Credit: Blue Sky Studios/ Fair Use

Studio Credits Net Connecticut Taxpayers a $92.8 Million Loss

A Greenwich-based animation studio collected $242.5 million in tax credits during its 12-year run in Connecticut – and state auditors say $66.8 million of that was improperly given.

Blue Sky Studio, a digital animation studio best known for its work on blockbuster films including Tron and Ice Age, was shut down by Disney this month, and laid off over 400 employees after the ubiquitous media company bought the studio’s previous owner, 20th Century Fox.

Blue Sky started in Greenwich in 1987, but moved to White Plains, New York in 2002. The company moved back to Greenwich in 2009 to take advantage of a tax credit Connecticut was offering digital animation studios.

The credit was equal to 30 percent of the studio’s eligible production spending within the state, but offered a maximum of $15 million a year. In 2009 – its first year back in Connecticut – Blue Sky spent $35.6 million, and earned $10.7 million in tax credits. Over the next seven years, it spent $483.3 million, and enough each year to earn the maximum $15 million credits.

In 2016, the company applied for another tax credit meant for film production studios, which did not have a $15 million a year maximum. That year it received both credits – $15 million from the digital animation credit and $8.9 million from the film production credit. From then on, it received the broader film production credit exclusively – a total of $126.8 million over the following five years.

From 2009 through 2020, Blue Sky Studios spent over $900 million in Connecticut, and employed an average of about 500 employees each year, according to data provided by the Connecticut Department of Economic and Community Development, which administers the state’s tax credit programs.

In that time, the company was given $242.5 million in tax credits, including both the digital animation credits, and the film production credits. But in a March report, state auditors said the company was only eligible for the digital animation credit, so any amount of credits it was given beyond the $15 million a year maximum of that program was improper – a total of $66.8 million.

“Since the General Assembly established a separate program for digital animation companies, it does not appear that it intended for digital animation companies to be eligible for film production tax credits,” the audit report stated.

Officials at the state’s Department of Economic and Community Development disagree with that finding, given that the animation company was also producing motion pictures.

“The company produces motion pictures, which is a statutorily qualified medium, also the company’s productions are further qualified as defined in [state statutes], which includes a, ‘production via any means and media in any digital media format, film or videotape.’ DECD will seek clarification from the State Legislature,” the agency said in its written response to the audit.

Given that the legislature approved the digital animation credit in 2007 — one year after approving the film production tax credit — state auditors say that it does not appear that lawmakers intended the credits to overlap. Auditors also questioned why the studio would have been given the lesser digital animation credit for seven years before being granted the film production credit.

Department officials later told CT Examiner that it was not necessary to seek clarification from the legislature given that the digital animation credits were “clearly distinct” from the film production credit. The company did not receive the film production tax credits for the first seven years after the company’s return to Greenwich, according to DECD officials, because it returned to the state under an “assistance agreement as a digital animation production company,” which included specific provisions concerning tax credits.

In it’s 2018 annual report, DECD claimed that Blue Sky – the only company to receive digital animation credits – would not have returned to Connecticut the credits and a package of other incentives.

But that report also highlighted the lack of return in state revenue provided by the credits. DECD estimated that investment spurred by the credits contributed a total of $1.6 billion to Connecticut’s GDP, but an estimated net loss of $92.8 million in revenue – losing about 60 cents of revenue for every dollar provided in credits over eight years.

Blue Sky created hundreds of well-paying jobs in Connecticut, but about 70 percent of the company’s employees did not live in the state, tamping down the positive effect those incomes could have had on the state economy, and on the amount of taxes those employees paid to Connecticut, according to the report.

At the time the report was released, Blue Sky had tripled its number of employees and recently extended its lease through 2028.

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