Alabama Education Funding Diverted to Pay for Film Incentives

 
 
April 03, 2012
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An Alabama Senate committee recently approved a House bill to increase tax subsidies for movie productions. The bill increases from $10 million to $15 million the total amount that the state can give away on film incentives, and expands on the productions that can qualify.

The money for the credits will come from the state's education trust fund, with a promise that the tax revenue made from the film productions will go back into the fund. Naturally, the Alabama Education Association was strongly opposed: "What we ask is that the school children don't subsidize industry."

The Education Association has good reason to be concerned. Film tax credit proponents often claim that the incentive pays for itself by increasing economic activity and hence tax revenue. Indeed, there are numerous studies that make this claim. But it is a myth that has been debunked by more comprehensive and realistic studies that take into account offsetting economic effects. These studies have found that states can expect to recoup perhaps 20 cents per dollar of tax credit issued, a huge lose from a tax revenue perspective.

It is baffling why lawmakers continue to believe that these types of incentives will result in a net revenue increase for the state. Josh Barro put it well in a Real Clear Markets column:

Most policymakers have learned to beware claims that tax cuts will "pay for themselves." Tax cuts do spur the economy and create more taxable activity, but few American taxes are so high that this can fully offset the revenue loss from cutting tax rates. [...]

Yet one area where these "free lunch" arguments retain bizarre resonance is the realm of film tax credits. State lawmakers understand that cutting income tax rates from 6% to 5% will cost the state revenue, but believe that cutting the tax rate on film productions to negative 25% or 40% can pay for itself with the tax revenue generated from related activities. Somewhere, Art Laffer is blushing.

In 2010 Michigan Senate Fiscal Agency economist David Zin performed a comprehensive examination of the case for film incentives, and concluded that

The nature of the credit and the resulting activity is such that under current (and any realistic) tax rate [Michigan] will never be able to make the credit "pay for itself" from a State revenue standpoint, even when the credit generates additional private activity that would not have otherwise occurred.

His conclusions are specific to Michigan, but many of his critiques of film incentives apply to all states. We would argue that his conclusion is likewise applicable to any current state film tax credit arrangement. Film tax credits force average taxpayers to subsidize the film industry. In the case of Alabama, school children are the ones who must pay the price to help guarantee a healthy ROI for film financiers.

Another common argument made for film incentives is that it is, for some reason, undesirable for a film to be set in one state but filmed in another. The bill's sponsor, Rep. Terri Collins, made this argument, citing the fact that Forest Gump and Sweet Home Alabama were both set in Alabama but filmed elsewhere. To the extent that this even matters, it is an unquantifiable argument based mostly on state pride. And tax policy simply should not be a tool for boosting state pride. But I've never been able to understand why this even is a problem for states: I doubt that your average movie watcher knows (or cares) where Forest Gump or Sweet Home Alabama were filmed. That is, until Rep. Collins mentioned it.

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