Michigan Scales Back Its Movie Production Incentives Program

January 04, 2012

On December 21, 2011, Gov. Snyder of Michigan signed into law legislation that revises the state's movie production incentives program (MPI).  A number of points should be considered in appraising the revisions.

Michigan has a program designed to give movie studios an incentive to produce in the state. Until recently, Michigan's movie production incentives (MPI's) took the form of a tax credit. For every dollar the studio spent, it received as much as 42 cents from the government as a credit against its tax bill. In 2011, 36 other states had similar programs. Earlier in 2011, the state's legislature made significant changes to the MPI program and the Film Office, the agency in charge of administering the program. The Film Office had, up to that point, the authority to credit studios for up to 42 percent of their expenses. Afterward, the credits were decreased to 32 percent of expenses.

Under the latest legislation, the government gives a grant of $25 million to the Film Office. This compares with the $57 million in tax credits in the previous fiscal year. Although the program has now been scaled back, some onlookers have opined that the legislature may increase the limit if and when the Film Office has exhausted its grant.

The legislation also obligates the Film Office to report back to the legislature on the specific movie projects that it finances; and to openly declare the criteria it uses to award subsidies. Previously only the Film Office had this information and discretion.

Most relevant here, Michigan has also transformed the subsidies from tax credits into expenditures. In doing this, Michigan recognizes, if only implicitly, that tax credits are indeed subsidies.

Some who have criticized the movie production incentives program in the past see the new measures as improvements. Gov. Snyder, who initiated both the $25 million cap and the new measures, argued that the new measures would bring transparency to a program that is currently "hidden in the tax code" (subscription required). Others are more critical of the changes. Michael LeFaive of the Mackinac Center says that he is disappointed that the incentives program will continue without meaningful reform.

Proponents of movie production incentives are divided in their take on the recent changes. Several members of the state's legislature expressed concern earlier in the year that a cap on the subsidy would 'kill the movie industry' in the state.

As we have argued since the inception of these generous subsidies, MPI programs fail to achieve the proponents' stated objectives. While proponents argue that the program increases the government's revenues and promotes economic growth, our analysis shows that the programs actually distort the allocation of resources, provide only temporary jobs and benefit special interests at the expense of the taxpayer.

While the complete removal of these subsidies is desirable, the increase in transparency and transformation of the subsidies into direct expenditures may have an unintended benign effect. These measures make it easier for legislators to see that a dollar spent on an MPI subsidy is a dollar that cannot be spent elsewhere. In the language of economics, the legislators see more clearly their opportunity cost.

As Nobel laureate James Buchanan has argued, in politics, individuals often see government programs as purely benefit and zero cost, in part because they often don't see where the money could have gone if not for the program. Politicians and voters may have what he calls fiscal illusion. These changes show the true price tag of the movie incentives to legislators and taxpayers. Before, the price was either hidden in the tax code and known only by the Film Office, or unseen by anyone but the studios.  Optimistically, legislators and taxpayers, more aware of the price of the subsidies, may be inclined to make more prudent tax decisions.

More on Michigan here.

More on Film Tax Credits here, here and here.

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