May 4, 2010

Michigan should stop red-carpet tax treatment of film industry

This op-ed appeared in the Detroit News on May 4.

At a film industry trade show in California last month, representatives from the Michigan Film Office touted the state’s film tax credit as one of the most generous incentive programs of their kind, but lawmakers should rethink whether this is the kind of spotlight Michigan wants.

In fact, movie production incentives are a waste of money that fail to live up to promises of economic growth, and they’re especially unwise when the state faces a $1.6 billion budget shortfall.

As a relative latecomer to the film tax credit game, Michigan had to enact a very generous incentive to lure productions from states like Louisiana that had jumped into the bidding early. Michigan and a pack of other states now find themselves in an arms race of incentives while Hollywood film producers sit back and enjoy the bidding war, waiting for the best deal.

Enter the dog-and-pony show otherwise known as the Locations Trade Show, hosted by the Association of Film Commissioners International in Santa Monica, Calif., earlier this month. Production company scouts browsed booths and freebies—including baseball caps from Michigan and candied pecans from Georgia—from states hoping to “win” shoots on their home turf.

Michigan’s film incentive program, which will cost more than $100 million this year, offers tax credits worth 30 percent to 50 percent of personnel expenditures and up to 42 percent of production expenditures.

Film tax credit supporters often highlight “job creation” as one benefit. The jobs “created” by movie production, however, are often temporary in nature with limited upward mobility—the kinds of jobs that end when shooting wraps and the production company packs up and moves. In other cases, jobs are simply shifted from elsewhere in the state.

While meals eaten at local restaurants and goods purchased at local stores by visiting film personnel benefit those establishments and raise a little tax revenue, this is a pittance compared to the tax credits. Far from raising additional tax revenue from production-related activities, states hardly recoup the cost of the film incentive itself.

A 2005 study from the Louisiana Legislative Fiscal Office found that the state could expect to recoup 16 percent to 18 percent of the tax revenue it spends on the film incentive program. This means Louisiana—often held up as the standard-bearer for successful film incentive programs—loses about 83 cents for every dollar it spends on movie production incentives.

Other studies avoid telling this harsh truth but instead exaggerate the economic benefits of film tax credits.

A 2009 report by the Pennsylvania Legislative Budget and Finance Committee looking at the state’s $75 million film tax credit and grant program estimated a “net fiscal gain” of $4.5 million, but only by assuming that any business interacting with the film industry would not have existed without the credit.

So what’s a state to do?

Michigan, like other states, has been forced by the recession to re-evaluate its spending priorities and tax expenditures alike—including film tax credits. That’s a good thing, and something that should have been done long ago.

State Rep. Tom McMillin, R-Rochester Hills, earlier this year called for an immediate freeze on the state film credits, noting that “the primary thing the film credits are producing are headlines, at the expense of jobs.” This is a good first step, but doesn’t go far enough.

Michigan seems desperate to keep its attractiveness to Hollywood, but the state should position itself as an attractive place to do business by fostering a tax system that rolls out a welcome mat for all companies—not a red carpet for the film industry.

Lower tax rates for all is better than select tax breaks and incentives for some.

Natasha Altamirano is manager of media relations for the Washington, D.C.-based Tax Foundation, a nonprofit, nonpartisan research and educational organization that has monitored fiscal policy at the federal, state and local levels since 1937.