Film Production

Case Study: Film Production Subsidies

Gone are the days when a movie producer like the legendary Sam Goldwyn could say, “A rock’s a rock, a tree’s a tree. Shoot it in Griffith Park.” Instead, the Los Angeles-based film industry has gone looking for locations – partly based on urban or rural scenery, but more often based on which state provides the heftiest economic development subsidies. In 2008, about 40 states spent $1.4 billion in tax credits, write-offs and grants, ranging from Montana’s $1.25 million to New York’s $460 million. And this to an industry whose revenues in 2009 topped $10 billion, an increase of nearly 9 percent over 2008.

Many states' costliest film subsidies take the form of corporate income tax credits pegged to a percentage – as high as Michigan's 42 percent and Iowa's 50 percent – of the money spent by the production company in the state. These credits far exceed what any firm would ever owe a single state (after all, states tax profits not expenses, their tax rates are single digits, and any one state generates a tiny share of a national production's taxable profits). That's why many of the tax credits are structured so that media companies can either sell them to other companies that really do owe taxes to the state or receive a cash rebate from the state.

The interstate competition for location shooting is especially intense. As of 2009, only six states did not yet provide movie production incentives (MPIs).  Tax Foundation analyst William Luther raised the zero-sum issue:

From a national perspective, even boosters would probably admit that little if any wealth is created by these programs. Jobs created in New Mexico are offset by those destroyed in California. Rather than creating wealth, MPIs just shift production from one state to another.

Put another way: Americans do not have more time or money to consume media just because media corporations have more places to create productions.

But these arguments matter little to many economic development officials and politicians, who find that the publicity surrounding both the filming and release enhances their status. Said Cornell University professor Susan Christopherson and economic development policy researcher Ned Rightor, “because film crew activity is highly visible to the public, it appeals to policy makers who want to be seen as taking action to improve their economy.”  

Until recently, movie production incentives and film tax credits were lightly audited and rarely evaluated, and the public, seduced by the glamour of the industry, paid little attention to the economics. Moreover, the terms of the subsidies are often absurdly generous, even spawning an industry of brokers, middle men who deal in transferable and refundable movie tax credits. In fact, according to the Tax Foundation report, 15 states have refundable tax credits, allowing film production companies to sell excess tax credits directly back to the state.

How do costs compare to benefits? Because production and post-production activities vary so much and are so temporary, it’s hard to generalize about the ripple effects movie production creates.  One set of hard numbers is available in some states, however: taxpayer costs versus revenues.  They reveal that some states lose money attracting movie production; in some cases they lose a lot of money. For instance:

NEW MEXICO.  The state of New Mexico has invested long and deep to attract TV and movie production, and as a result, Albuquerque now has some of the world’s largest soundstages. But, according to one study, in 2007, the state “granted $38.2 million in tax rebates for TV and movie production, but in return saw only enough increase in economic activity to generate $5.5 million in public revenue.”

MASSACHUSETTS.  An independent 2009 report by the Massachusetts Department of Revenue said that the state’s 25 percent film incentive program that “unequivocally showed the credits weren’t working.” In 2008, the state had paid out $113 million in tax credits and generated $17.7 million new revenue and 1100 full-time jobs. “That's roughly $89,000 spent by the state creating each new job," state representative Steve D'Amico told a reporter. “In terms of cost-to-benefit, it's clearly not justified.”

IOWA. In 2007, the Iowa Film, Television and Video Promotion Program instituted an extremely generous incentive program, offering producers a 50 percent tax credit, promoted by the Iowa Film Office as “half-price filmmaking.” The program blew up when a state audit found numerous irregularities; five officials were fired, including the film office director, and the program was suspended with little support for reinstatement.

Public officials also routinely ignore evidence that film subsidies flunk the definition of “incentive,” that is, they do not cause something to occur that otherwise would not have.  But that hasn’t stopped many states from offering more and bigger subsidies. For instance:

VIRGINIA. Gov. Robert McDonnell created a $5 million refundable film tax credit program, and increased the state’s film incentive fund. The latter offers filmmakers cash to shoot in Virginia. Said one producer, “It's not that big of a chunk, but then again, it's money that didn't have to go into [publicity and advertising]. Fifteen thousand is still fifteen thousand.”

CALIFORNIA.  Faced with competition from most of the country, the movie industry home state of California was forced to enact its own incentives. The state, which has massive budgetary shortfalls, has been offering $100 million a year, providing from 20 to 25 percent against income and sales tax liabilities. However, in August 2010, The Los Angeles Times reported that the California Film Commission had already allocated all of its $100 million in tax credits for 2010 to 30 projects and had a waiting list of 45 more.

The house-cleaning in Iowa is not typical. In Louisiana, the former film commissioner was sentenced to prison for accepting bribes from a New Orleans film producer in exchange for transferable tax credits. And in spring of 2010, according to The Times-Picayune, “The head of a defunct Elmwood movie studio pleaded guilty Thursday to federal charges of selling $1.9 million in nonexistent film-industry tax credits to at least 27 current and former members of the New Orleans Saints organization.” But state legislators have continued to fund and expand the MPI program. And in Connecticut in 2009, a nonprofit group revealed that many MPI subsidies had gone to out-of-state entities, and that costs far exceeded benefits. Although some debate ensued, Connecticut still has a 30 percent tax credit.

Film subsidies have now even been linked to lung cancer.  According to the Smoke Free Movies campaign, “The more smoking kids see on screen, the more likely they are to become smokers…” and “The major studios account for 90% of kids' on-screen tobacco exposure.” Despite this well-established danger to public health, no state denies subsidies to films rated G, PG or PG-13 that include smoking scenes. Indeed, youth-rated films dominate those subsidized films with smoking.

Sources

Robert Tannenwald, State Film Subsidies: Not Much Bang for Too Many Bucks, Center on Budget and Policy Priorities, November 2010; http://www.cbpp.org/cms/index.cfm?fa=view&id=3326

Susan Christopherson and Ned Rightor, “The Creative Economy as ‘Big Business’: Evaluating State Strategies to Lure Filmmakers,” Journal of Planning Education and Research XX(X) 1–17, 2009.

Jonathan Polansky  and Stanton Glantz, Taxpayer Subsidies for US Films with Tobacco Imagery, University of California, San Francisco, 2009; http://escholarship.org/uc/item/8nc8422j#page-1

Will Luther, Movie Production Incentives: Blockbuster Support for Lackluster Policy, The Tax Foundation, January 14, 2010; http://www.taxfoundation.org/publications/show/25706.html

Zach Patton, “The Value of Movie Tax Incentives,” Governing, June 2010; http://www.governing.com/topics/economic-dev/The-Value-of-Movie-Tax-Incentives.html

Jason Hancock, “With or without abuse, value of Iowa film incentives is difficult to measure,” The Iowa Independent, September 22, 2009; http://iowaindependent.com/20038/with-or-without-abuse-value-of-iowa-film-incentives-difficult-to-measure

Darcy Rollins Saas, Hollywood East? Film Tax Credits in New England, Policy Brief 06-3, New England Public Policy Center at the Federal Reserve Bank of Boston, October 2006; http://www.heartland.org/budgetandtax-news.org/article/24181

Gordon Russell, “Film tax-credit scam that ensnared dozens with ties to New Orleans Saints leads to guilty plea,” New Orleans Times-Picayune, May 13, 2010; http://www.nola.com/crime/index.ssf/2010/05/film_tax-credit_scam_that_ensn.html