‘Airbender’ tax credit shows how far states will go to woo filmmakers

Pennsylvania film officials were understandably eager to have the “The Last Airbender” shoot in their state.

The $150-million movie would burnish Pennsylvania’s reputation as a growing film hub and provide work for hundreds of crew members. A former Navy seaplane hangar in Philadelphia would be converted into one of the largest soundstages on the Eastern Seaboard as part of the project.

They also had the film’s director, M. Night Shyamalan, in their corner. Shyamalan grew up in a suburb of Philadelphia and has long favored Pennsylvania as a location, shooting half a dozen of his films there, including “The Sixth Sense.”

There was one problem. The 2010 film would be driven by digital effects, and Paramount Pictures wanted to have them produced at George Lucas’ Industrial Light & Magic studio in San Francisco. But Paramount also wanted the work to qualify for Pennsylvania’s film production credit.

What happened next was not unlike the magic on screen. The visual effects were largely produced in San Francisco, but the film studio was given a tax credit as though they had been done in Pennsylvania.

Citing “special circumstances,” the Pennsylvania Department of Community and Economic Development granted Paramount a waiver that allowed the studio to claim a 25% tax credit on $29 million in visual effects work performed outside the state, according to a Nov. 12, 2008, letter to Paramount obtained by the Los Angeles Times in a public records request.

The waiver saved the studio about $7 million. Or, put another way, it cost Pennsylvania that much in lost tax revenue.

Jane Saul, former director of the Pennsylvania Film Office, said the waiver was justified because Pennsylvania didn’t have a visual effects house capable of achieving what the filmmaker wanted. She said the project was too valuable to pass up.

“This is M. Night Shyamalan,” Saul said in an interview. “The jobs that were created and associated with this project and what it did for the state and the industry — that’s how such a decision was made. It was such a benefit and it was within the confines of the law.”

The “Airbender” waiver, which had not been previously reported, reflects the lengths to which some jurisdictions will go to land a big-budget film. As states and other countries increasingly compete for Hollywood’s business, no one wants to get a reputation for being a stickler.

“States are willing to do just about anything to get [film] dollars in their locale,” said Scott Ross, a co-founder of Venice visual effects company Digital Domain.

New York state, for example, recently approved $16 million in financial incentives to CBS to keep “The Late Show” in New York after Stephen Colbert takes over as host from David Letterman next year. Few industry analysts considered a move likely; New York has become the favored location for late-night shows in part because celebrity guests are already there for publicity swings on the morning news shows. Colbert also has deep ties to the city.

As a TV talk show, “The Late Show” didn’t qualify for New York’s film tax credit. No problem; New York Gov. Andrew Cuomo steered $11 million in tax credits from a state jobs program for the show, on grounds that it would provide employment to New Yorkers. CBS also would get a grant of up to $5 million to offset the cost of renovating the historic Ed Sullivan Theater. In return, CBS committed to providing 200 New York-based jobs to support the show.

The “Airbender” and “Late Show” tax credits were legally permitted, but in other cases filmmakers have taken advantage of lax enforcement to actually break the rules.

Los Angeles film director Daniel Adams was sent to prison in 2012 in connection with Massachusetts state tax credits he received for two films, “The Golden Boys” (released in 2008) and “The Lightkeepers” (2009).

Prosecutors said Adams overcharged the state $4.7 million for expenses. Adams served a 21-month prison sentence and was ordered to pay $4.4 million in restitution.

Adams, who was released from prison a year ago, says the fraud was made easier because state officials rely on information provided by accounting firms that do only a spot check of production expenses.

“They basically rubber-stamped it,” he said. “If you’re wishing to do something dishonest like we were, it’s pretty easy.”

Adams said he was caught only because Massachusetts tax officials flagged his claims for rebates on taxes paid on the salaries of several actors, including that of Richard Dreyfuss.

Lisa Stout, director of the Massachusetts Film Office, said producers must hire state-certified accountants to audit their expenses and that tax credit applications are scrutinized.

“They go through everything,” she said. “It’s a very thorough, rigorous system. I think it’s very important that this misuse of funds was caught. We deal with wonderful, ethical people every day, and it’s worrisome that there are people out there consciously looking to defraud a state.”

Adams said the fact remains that he was not caught until the tax authorities questioned his claim for the rebate.

“Where there is easy money, there is corruption, no doubt,” said Adams, who pleaded guilty to the charges. “Tax credits have been around for years, and people have been taking advantage of the looseness of the rules.”

Some states have cracked down on abuses.

Iowa halted its film incentive program in 2009 after uncovering a series of problems. The state’s 50% tax credit program — billed as “Half Price Filmmaking” — drew a slew of stars and movies. But a state audit found that $26 million of nearly $32 million in film tax credits was awarded improperly. Among other things, filmmakers used credits to buy themselves luxury vehicles.

In 2009, Louisiana’s former film commissioner was convicted for accepting bribes. A year later, a film tax credit broker pleaded guilty to selling fake tax credits to New Orleans Saints football players, including quarterback Drew Brees.

This year, federal prosecutors in New Orleans indicted L.A. producer Peter Hoffman, the former president of Carolco Pictures, best known for the “Rambo” and “Total Recall” movies. Hoffman and partner Michael Arata were charged with conspiracy and wire fraud for falsifying expenses to secure $1.1 million in tax credits.

Both men have pleaded not guilty, and a trial is pending. “There was nothing fraudulent about what we did,” Hoffman said in an interview, adding that tax credits had been reviewed and certified by state officials.

In Pennsylvania, Film Office Director Diane McGraw said in an email that she could not comment on the waiver granted to Paramount for “The Last Airbender” because the project was “approved during the previous [gubernatorial] administration” and that “current staff had no direct involvement.”

But a spokeswoman for the state’s Department of Community and Economic Development said a similar waiver would not be approved today.

“We … want to ensure that any Film Tax Credit awarded supports Pennsylvania jobs, Pennsylvania investment and the overall growth of the film industry in the state,” Deputy Press Secretary Lyndsay Kensinger said in an email.

Representatives of Paramount and Shyamalan declined to comment.

Republican state Rep. Todd Stephens, a critic of film tax credits, said the episode pointed to the need for reform.

“It’s disturbing to me that we’re providing Pennsylvania tax credits to provide jobs for Californians,” Stephens said after the “Airbender” waiver was described to him. “We obviously need to reform this program at the very least to ensure that we are creating jobs in Pennsylvania.”

richard.verrier@latimes.com