Multipliers, Opportunity Cost, Self-Esteem, and Censorship: Welcome to the World of Film Tax Credits

September 29, 2010

Josh Barro of the Manhattan Institute last week had a very good piece on film tax credits. It comes on the heels of a report by the Michigan Senate Fiscal Agency which argued that film tax credits are a bad deal for Michigan and that the state is losing money on the tax credits at a phenomenal rate. Barro’s entire piece is well worth the read, but here are a few excerpts.

Yet one area where these “free lunch” arguments retain bizarre resonance is the realm of film tax credits. State lawmakers understand that cutting income tax rates from 6% to 5% will cost the state revenue, but believe that cutting the tax rate on film productions to negative 25% or 40% can pay for itself with the tax revenue generated from related activities. Somewhere, Art Laffer is blushing.[…]

If [this] assertion were true, the Keynesian multiplier on film production subsidies would have to be greater than 10: that is, every dollar of film subsidies paid out would have to generate more than $10 in added economic activity, enough to generate $1 more in state tax receipts.

For comparison, the Mark Zandi model often used to evaluate stimulus proposals uses multipliers that range between 0.22 and 1.74. Perhaps the stimulus package should have included fewer unemployment checks and more film subsidies.

But alas, film subsidies are not this kind of silver bullet. A new report out Saturday from the Michigan Senate Fiscal Agency looked at that state’s film tax credit program — the country’s most generous — and found that even under the most optimistic assumptions, tax receipts driven by new economic activity barely offset 10% of the cost of awarding film tax credits. It estimates that the $125 million Michigan will spend on film credits in FY10-11 will generate just $13.5 million in new tax receipts, for a net fiscal cost of $111.5 million.

Barro goes on to argue that, as negative as it is, the Senate Fiscal Agency’s analysis of film tax credits is still too generous. For one thing, it ignores the private opportunity cost of the film industry: not only could the forgone tax revenue be used for other purposes, but so could (and would) the private resources that flow to the film industry as a result of the film tax credit. These resources would certainly not sit completely unutilized in the absence of the credit.

Now that the truth about the economic benefits and revenue costs of film tax credits is receiving more attention, backers of the credits seem to be retreating to arguments about the intangibles of film tax credits: that they provide an image enhancement and boost collective state self-esteem, and that you “can’t measure the intangibles“. But the price tags associated with film tax credits, often in the hundreds of millions of dollars, seem to far outweigh the intangible benefits.

And I would point out that simply getting your state on screen might not necessarily have a positive impact on a state’s image. For instance, I imagine some people would question whether the HBO series Hung, which received $1.2 million in film tax credits (as estimated by the Michigan Senate study), and whose main character is a Detroit father, history teacher and coach who resorts to prostitution to supplement his income, provides a positive boost to the state’s image. Of course, the other option is censorship…

Ultimately, film credits are a waste of taxpayer dollars and only result in an unproductive race to the bottom with the credits becoming more and more generous as time goes on. Barro urges New Jersey, whose Governor suspended the state’s film tax credit earlier this year, Michigan, and all states to avoid the film tax credit boondoggle. We couldn’t agree more.


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