What a 100% Tariff Could Mean for Movies with Will French

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Welcome to a special episode of On Production featuring a great returning guest. Will French. Will joins me on the show today to discuss a recent development on Sunday night, May, 4 President Trump post on the truth social platform indicating he has authorized the Department of Commerce and the office of the US Trade Representative to impose a 100% tariff, quote, any and all movies coming into our country that are produced in foreign lands. In President Trump's own words, he says, quote, the movie industry in America is dying a very fast death. Other countries are offering all sorts of incentives to draw filmmakers and studios away from the US. This is a concerted effort by other nations and therefore a national security threat. It is, in addition to everything else, messaging and propaganda. End quote. Today, A White House spokesman said, although no final decisions on foreign film tariffs have been made. The administration is exploring all options to deliver on President Trump's directive to safeguard our country's national and economic security while making Hollywood great again. This is a developing story, but to dig into the context of this topic in depth, I invited Will to really chat about this, because will, if you remember from last time he was on the show, is really, in my opinion, a pioneering figure in film and television finance. He's widely recognized for his instrumental role in establishing and expanding us film tax credits as a market today, he currently serves as the senior managing director of Film and Television finance at Fallbrook financial services, and Will oversees the division specializing in US tax incentive lending, production accounting, audit processes and direct tax incentive lending for both studio and independent clients. So that's to set the stage. Will thanks for joining me. Can you sort of give us some bigger context here. What is going on? Is this a real issue? What's happening? I

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2:08  

mean, what a day to sort of be hit with that and not see it coming? Was, was something else. And you can imagine that the industry is just buzzing right now, and primarily because nobody knows what it means or how it could be applied. And you're talking about billions and billions of dollars being actively spent right now in a variety of markets, domestic and international. So everybody is very much focused on trying to figure out what's going on here. Yeah, I think that the the issue is a very real one, and and having the administration wanting to do something about it, I actually think at the end of the day is very positive, uh, situation. We can get into all of that, that detail as we talk today, but let's start with just trying to understand where the film industry is right now. And I mean that, you know, intending the pun, where, where is it? So I would say that that filming in the US is way down. If I look at some statistics from Prod Pro, which tracks production activity, which was reported, I think today in the Hollywood Reporter, that we're currently at 14 and a half billion dollars of spending, which is down 26% since 2022 in our daily practice, we see it. The banks are doing fewer film lending, transaction deals in the US, the completion bond companies are doing less in the US, the the production trackers that we used to use, which we do, you know, use on a daily, weekly basis, used to track which state is this project going to within the US. And now what you see primarily is that it tracks which country these these films are going to so the work really has migrated outside of the US. Some recent examples of that. Because I think it's important to kind of let the public, you know, know what they're seeing and where, where what they're seeing is being produced. You've got Christopher Nolan's The Odyssey. I'm talking really about big budget type stuff here that's being shot in Italy and Morocco, the UK is home to Avengers. Doomsday, mission, impossible, The Final Reckoning. Hungary. There's a lot going on in Eastern Europe right now. Dune Messiah. Dune Part Two, the brutalist was UK and Hungary Italy has seen a lot of production in recent years, the resurrection of the Christ, which is Mel Gibson's project, Germany, Captain America, Civil War, The Matrix Revolutions, Wes Anderson's Venetian scheme, New Zealand, Avatar, the avatar projects. And we'll talk about this in a little bit more detail, because it's a good example of how a tariff. Might be applied, and what the what the overall economics might look like. And the Minecraft movie, which is very top of mind to everybody, because it's it's doing so well in the box office right now. That was New Zealand and in Canada. All of this stuff used to be a shot primarily in the in the US. So to go through that list of very prominent projects and understand how spread out they are around the world really does define the scope of the problem, sorry, so we know the scope. Why? Why has it happened? Well, you've got micro and macro economic factors that are in play here, while today our US dollar is not necessarily very strong historically. For the last couple of years, it has been and a strong US dollar means you can buy more as you take those dollars into foreign markets. In addition, we've had very high interest rates here in the US making borrowing a little bit more challenging. You've got higher US labor rates here than what you would see in other parts of the world. And this is, of course, where the administration is focusing a lot on tariffs to sort of level the playing field when it comes to high US labor rates versus lower international labor rates. But by some accounts, production spending on crew members below the line, spending in, say, Eastern Europe, might be one quarter the cost of what you'll spend in the US. Now, of course, we know how we got to this to this point. Also, we had big strikes a couple of years ago in 2023 and one of the outcomes of the strikes is that you have some higher labor rates here in the US, so strong dollar, high interest rates, low cost of labor overseas, high cost of labor here in the in the US and and on top of it all is these tax incentive programs, which we're used to here in the US, because our US states have been adopting them and improving them for the last 20 years. All these foreign markets are now doing exactly the same thing. So if you go to the American Film Market, or the Cannes Film Festival, and you walk around, you're going to see advertisements from countries all over the world, advertising that they're giving away 30% in tax credits, 40% in refunds, you know, 50% in rebates. And some of these numbers get by. The highest one that we're tracking right now is in certain Spanish regions, you can get up to 60% back. And what you see is also both federal and local incentives being offered in some of these countries, and you can combine the two to get the most possible money back, whereas here in the US, all of that heavy lifting is really only being done by the individual states. Think Georgia, Louisiana, New Mexico, New Jersey, New York, California. They're all offering their own programs to try and keep runaway production in the US, and it's just not working right now because the economics tilt in favor of the foreign markets.

