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Motion Picture Association Fails to Refute Damaging Film Tax Credit Study

4 min readBy: Joseph Bishop-Henchman

The MPAA is up early this morning with a news release and short (~1,200 word) piece attempting to refute two studies by Professor Michael Thom of the University of Southern California (USC). The news release is full of adjectives and adverbs: “troubling,” “false,” “misleading,” “recklessly,” “otherwise respected,” “tarnishes the reputation,” “academic malpractice,” and “provocative.” Provocative might be the key one: the MPAA is pretty upset that a university in its backyard dared to research the effectiveness of 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. subsidies to the movie production industry, let alone come up with a result that suggests they don’t work.

The studies, published by The American Review of Public Administration and American Politics Research, examine why states adopted or terminated film tax incentive programs and measures the effects of film tax credits in 40 states on employment and wages from 1998 to 2013. The authors found that sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. waivers had no measurable effects; transferable 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 had a small, sustained effect on employment but no effect on wages; and the most generous form of tax credit, refundable credits, had no employment effect and a temporary wage effect. Spending more on incentives had no lasting impact.

The MPAA obviously needed to respond to this study, which is very damaging to their efforts lobbying states for more film tax credits, and coming as about a dozen states have curtailed, suspended, or ended their programs. The author makes a solid effort to find problems with the Thom articles, but they fall short of a refutation:

  • The MPAA argues that data used by USC is not precise enough. The MPAA acknowledges that Professor Thom used the most relevant and timely data available, from the Bureau of Economic Analysis (BEA), using the North American Industry Classification System (NAICS) codes for motion picture and sound recording industries. The MPAA says this data is both overinclusive (including cashiers, for instance) and underinclusive (not including freelance workers, for instance). You could say that the data could be more refined and more detailed for any study on anything, but that doesn’t mean that a study using the best available data from the most trusted source for that data is invalid.
  • The MPAA argues that the USC study ignores different impacts of different size programs. This criticism is flat-out false: Professor Thom has a section in his paper called “Agglomeration Bias” where he wonders if the outsized activity in California and New York biases the results for all other states. So he ran the numbers without the two states and found no changes in employment and wage effects. He also found cumulative incentive spending and annual percentage change in incentive spending had no significant effects. The MPAA may believe that doubling or tripling an incentive program causes employment and wage growth, but Professor Thom finds that incentive spending of all sizes has little effect. That’s not a problem with Professor Thom’s model, that’s just the MPAA disagreeing with the results.
  • The MPAA argues that different effects from transferable and refundable programs are “implausible.” A California production company operating in, say, Louisiana for a few weeks on a production will pay some taxes, but not enough to encompass the full promised 30 percent incentive on all their in-state spending. So states have made their film tax credits either transferable (film companies can sell tax credits to in-state taxpayers who use them to pay taxes they owe) or refundable (the state just cuts a check to the film company for the extra amount). USC finds these have different employment and wage effects, which is intuitive: the transferable credit creates a brokerage industry to facilitate sale and purchase of credits, and thus has a small employment effect but no wage effect; refundable credits make the incentives more generous but eliminate the middle-man brokers, so it has no employment effect but a temporary wage effect. The MPAA says these are “technical categorizations” but they’re not: they fundamentally change how the programs operate. The industry pushes hard to make non-refundable credits into transferable or refundable credits, and to make transferable credits into refundable credits. It’s not surprising, and certainly not flawed, to find they have different economic effects.

The MPAA piece then wraps up with a slander on Professor Thom, claiming that the articles would not have been published had they been peer-reviewed. Not only is that statement not supported by the evidence they offer, both journals that published the studies are peer-review publications. In their news release, they also suggest reading studies that have measured positive impacts on growth and employment, and link to a webpage of a consultant who lists the studies-for-hire they have done for the MPAA.

I don’t envy the MPAA: every independent study of film tax incentives has found they don’t pay for themselves in economic growth, jobs, and boosted tax receipts, and the combination of the recent recessionA recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years. and better stewardship of taxpayer dollars has meant many of these programs have hit the chopping block. There are still true believers, in New York and Georgia and some other places, but generally the idea of using taxpayer dollars to subsidize one of America’s most successful industries has passed its peak.