Most tax credits issued by the state to film production companies end up being sold to brokers, which then resell them at a profit to financial firms, other corporations, and wealthy individuals to slash their tax bills.
At least 96 percent of the $265 million in tax credits used to attract movie and television productions to Massachusetts were sold by the film companies between 2006 and 2010, according to the state Department of Revenue.
The incentives are so generous - rebates of up to 25 percent of production costs in the state - that most film companies do not end up owing nearly enough in taxes to use the credits. So they sell them at a discount, fueling a booming industry for brokers, accountants, and savvy taxpayers.
The trade in credits is sparking new criticism of the economic development program.
“The public assumes that the film tax credits are going to the film industry to bring jobs - not to Walmart,’’ said Deirdre Cummings, legislative director for the Massachusetts Public Interest Research Group, an advocacy organization based in Boston. “I think the general public would have a problem with that.’’
Companies and individuals use tax credits to reduce tax bills. For example, a $1 million credit reduces a company’s tax payment by that amount.
But most film companies do not owe enough in state income taxes to use the credits, so they typically sell them.
A production company that is awarded $10 million in tax credits might sell them to a broker for $8.7 million. The broker then sells the credits to a financial company that owes state incomes taxes for a bit more - say for $9 million, earning the broker a $300,000 profit. The financial firm can then claim the full $10 million in credits on its tax return, saving $1 million.
The practices were highlighted last month when prosecutors charged a Cape Cod filmmaker, Daniel Adams, with fraudulently obtaining $4.7 million in credits for the films “The Golden Boys’’ and “The Lightkeepers.’’
Prosecutors said Walmart Stores Inc. and Bank of America Corp. bought the credits through a broker to reduce their taxes.
The companies do not report how much they earn in Massachusetts or pay in taxes in the state. The state Department of Revenue generally does not disclose how much individuals and corporations pay in taxes because of confidentiality laws.
Bank of America declined to comment. Walmart said it “makes every effort’’ to comply with state laws.
Other companies confirmed they buy film tax credits. One of the largest insurers in the state, Hanover Insurance Group of Worcester, has purchased “small amounts’’ of tax credits in recent years. Kahn, Litwin, Renza & Co. Ltd., an accounting firm with offices in Boston and Providence, buys film tax credits to help clients lower their tax bills, said Robert D’Andrea, a principal with the firm.
Officials in Governor Deval Patrick’s administration declined to say whether the governor supports film and other transferable tax credits, which can be sold to investors. A state commission is studying the issue, and the administration is awaiting the findings, to be reported in April, said Alex Zaroulis, a spokeswoman.
“We are focused on making sure the tax credits work,’’ she said.
Massachusetts, one of about three dozen states that provide film incentives, began offering tax credits in 2006 to lure movie and television productions to the state, create jobs, and boost the economy.
The incentives have helped to attract major feature films such as Ben Affleck’s movie “The Town’’ and increased film production spending in the state by more than $300 million from 2006 to 2010, according to the Revenue Department.
The competition between states for film productions has been fierce in past years. Massachusetts, for example, adopted its tax credits just months after Rhode Island launched a similar program.
Film incentives are not the Bay State’s only transferable tax credits, which are frequently used to help nonprofits and small companies not yet earning significant profits.
The state allows companies to sell credits for so-called brownfield development on former industrial sites; historic rehabilitation; building low-income housing; and manufacturing medical devices. This fiscal year, the state expects to spend more than $200 million on transferable credits, including $80 million for film companies.
Critics say the state could save millions of dollars a year by converting the tax credits to a grant program that provides direct subsidies equivalent to the 87 percent value that film companies typically receive. That would cut out brokers and buyers who pocket the rest, estimated by the state at $33 million over five years.
Such a system would allow the public to know who benefits from the subsidies. For the most part, the names of tax credit buyers are kept secret because of privacy laws.
“They are essentially a grant,’’ said state Senator Jamie Eldridge, Democrat of Acton, “so the state government needs to have a more transparent process for making decisions about whether this is a good use of taxpayer dollars.’’
Many brokers and film companies, however, say the current system works fine.
In Somerville, Powderhouse Productions Inc. churns out television programs for several networks, including “Dogs 101’’ for Animal Planet, “Extreme Engineering’’ for the Discovery Channel, and “America’s Wildest Roads’’ for the Travel Channel.
The company has gotten several million dollars in state film tax credits, selling most of them to Coastal Capital Advisors LLC in Boston, which then peddles them to companies looking to cut their tax bills.
Coastal would not disclose its buyers.
Tug Yourgrau, Powderhouse’s president, said the credits have helped his production company become one of the biggest in New England and triple employment to more than 100 since 2006.
“It’s Miracle-Gro,’’ he said.