Testimony on Film Tax Incentives to the Oklahoma Task Force on State Tax Credits and Economic Incentives

October 12, 2011

Mr. Chair and Members of the Task Force:

I thank you for the invitation and appreciate the opportunity to speak with you about the effectiveness of film tax credits. For those unfamiliar with the Tax Foundation, we are a non-partisan, non-profit organization that has monitored fiscal policy at all levels of government since 1937. Through research and education we aim to promote economically principled tax policy at all levels of government.

Over the past decade film tax credits have gone from being an oddity only available in a few states to a program in nearly every state. Film tax credits are credited with creating jobs, economic activity, and tax revenue for states, as well as bringing a little Hollywood glamour to some states.

Our review of these programs, which we undertook in 2008 and continue through today, finds that generally the benefits of film tax credits are often exaggerated and misunderstood, while the costs of film tax credits are underestimated or completely ignored. We also find that many states are currently locked in an unproductive arms race of film tax incentives, with film producers reaping most of the benefit. Many states are consequently reexamining their film production incentive programs in this time of fiscal distress.

I would like to cover three general areas. First, things to watch out for in proponents' arguments. Second, the economic evidence and national trends. Third, options of what Oklahoma could do.

Proponents Arguments

First, economic benefits. I freely admit that film production produces economic benefits. Giving a 35% or 40% tax credit to an activity will produce more of that activity, whatever it is. There are studies that claim that film tax credits provide an economic benefit for states. For example, supporters have claimed that film tax credits "pay for themselves" with increased tax revenue stemming from increased jobs and economic activity associated with film and television production. This claim rests on two dubious assumptions: first, that all of the credit recipients would have located elsewhere in the absence of the credit, and second, that all of the new jobs and revenue related to film production (such as restaurants, hairstylists, props people, extras, and so forth) would have sat idle and unproductive in the absence of the film production. Neither of these are true. Some of the productions would have happened in the state anyways, and the restaurant and hairstylist and hotel would have had more than zero customers without the production. In all cases examined by independent analysts, film incentive rebates and credits lose governments revenue without producing enough new net jobs to offset the cost.

The key concept missing from proponents' arguments and industry-sponsored studies is opportunity cost. There is an opportunity cost associated with giving tax dollars to film production companies. Those dollars could have been used otherwise, either on other government spending or by keeping the money with taxpayers. One must therefore compare the benefits of spending on film production versus these other alternatives, and not merely compare the benefits of spending on film production versus nothing. Jobs created vs. jobs created if spent on the next best use. Such a comparison is generally missing from industry-sponsored analyses of these programs, precisely because such an analysis usually shows that these programs are not effective.

Such analyses routinely claim that one dollar of film spending trickles through the economy and creates more economic activity. For instance, if a film production spends one dollar on wages for a worker, that worker will take that income and spend it in the economy, creating income for others, and so on. This is known to economists as a multiplier. But all spending has multipliers, not just the film industry. Spending on other government programs, or letting taxpayers keep their money, also has a multiplier that reverberates through the economy. Some industries even have better multipliers than film production. That film production has an economic impact alone is not enough to justify choosing film subsidies over other uses of taxpayer dollars.

Economic Evidence

Every independent study has found that film tax credits lose revenue. Independent studies that have estimated the impact of film spending calculate that state governments recapture only between 8 cents and 28 cents in new revenue for every dollar of tax credit. That is, these programs lose governments between 72 and 92 cents for every dollar spent on them, even after accounting for increased economic activity generated by film production.

That fact arms you with the real question that should be asked: is this revenue loss - this spending on this program the highest priority use of these taxpayer dollars? Only Oklahomans can answer that but I would like to offer a few things to think about in doing so.

Oklahoma is playing in an extremely competitive and crowded playing field. In 2002 only five states had tax incentives for film productions. By 2009, all but six had them. Since about 1997, states have awarded over 4 billion dollars in film tax credits and incentives to film productions around the country. Obviously the arms race of incentives took off pretty quickly in the last decade. But it's not over. The pressure is mounting and many states are continuing to increase their incentives to gain an edge over other states. For those that haven't, it hasn't been for lack of industry pressure. Many state lawmakers, especially recently, are concerned about their state budgets and have passed on expanding the costly subsidy program.

Film tax credit proponents want to make is seem like states just need to enact one more expansion, to increase the credit rate just a little more, or allow just a few more eligible expenses, and then they will have the upper hand. The truth is that in the long run no state can ever win at this game. Some states are pouring taxpayer treasure into implementing and expanding refundable, transferable tax credits and direct cash rebates, often at higher levels than Oklahoma is offering. Going down this road risks offering a lot of money trying to outbid states willing to spend literally hundreds of millions of dollars annually attracting television and film productions.

In a sense, film tax credits can be thought of as a highly competitive market, with governments acting as the "producers" of film tax credits and filmmakers as the "consumers". And as any economist will tell you, in a highly competitive market such as this, the buyers can buy from whichever seller offers them the best deal, and therefore they reap all the economic benefit of film tax credits; the economic benefit for the seller, that is the states, goes to zero.

Options for Oklahoma

If Oklahoma really wants to subsidize an industry, you shouldn't pick one that everyone else is focusing on. The competition for film productions is high and is getting harder.

We would obviously like to see the end of all film tax credits and subsidies nationwide. This would be a move in the direction of sound tax policy and would save the state millions of dollars at a time when revenue is hard to come by. No doubt there will be a lot of protest from the beneficiaries who want to keep this source of funding: once a tax benefit is in the tax code, it can sometime seem almost impossible to get rid of. The recipients fight hard to keep it.

Transparency is important and can best be done by making film programs explicit appropriations that must compete in the annual budget process with other priorities. A good online database of film tax credit recipients and amounts, and dollars spent per full-time equivalent job created, is also a must. That last stat - dollars spent per FTE job created - led Michigan to sharply scale back their program after it revealed that they were spending more than $90,000 in film subsidies per each job created. This, for one of the most profitable industries in America.

Continually study the effectiveness of the film rebate program using realistic economic assumptions, including opportunity costs.

As far as national standards go, Oklahoma's rebate program is modest. Even so, $5 million in film production subsidies is $5 million not going to other priorities. I know it is a hard sell to suggest that Oklahoma taxpayers stop subsidizing Hollywood production companies and perhaps pass on the glitter and glamor of big film productions. But Oklahoma residents might be better off if they keep their money, sit back, make some popcorn, and enjoy films that taxpayers in other states are footing the bill for.

Thank you.

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