What will happen if Vancouver’s video game industry loses its tax credit?

Klei Entertainment | BCBusiness
Jamie Cheng, owner of Klei Entertainment, says B.C.’s tax credits leave him with more money to take risks and grow.

B.C.’s video-game industry, while not booming, is in a relatively stable position. That all could change if a critical tax credit disappears in next month’s budget

Like many in his field, Jamie Cheng, owner of Klei Entertainment—a small Gastown-based mobile gaming studio—views the local video-game sector as an ecosystem of stable, high-paying jobs. B.C.’s 67 video-game studios have an average lifespan of nine years, according to the Digital Media and Wireless Association of B.C. (DigiBC), while average annual salaries for the industry’s roughly 5,000 workers top $80,000. Institutions such as the Centre for Digital Media and the Vancouver Film School churn out graduates by the hundreds—many of whom go on to work for giants such as Electronic Arts (EA) or, like Cheng himself, found small studios of their own.

While the ecosystem is stable, it remains fragile—and heavily dependent on government support for its survival. B.C.’s Digital Media Tax Credit is one program credited for maintaining a vibrant local scene. The 17.5 per cent rebate on salaries of game designers and developers was introduced in 2010, and many say it has helped save thousands of jobs over the past five years in what has become a ruthlessly competitive global business. As Howard Donaldson, president of DigiBC, puts it: “It has stemmed the bleeding.”

The question of whether or not the five-year tax credit gets renewed in next month’s provincial budget is a hot topic amongst industry professionals, with many arguing that the future of the local gaming industry hangs in the balance. Beyond saving studios and helping to create some 1,700 new positions, DigiBC’s Donaldson says the tax credit has seen a good return on investment: by his estimate, the $100 million doled out by the province has delivered $135 million in additional corporate income taxes and indirect taxes to provincial coffers.

The problem, however, is that in recent years other provinces and states have also jumped on the tax-credit bandwagon, lessening B.C.’s competitive advantage. Quebec now offers an all-in credit of around 30 per cent, with breaks on contract labour (eligible salaries in B.C. have to be full-time). Ontario offers credits that range from 25 to 40 per cent on all labour. South of the border, Texas and Florida, both of which have low state income taxes, offer a 20 per cent break on all expenses, while Louisiana, which has a reputation for fat tax breaks for the film industry, offers a 35 per cent credit on labour and a 25 per cent credit on expenses.

EA is one company that’s become an expert at squeezing the most out of each locale it operates in. The company keeps a master chart at its California headquarters that lists average salaries, cost-per-head counts and tax-credit discounts for its projects in various jurisdictions. “It plays a bigger and bigger part in where we put projects,” says Jon Lutz, VP of planning and strategy at EA Canada, of the tax-credit game. Even with the tax credit, local graduates are still forced to look for jobs in other jurisdictions around the world. “We’ve become an exporter of talent,” says DigiBC’s Donaldson. He estimates that B.C. has lost 1,500 jobs to other jurisdictions in North America since 2009, counting hundreds of B.C.-educated developers and designers in Washington, California and Florida alone.

This new world order—what’s derisively called “the race to the bottom” by critics, with competing jurisdictions undercutting each other with ever-richer credits and incentives—is a far cry from the 1990s, when Vancouver carried the banner as Canada’s video-game capital. At that time, EA Canada was the world leader in the development and marketing of sports games, producing its record-selling FIFA, NBA and NFL franchises from its Burnaby campus. At its peak, EA Canada employed 1,700, with the company carving the path for a slew of gaming upstarts.

“When we entered the industry in 2004, projects were lucrative and we had great margins,” says Brenda Bailey Gershkovitch, founder of Silicon Sisters, a local studio that builds video games marketed toward women. But four years later, all that changed, says Gershkovitch. The recession hit, and the film, animation and gaming industries—each dependent on discretionary spending—took a particularly big blow. Smaller studios shut down, and EA sold off real estate and laid off hundreds of workers. The shifting fortunes prompted Howard Donaldson, then an executive at Disney-Club Penguin, to rally other leaders in the gaming space to create BC Interactive, the predecessor to DigiBC. “I found it odd that the government wasn’t doing anything,” says Donaldson, “so I started to investigate why we were being unsuccessful.”

Jamie Cheng says that government assistance, including the Digital Media Tax Credit, has helped Klei get off what he calls the “royalty treadmill.” Instead of pouring all the royalties he sees from game sales into Klei’s operations, Cheng can now—thanks to the tax credit—invest more in product development. “The incentive to reinvest in yourself is a huge boost,” says Cheng. “The tax credit allowed us to take a risk.” And that risk is paying off: today Klei’s 40-person team pumps out multiple PC titles, which combined have sold over one million copies.

While the Digital Media Tax Credit has been criticized both for its cost and the fact that rich multinationals, such as Electronic Arts, are huge beneficiaries, most in the industry seem to be of the opinion that the program, on balance, has been a lifesaver—creating both jobs for the present and a sustainable industry for the future.

“We’re not going to need tax credits forever,” says EA’s Lutz. “But I think this is something we need now to ensure that we don’t lose what we’ve got.”