Yesterday, Maryland Governor Martin O’Malley posted a photo on his Facebook page of himself and Julia Louis-Dreyfus on the set of HBO’s VEEP (currently filming in Baltimore) with the caption: “I was happy to join the cast of VEEP on set this morning. The Maryland Film TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Credit has provided 2,500 crew members, cast, and extras with full-time jobs and supports 6,000 Maryland businesses.”
Now I love VEEP, but we’ve always been critical of film tax incentives—and with good reason. These tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s go to movie and television production companies as an incentive for them to film and produce within a state. But they come at a high cost.
My colleague Joseph Henchman summarized the issue nicely a few years ago:
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…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.
To make a long story short, the credits are touted as integral components of state economic development, but they really just use up valuable revenue for subsidies to out-of-state production companies.
Of course the film industry has a different perspective. When we critiqued the practice in 2011, the Motion Picture Association of America (MPAA) shot back. They claimed that “[p]ure and simple: film and tax incentives create jobs, expand revenue pools and stimulate local economies.” Even worse, MPAA seems to pit states against each other in order to garner more benefits. In a recent lunch in Burbank, California, the chairman of the MPAA encouraged California to expand its incentive program, noting:
“You are well aware film and TV production here in Los Angeles faces another challenge – the growing number of productions moving out of this state and out of the country,” [the chairman] said. “Other communities are feverishly developing their own film and television production infrastructure, both human and physical. They have come to realize what California has always known: Film and television productions are important job creators and economic generators.”
Unfortunately, they’re leaving out half of the picture. First of all, the jobs created from production are often temporary—they are no longer available once the company leaves the state to move on to another project. So those 2,500 jobs Governor O’Malley is talking about probably weren’t long-term. And it’s highly unlikely that they will create a permanent film industry with a state.
Second, these programs don’t pay for themselves by generating new tax revenue from increased economic activity. In fact, most studies find the contrary:
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.
And finally, the estimates of the economic activity generated by film production should be taken with a grain of salt. More precisely,
Advocates rightly point out 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…But the fact that film productions impact the broader economy is not unique to this industry.
So that same money spent elsewhere (such as on other government spending or on tax cuts) would have similar multiplier effects.
Maryland offers a refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit (EITC). for 25 percent of movie production expenses and 27 percent for television. This $7.5 million program is smaller than other state programs (California spends $100 million per year and New York $400 million). By our count, Maryland’s benefits were the 21st highest in 2012 (report forthcoming). That ranking will be higher next year, when the state is slated to spend $25 million on film incentives.
Just think what Maryland could do with an extra $25 million per year. Here are a few of the things of this order of magnitude Maryland spent money on in its most-recent budget:
- $29.6 million for a new Physical Sciences Complex on the University of Maryland’s College Park campus;
- $24.8 million to increase funding for school nutrition programs;
- $20.8 million in grants to local law enforcement to combat domestic violence, gun trafficking, and substance abuse; and
- $35.4 million for health capital projects like hospitals and primary care facilities.
Less handouts to film companies means more revenue for things like education, healthcare, and public safety—or even lowering the overall corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate for all businesses.
More on film tax credits here and more on Maryland here. Follow Liz on Twitter.
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