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7:59  

It's really fascinating. Will have films ever been subject to us tariffs in the past?

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8:07  

That's a that's an interesting question with a bit of a tricky answer. The idea of putting a tariff on a film raises more questions than it answers, and the reality is that, no, we don't have an example of the US putting tariffs on foreign films, or vice versa. But there's clearly a long history of using the film industry and the American film industry in trade negotiations and trade wars, going back to the early nights, pre World War One, post World War One, post World War Two, and what I think the administration is kind of reacting to right now is that China came out recently and said that they were going to be restricting the inflow of us projects. Now we don't have a corollary concept to that. In the United States, anything that's made anywhere in the world can be shown in the United States, we don't censor things. We don't keep things out, but China does, and China can choose to let in or out various US productions. And so I think that was sort of the thorn in the side of the administration that prompted bringing a tariff to the table at this particular point in time. And of course, we know that the administration is very focused on tariffs to begin with, as opposed to other potential solutions for how you might equalize the trade imbalance here, as it relates to the to the film industry, I also think it's very important to note, because you brought up sort of the national security issue at the top of the top of The podcast, that this world might look very different if the content that was produced over the last 100 years had come out of Iran, for example, or China or Russia, the fact that we as the United States were industry leaders in the creation of content that then went out all over the world. showcased American ideals, American values, American culture, and really elevated America to the highest possible stature worldwide. So now I think what you see is we've allowed that to slip, and production really is very evenly spread all throughout the world. And does America want to do something to grab that back and to to re establish itself at the forefront, at the forefront of today's culture, cultural issues throughout the throughout the world. So that's in play here. And I think that's why the administration wanted to do something and do something very big. Then the question is, well, what's the right way to do? This? Is a tariff the right solution. I think that that a tariff is a stick and an incentive is a carrot, and this industry banks on incentives and knows incentives and knows how to use them, and the industry can very quickly pivot when incentives are are modified or improved or offered around the world. We saw this in the early 2000s when the US jurisdictions like Louisiana and Rhode Island and Massachusetts and Pennsylvania and New Mexico Arizona, back at the time, said, We want to stem the tide of runaway production, so we're going to offer our own incentives for for this industry. And sure enough, the industry very much came back into the US, primarily from Canada at the time, and started shooting in these jurisdictions these days, Georgia, which was also one of the early players in in that incentive space has one of the largest production industries anywhere in the world, certainly in the US, spending probably more than a billion dollars a year on their own, on their own. So these things work, and we've seen it. We've proven it here in the United States, a tariff. On the other hand, the corollary to me is like a chainsaw and a scalpel will both cut things, but a scalpel can cut things much more cleanly and and get get to the problem, whereas the chainsaw is going to make a big mess. So I feel like we're talking about a chainsaw situation, but it's also meant to get everyone's attention, and it sure has gotten everyone's attention. So could it work? I think it could. I think that you're going to be hard pressed to find anybody green lighting productions right now that are intended to shoot outside US borders, just because there's no clarity on what this is, how it could work, how it could be done, and how devastating it could be. So I think just the pure floating of the tariff concept is going to result in production activity coming back more into the US until it gets until it gets worked out. But there's probably a short term play here, which is the announcement of a tariff, and a longer term play here, which is really coming up with the right solution for how to permanently get the industry refocused, if you will, back in the US. And that probably looks more like an incentive, a carrot, if you will, than a stick, which is the tariff

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13:22  

that's fantastically informative. Well, can you give me any insight? What is Section 181

