Earlier this month, we reported that 37 states will offer 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. incentives in 2011, a drop from 40 states in 2010 and the first such drop since the trend began over a decade ago. The aggregate dollars paid out by states has also dropped, from $1.396 billion to $1.299 billion. I made the prediction that 2010 will remain the peak year, which was noted approvingly by, among others, The Economist magazine.
Why is this happening? I think it’s a mix of two reasons: (1) every impartial study of film tax incentives has indicated that they are ineffective economic development tools, have a poor return for job creation, and do not pay for themselves, and (2) legislators are weighing priorities in tight state budgets, and are willing to let go of a program that is being hammered by experts on the left and the right. Even Michigan, which was leading the pack by paying 42 cents to qualified film and television productions for every dollar they spent, has thrown in the towel. Eight other states zeroed out their programs, and eight states made moves to scale back their programs. (On the other hand, our report noted, six states renewed or expanded their programs.)
Within a day of our study’s release, the Motion Picture Association of America (MPAA) responded on their blog:
Pure and simple: film and tax incentives create jobs, expand revenue pools and stimulate local economies. That’s why a study released by the Tax Foundation yesterday strained credulity and provided a host of prejudged conclusions about the value of film and television 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 in bolstering jobs and local economic development.[…]
Two recent studies that performed cost/benefit analyses confirmed the economic benefits of production tax incentives to New York and Michigan. Michigan’s report, sponsored by the Detroit, Ann Arbor, Traverse City and Grand Rapids Convention & Visitors Bureaus indicated that the incentive created nearly 4,000 full-time equivalent jobs for Michigan residents in 2010 at an average salary of $53,700 per year, and generated roughly $6 per dollar of net credit cost. The New York report showed a 1.9 return on the state’s investment (ROI).
In locations with uninterrupted film tax credit programs there have been continuing investment and job growth. In Massachusetts, for example, only 10 films were produced over seven years with $67 million of direct investment. Once the credit was enacted the Commonwealth had 26 films in three years with a startling $676 million of direct investment to the state.
I cut part of it out in the quote above, but their first four paragraphs were an attack on our motivations in putting out the report (yes, this rather dry report is the one they claim is full of bias). I thus feel justified in noting that most or all of the benefits of these film tax incentive programs accrue to the film and television production industry. Hence, the MPAA’s panicked denials that there is any downward trend or any legitimate argument against their subsidies. I also put aside their implication that we did not report on states expanding or renewing their credit programs, because we did.
I now turn to specific critiques.
Michigan Film Incentive Costs $90,000+ Per New Job
Their Michigan study, conducted by Ernst & Young but commissioned by and paid for by state economic development officials that push the film tax incentive program, found that the credits cost $73 million in 2009 and created 797 full-time equivalent (FTE) jobs, for a cost of $91,593 per new job. In 2010, the study found the incentives cost $117 million and created 1,039 full-time equivalent jobs, for a cost of $112,800 per new job. Only by taking credit for all economic activity remotely related to film production can you reach the numbers the MPAA cites, and even then, the Ernst & Young study finds a net cost of $34 million in 2009 and $60 million in 2010, unrecouped by higher tax collections from ancillary activity or reduced unemployment costs.
Note that Michigan’s film office was essentially forced against its will to report cost-per-FTE-job figures, after a 2010 study commissioned by the bipartisan Senate Fiscal Agency criticized them for not doing so. That study, by the way, concluded that “film incentives represent lost revenue and do not generate sufficient private sector activity to offset their costs completely.” Michigan recently scaled back its film tax incentive program.
New York Study’s Astounding Return on Investment Ignores Opportunity Costs
The New York study, conducted by Ernst & Young but commissioned by and paid for by the New York film office and the MPAA itself, reaches its positive numbers only by taking credit for all economic activity remotely related to film production. This is problematic because it ignores the concept of “opportunity cost”—the fact that the money used for film subsidies, and the labor and resources used by them, would have been used for something else in the absence of the program.
Even if the displaced activity is less productive, it still means there’s some amount of economic activity that would occur without the incentive program. E&Y’s studies attribute all economic activity remotely related to film production to the film incentive program’s existence. This is especially problematic for New York (and California), as they draw a significant number of film and television productions even without incentives. (A just released study from the Los Angeles County Economic Development Corporation makes the same critical error.)
Even those fanciful assumptions don’t prepare the reader for E&Y’s conclusion, which is more optimistic than what any on the left ever said about the stimulus or any on the right ever said about the Bush tax cuts. The report unbelievably calculates that $214 million in credits in 2007 resulted in $1.7 billion in production spending (and $2.1 billion in indirect spending, for a total spend of $3.8 billion), which in turn generated $403 million in new tax revenue (190% of the credits). Put another way, the E&Y report claims that $1.00 in credits generates $17.75 in new economic activity, which in turn generates $1.88 in new tax revenue. This means that if we gave $1 trillion a year in subsidies to the MPAA’s members, we could solve our long-term budget problems.
In reality, it sounds like E&Y’s report assumes what it is supposed to calculate. It’s unclear whether the multipliers that they cite (that is, the ratio of dollars of activity generated to dollars spent) are calculated from the data, or assumed to produce the data. My guess is that it’s the latter, as this is a common practice (and was used for the stimulus to show how, for example, many new jobs would be created for a given dollar of government spending). E&Y assumes that film production has an incredible multiplier in its calculations (2.77 for new job creation, 2.52 for new income, 2.26 for new productions), so the conclusion that proponents draw from it – that film production has an incredible multiplier – should be taken with a grain of salt.
Subsidizing Film Productions Leads to More Film Productions
The MPAA notes that states that pass new tax credit programs see a burst of new activity. There is no dispute between us here, for it is a truism. Subsidizing anything gets you more of that thing. The question is whether the benefits of a given amount of net new job creation and the net new investment exceed the cost. (I would note, however, that states must continuously increase the generosity of their programs or risk losing productions. It’s a never-ending escalation that no state can truly win, making it unlikely that any permanent industry will result from it.)
One measure of that is whether the tax credit pays for itself in induced tax revenue collections, or more than $1 generated for every $1 spent. Aside from E&Y’s studies paid for by economic development authorities and the MPAA, every other study has found film tax credits generate less than 30 cents for every $1 of spending:
• Arizona’s Department of Commerce calculated 28 cents on the dollar.
• Connecticut’s Department of Economic Development found a 7 cent return on every $1 spent.
• Two studies in Louisiana found between 13 and 18 cents on the dollar.
• Massachusetts’ Department of Revenue found it got 16 cents on the dollar.
• Michigan’s Senate Fiscal Agency found 11 cents on the dollar.
• New Mexico’s Legislative Finance Office found 14 cents. (E&Y did a New Mexico study too, calculating $1.50 on the dollar, but having the same problems as their Michigan and New York studies.)
• Pennsylvania’s Legislative Budget & Finance Committee found 24 cents on the dollar.
Of the above studies, only Massachusetts’s study did not assume that all film and television production occurred because of the credit. So all the other numbers should be considered on the high end.
The MPAA blog closes with the statement that “[n]ew investment in film and digital media production is, on balance, revenue positive.” The evidence does not support that statement.
Film tax credits do not pay for themselves. While some benefits accrue to in-state filmmakers and suppliers, on the whole they are a net transfer from taxpayers to out-of-state production company beneficiaries.
For more information on film tax incentives, please see our larger report on the topic.
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