Thoughts on Tax Breaks for Game Developers in Pennsylvania

NewsworksImageWe were interviewed the other day for a brief piece by WHYY/Newsworks, but since they wisely limited the length of my ramblings on the subject, I thought a few additional notes on the issue might be of interest to some patient folks:

1. In 2006, I co-founded a company in New Orleans with the folks who were behind Louisiana’s tax credits for the game industry (the largest US project of this sort, aside from Rhode Island’s wacky 38 Studios experience). It was a very different time, in terms of industry opportunities, but it was quite useful for the area. I left that company at the point we raised VC funds (after a year), and I do think the tax credits probably helped with the raise.

2. Philadelphia Game Lab is a non-profit dedicated to opportunities in small team game development, which represents game types and distribution models that while now perhaps the majority of industry opportunities, were not considered meaningful as Louisiana’s breaks were being planned. Hence, their concepts of “wins” were very different from what would be applicable to us.

3. At capacity, we will host a dozen teams of game developers in our location at 2212 Walnut. Of the eight that we have invited so far, five either came to Philadelphia from other states because of opportunities (especially around university expertise) and cost savings (including lifestyle) here, or will be coming here for that and specifically to the Philadelphia Game Lab. We are consistently asked by companies coming here whether there are tax breaks, and if it does nothing else, having any tax break will “check that box” so that I won’t have to simply say “Nope. But I can help you talk to the right people.”

4. I strongly believe that an important aspect of a tax break for game development here is that it should take as a given that most teams are of less than 24 people, and these folks can’t mess about with government relations. There should be a simple form that allows people to claim the tax credit, and it should be first-come, first-served.

5. I started my career in the film production industry (as everything from a grip to cameraman to having my own commercial production company), so I’m highly aware of the differences between the benefits to a city of film production versus game creation. Film production tax credits both help support a skilled creative technical class and highlight the city as a location, which is extremely important given the percentage of our revenue that comes from tourism. Hence, while the film tax credit ends up costing quite a lot, it does double duty. There is no way that the cost of tax credits for game production in Pennsylvania will approach that of film. There was a time, when major publishers and developers were opening large new AAA development shops that it was conceivable that it could have been that big (although I’d argue that that was never really a possibility for Philadelphia). -Currently, big developers are shutting down shops, including those in Montreal, which has been a center for development, and has excellent tax and educational benefits for game development. However, any subsidization of game development in this town has a much more direct impact upon facilitating keeping the smartest college grads here, as what will be hired are skilled recent graduates from Penn, Drexel and other local universities.

A potential issue in simply adding the game tax credits to the film program is that film productions are very transient, so that once they confirm a credit for production, it’s locked in for the term of the project here. In contrast, game development is not at all transient; creators work for years on either one project or many smaller titles, and stability is critically important; the concept of a “production pipeline,” or the ability to create ongoing quality work is a core value that a game developer provides to investors. While folks in film production here panic periodically as they see that the state may not renew the production tax credits for the following year, this lack of stability only affects local folks on the ground, not producers who are deciding where to shoot (they have no sunk costs and can just go elsewhere this time). In contrast, if someone sets up shop here for game production with the idea that the tax credit enables their business model, it would be a very bad thing for such a credit not to exist next year.

Last year, I wrote a white paper on the history and potential benefits of Tax Credits for the game industry, some of which is not relevant, but here are a few elements that may be of interest:

• There are no “whales” left in the game industry at this time. The focus is on outsourcing and smaller, nimble companies. The big wins achieved by some states over the past few years, including Louisiana, in driving relocation, simply aren’t there to be had at this point.

• There have been two major successes for Louisiana as a result of their initiative:

• –  Gameloft opened a 140-person studio

• –  Electronic Arts funded creation of a Quality Assurance Lab in coordination with LSU. It started with 200 employees, then went to 400 and is growing to 650. However, as these are students, the vast majority are are part-time, so it has a lot of benefit for LSU, but as LSU doesn’t have a strong engineering program, the benefits may not be long-lasting or effective for the local economy.

• The businesses pitched to move to Louisiana were done so with a presentation built entirely around the benefits of tax breaks. The tax breaks were significant and given the full and aggressive backing of Governor Jindal’s administration.

• Louisiana give tax credits to Game and Film entities each year. Most entities receive more credits than they have taxes due. Until 2011 there was an ad hoc marketplace for these credits, that paid 80-90% of their value, but last year the state began allowing them to be “cashed-in” at 100% of their value.

• There are a variety of attraction scenarios that could be effective in the current environment. One concept which seems to hold promise is a model employed by several Canadian provinces, in which salaries are subsidized by the state, at levels of between 30-50%. In an environment of small, technically skilled teams, the knock-on effect of subsidizing funded initiatives so that they are able to combine this benefit with the low costs of living in Philadelphia could be significant. Housing is another element that could be a successful draw for these smaller teams to move to Philadelphia, if we can find a way to add this to the package.

 Thoughts on Tax Breaks for Game Developers in Pennsylvania

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