Here’s what it would do:
• Amend a law granting a combined total of $10 million in tax breaks to film and TV companies that work in New Jersey.
• Allow digital media companies to get the break, and increase the combined total of breaks to $30 million for the film, TV and digital media industries.
• Grant companies a corporate or gross income tax credit equal to 20 percent of the amount spent in New Jersey on production.
• To be eligible, a company would have to spend $2 million on production in New Jersey.
Source: New Jersey state Legislature Web site
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New Jersey is one of several states offering incentives in the hope of creating a digital media hub, or cluster of companies, that will grow as the fast-moving industry does.
Florida, Texas, Massachusetts and Connecticut have all passed similar bills in the past two years. Sarlo and others say the New Jersey bill could create thousands of highly paid jobs and boost the state’s struggling economy.
“The digital media market is a very hot market right now,” Sarlo said. “And I don’t want us to miss the opportunity.”
The market is also broad. New Jersey’s bill targets the makers of “digital media content,” which could include everything from developers of games, music, film and television products, to digital publishers, Internet education sites, Internet access companies and online advertising companies.
$1.4 trillion prediction
A 2006 PriceWaterhouseCoopers report valued the global industry at $965 billion in 2004, and predicted it would grow 10 percent a year, reaching $1.4 trillion by 2010.
In the U.S., digital media companies are concentrated in Hollywood, Silicon Valley, Florida, and Austin, Texas, and elsewhere.
Florida wants to attract more companies to the Orlando area, boasting that that it already has 1,200 digital media companies with a combined workforce of 30,000 and revenue of $9 billion. The state says the sector grew out of film and television production and theme park industries, and technology companies such as Lockheed Martin.
A study completed for NBC estimated there are 1,045 digital media workers in the state.
Supporters of the New Jersey bill say the state’s highly educated workforce could prove fertile ground for digital media employers.
“The market is going to be exploding,” said Assemblyman Upendra J. Chivukula, D-Somerset, who sponsored the bill. “We are in the initial stages. And by investing money now, we can capitalize on that.”
That view prevailed in the Legislature, where all but eight members backed the bill. But Corzine, and some other state officials, have yet to be convinced.
“We have voiced concerns about the fact that it doesn’t give us much return on investment as far as job creation,” said Brendan Gilfillan, the governor’s spokesman, who declined to comment further on whether Corzine would sign it.
His assessment echoes that of the non-partisan Office of Legislative Services, which said it couldn’t document significant financial benefits to the state from the bill.
“In my view, it’s corporate welfare being given to folks from Hollywood who have friends in New Jersey,” said Assemblyman Richard Merkt, R-Mendham, an opponent of the bill. “This thing was wired. The powers that be decreed that this thing was going to go through quickly.”
The bill grew out of legislation passed in 2006 that granted corporate business and gross income tax credits to film and television production companies working in the state.
Companies are eligible for a tax credit equal to 20 percent of their in-state expenses if at least 60 percent of their production budget was spent in New Jersey.
The law, which expires in 2015, capped the value of breaks granted to all productions at $10 million a year. And state officials say the incentive is so attractive that applications for the break already exceed the annual limit for the next two years.
Steve Gorelick, associate director of the New Jersey Motion Picture and Television Commission, said that although the state has attracted a rising number of productions in recent years, the number would decline without the incentive due to the fierce competition between states.
“Producers do not work extensively in states where there are no economic incentives available,” he said.
Expanding eligibility
The digital media bill would amend the TV and film production law, increasing the amount available from $10 million to $30 million a year. And it would broaden the eligibility criteria to include companies that spend at least $2 million on digital media production in New Jersey, including wages and salaries, production costs and rental expenses for equipment and facilities.
Bill supporters say that unlike the movie and TV production companies, which tend to move on once the production is complete, digital companies would likely stay here and create permanent positions.
Sarlo said the “impetus” for the bill came from NBC after the film and television and movie bill passed. He said the company “approached us and said, ‘Listen, we are looking to expand’ ” in Englewood Cliffs.
The effort comes at a tricky time for NBC: It is pushing for a new tax break less than a year after a subsidiary, MSNBC, closed a 400-employee Secaucus office opened with the help of a $10 million tax break in the mid-1990s.
Sarlo introduced the digital media bill in February, and held a press conference to promote it in April, citing a report on the bill’s impact prepared by Ernst & Young at the request of NBC.
The report concluded that the bill would create 1,550 new digital media jobs by 2012 — 60 percent more than if the credit was not available — and an additional 2,800 jobs in supporting industries. The new taxes generated by the bill would offset its $20 million cost, the report said.
A week later, NBC’s lobbyist William Pascrell III said the company would soon announce a plan to move a “significant” number of digital media jobs to New Jersey. The announcement was never made.
The apparent cat-and-mouse game continued after the bill passed. As it sat on Corzine’s desk, NBC said in July that it was creating a digital media center at its CNBC site that would mean an undetermined number of jobs. The company has yet to reveal the number of new jobs to be created, and did not respond to a request for comment last week.
State records show that NBC lobbied the governor’s staff and other state economic development officials on the bill. Also lobbying were the Motion Picture Association of America, the New Jersey representative of AeA, a national trade group that represents the technology industry, and the Entertainment Software Association, a Washington, D.C.-based group that represents the computer game industry, state records show.
Sarlo said the bill was amended at the software association’s request, removing a section that restricted the beneficiaries to companies that make digital media for the Internet. The association wanted the change because games are generally not Internet-based, and association members couldn’t benefit from the original bill, he said.
State records show that within two weeks of the change, the association gave a $500 campaign donation to Sarlo, and $3,000 each to the Democratic Senate and Assembly PACs.
Sarlo’s chief of staff, Chris Eilert, said the contribution had nothing to do with the amendment, which was first discussed months before it was approved. He said the Entertainment Software Association later bought a ticket for a fund-raising event.
“We were firm believers of this legislation because of the potential for bringing thousands of jobs to New Jersey,” Eilert said, after consultation with Sarlo.
“And expanding it to include the video game industry simply increases the potential for job creation.”
Also supporting the bill were Cisco Systems Inc., Google and Yahoo, said NBC lobbyist Pascrell.
In August, Sarlo trumpeted Ernst & Young’s update of its earlier report, which increased the estimated number of new jobs created to 2,446 in the industry, and 4,404 support jobs.
The senator said the new benefits cited in the report “more than justify” the bill’s enactment.
Yet the non-partisan Office of Legislative Services, in its review of the bill’s effects, concluded that the revenue gain to the state was “indeterminate.”
“The OLS cannot project the value of the offsetting positive economic activity the $20 million might generate,” the agency wrote.
One reason, the office said, is the difficulty of separating digital media spending sparked by the tax credit from expenditures that would have come to the state anyway.
Another reason, the OLS said, is the difficulty of predicting how much money would remain in the New Jersey, and how much would be spent in other states after the workers move on.
Indeed, the bill may not boost the growth of the digital media industry in New Jersey at all, because it doesn’t specify how much of the $30 million should go to each of the digital media and film and TV industries.
It’s possible, for instance, that all the breaks could go to film and TV production, which tends to create temporary work, and none toward the creation of permanent digital media companies.
Sarlo said Corzine’s staff has indicated he will veto the bill and request that the digital media industry be added to the original motion picture and television bill without increasing the size of the available break.
The senator said he thinks that would stifle the state’s ability to compete for digital media jobs.
“It makes no sense to me,” he said.
E-mail: morley@northjersey.com
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