House Majority Leader Gordon Fox, D-Providence, left, and Rep. Joanne Giannini, D-Providence, were still smiling one day after copies of the proposed state budget were distributed yesterday. The Providence Journal / Connie Grosch

PROVIDENCE — It should have been the high point of Rhode Island’s movie-making industry to date.

Hometown director Michael Corrente stood on the steps of Providence City Hall to announce his plans to bring a quintessential Rhode Island story about famed former Providence Mayor Vincent A. Cianci Jr. to the big screen in The Prince of Providence.

Flashbulbs popped and locals pleaded for roles as extras while Corrente promised the movie would be shot almost entirely in the capital city.

But less than 24 hours earlier, the state’s fledgling film and television industry was dealt its biggest hit in its five-year history when lawmakers announced a plan to cap the sale of film and television tax credits at $15 million a year to help close the state’s yawning budget deficit.

The move puts unexpected constraints on the program House Speaker William J. Murphy has championed as an important economic development initiative. It also jeopardizes the much-touted plan to build a major movie studio in this state.

Under the new rules — approved Wednesday by the House Finance Committee as part of the budget plan — credits would be doled out on a first-come, first-served basis to film companies which could then sell them to those looking to reduce one’s Rhode Island tax liability. Once the yearly allotment of credits has been used up, filmmakers will no longer be able to access them.

Lawmakers, including Murphy, said the state cannot afford to offer limitless credits “in tough economic times,” when state services and other incentive programs, including the state’s historic tax credits, are being cut.

The restrictions place Rhode Island “at a disadvantage” over neighboring states, Steven Feinberg, director of the Rhode Island Film & Television Office, acknowledges.

“Some productions interested in filming in Rhode Island may pause, as our surrounding states do not have a cap in place,” he said. “We will also lose the opportunity to land some of the larger films as we would exceed the cap.” (2006’s Underdog, the state’s largest film to date, was issued about $9 million in tax credits.)

But Feinberg and Murphy dispute that the change will put an end to Rhode Island’s movie business or even seriously limit it. Since its inception in 2004, the state has issued an average of $15 million in yearly credits –– in 2006, the state gave out more than $22 million in credits, while in 2007 it gave out $13 million.

What it could do is convey an unwelcome sign to Hollywood movie makers.

“We’re sending out the message that we’re becoming less film friendly when in fact Connecticut and Massachusetts are becoming more aggressive,” said Lynne McCormack, Providence’s director of arts, culture and tourism.

Massachusetts two years ago passed legislation, which like Rhode Island’s, offers a tax break on 25 percent of all qualified production costs. Connecticut followed suit, upping those credits to 30 percent. Both states also offer sales tax breaks and have no caps.

But the investment return from the movies is questionable. A report by the Massachusetts Department of Revenue suggests that the tax incentives there have cost the state more than $100 million in lost tax revenue over the last three years. A similar analysis by Rhode Island’s Department of Revenue is now “being finalized” and is due out next month, state officials say.

“Governor Carcieri is pleased that the House Finance Committee has moved to instill an additional measure of fiscal discipline on this program,” spokesman Jeff Neal said yesterday.

Senate Finance Chairman Stephen D. Alves said the change was simply “a matter of dollars and cents.”

It was Alves who this spring proposed a stricter $10-million annual cap. Close to 100 people appeared before a Senate committee, most of them industry workers who testified that the cap would hurt their livelihood.

In a letter to lawmakers, a Showtime executive said the bill could have a “potentially chilling effect” on the popular series Brotherhood, which has filmed two seasons in Rhode Island and is scheduled to shoot a third this summer, averaging about $5 million in credits each year.

“Production companies including Showtime prefer to avoid states with a capped incentive because of the possibility that they would be told to ‘stand in line’ for an incentive that may not be guaranteed …,” executive vice president Melinda Benedek wrote.

The cap will also put a likely end to the state’s plans to build a large movie studio in Hopkinton.

“I do not think it will be a viable situation if there’s a cap on the credits,” Feinberg said of the facility. The studio’s success hinges on it being booked with big-budget productions that might go elsewhere if they can’t guarantee the credits they need, he said.

Lobbyist Frank McMahon, who is working with the development consortium behind the studio, said the group is still assessing what the change will mean.

If the House and Senate approve the budget as expected next week, the cap will go into effect for the 2008 calendar year.

In spite of that, Corrente remained optimistic yesterday. “Yes, the tax credits are important, but you can get here what you can’t get in a lot of other places. It’s like one big back lot,” he said.

The challenge now, some say, will be convincing industry insiders that Rhode Island is still worth the trip.

cneedham@projo.com