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so it's not that the US doesn't have some type of incentive. It does. It was just never really intended to be an incentive. And we we refer to that as section 181 of the Internal Revenue Code. What 181 says is that you can expense the full cost of making a movie in year one. So if you spend $100 million making a film, that's a tax write off that you get right there. You've expensed it. You don't have to pay tax on on the corollary, the the coinciding 100 million dollars of income that you might have. But what you're supposed to do is, then, when you start selling that the rights to that film, or start making money on it, you're support, you're supposed to start paying taxes from day one and dollar one. And so it's the system is being used right now to bring funding into projects by investors who are interested in tax deductions, but then they're not doing necessarily what they're supposed to do, and recognizing income as that film gets completed and starts to be distributed into the marketplace. So we have something. We have it on the books. It's working to put some funding into projects, but at the same time, it's not being used in the way that was intended to be used, which probably is going to mean that there. Going to be issues to clean up with it in the future, maybe the IRS is going to start to disallow those deductions, or something like that. And that's not what you want, if you if you're going to be talking about a form of incentive intended to work in the long run, to fix this problem of this trade imbalance as it relates to the film industry, you really want something smart and scalpel oriented that's that's going to work and and 181 is, is a band aid at at best, you could make the case that one way to solve this issue is to reform section 181 and truly make it an incentive for filmmaking in the US. And forget about this expensing versus recognizing income, you know, in future years, and follow the systems that have been experimented with in the last 20 years, which is essentially tax credits versus tax refunds versus rebates versus grants. That's kind of the nature of how these things look, and different jurisdictions have picked different ways of doing things. The US film industry incentives that work the best are the ones that involve transferable tax credits. It's that's true for a couple of reasons. One is you don't want to limit the value of the incentive to whatever the earning party's tax liability is. So if I'm making a movie and I owe $100 in taxes, but I could get a $1 million tax credit if I can't sell that tax credit to somebody else, then I'm limiting the value of that credit to what I pay in taxes, which doesn't make any sense in this industry that spends a lot of money but doesn't necessarily have a lot of companies who are making big dollars, like the major studios do, so a transferable tax credit in that way follows what the states are doing that have effective programs. Georgia is a transferable tax credit. New Jersey is a very big one these days, California, a lot of the northeastern states that use that model that's proven itself to be effective in the in the US. And then the other thing it does is it pairs investors with film producers. So if we want to incentivize production activity and production spending, let's bring in our investor base from within the US to participate in that, and then they can use those tax incentive tax incentives, because they are the ones that pay a lot in taxes. So the blending together of the investors and the producers, by virtue of these transferable tax credits, can really help to bring financing to the industry. The other interesting thing about a tax credit, as opposed to a refund or a rebate or a grant, is that it serves as collateral for financing. You can take a UCC lien against a tax credit. You can't take a UCC lien against a tax refund or something like that. So it means I can take it to the bank, and I can borrow against it, and and it's been a very effective way of doing things. So it's not like we have to guess at what types of programs work the best. We have 20 years of data on it coming out of the US, you know, ourselves, and so we can sort of learn from from that, and then you see the similar programs in the international jurisdictions, and you can see which ones work and don't work and things like that. So this would not be a very hard thing to do. But of course, the difference between a tariff and an incentive is a tariff is a penalty that can arguably bring revenue into a government, whereas an incentive is going to be an outflow of revenue to create an economic impact. But if you really wanted to figure out the right sustainable model, I think that we've seen that tax incentives and credits work better than the alternative.

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19:16  

So Will. We're less than one full business day since this pronouncement on Sunday. What's next?

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19:25  

Well, it what I think we've already seen, and you touched on at the top of the at the top of the show, is that the administration seems to be opening the door to discussion about how to do this. And the President led with an announcement about a 100% tariff, but now they're saying sort of everything is on the table for consideration. I think that's a very positive place for for the film industry in the US to be. And if I were, if, if I, if I, if I'm anybody in the. Film industry based in the US, I would say it's way better that this conversation is being had than if it were not being had, because if it were not being had, we've already seen that this industry is leaving the US. This is the opportunity where you can really do something to bring it back. So I would assume that they're going to be people coming together to make suggestions about how to do it. I think it would be terrific if the administration were open to hearing from a broad group of interested stakeholders, whether they be the big studios who tend to control a lot of legislation through the MPAA, or whether they be small independent producers who probably produce as much as the big studios do, just through 1000s of projects, as opposed to a dozen projects or something like that. So getting everyone together to the table representing all of the diverse film industry interests and stakeholders. I think that's the right next, next stage here. I don't think you need to be negotiating with China over this or or France or Eastern Europe, or anybody like that. I think this is solvable strictly within our own domestic industry. And there are some very good ways of skinning this cat.

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21:22  

It's extremely informative. Will thank you for joining me. Obviously, both you and Fallbrook film finance will be monitoring this story very closely as well. I and Wrapbook, and we look forward to being able to bring more this type of information to bear as more information comes to light. Thank you very much.

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21:40  

Thanks for having me.