New Pennsylvania Study: Film Tax Credit Pays for Itself Only Under Bizarre Assumptions

June 4, 2009

Pennsylvania officials, eager to justify extension of their film tax credit program in a time of budget shortfalls, have produced a new study claiming that the $75 million cost “pays for itself” in producing $500 million worth of economic activity.

As I said in Pittsburgh a few weeks ago, the assumptions at the heart of this claim are mistakes that no serious economist would make:

Film offices like to talk about how tax credits create $4 (or thereabouts) of spending for every $1 of credit. But all economic activities have multiplier effects. If I handed out $100 to college kids to spend at bars, that $100 of income to them would become $100 in income to the bars, another $100 in income to suppliers, the workers, etc. But just because something has a high multiplier doesn’t answer the question of whether the state should subsidize it.

And film production doesn’t even have that high of a multiplier: relatively internal production processes like auto manufacturing or nuclear power plants actually have higher multipliers. Also, benefit calculations usually don’t count alternative uses. That hairdresser who can charge $60 with the film in town would probably still charge $50 otherwise; film tax credit proponents would say they created a whole new job and generated $60.

Finally, whatever marginal tax revenue new film production generates is usually dwarfed by the costs. Two of the most aggressive states in film tax credits report they get back less than 20 cents in taxes for every $1 in credits.

Indeed, as the Commonwealth Foundation notes, the study itself says that the authors “did not quantify what proportion of this activity would be at risk.” In short, they assume that every film production in Pennsylvania exists only because of the credits, and that all related activity would cease unless the credit existed.

Even with those generous assumptions, the real results aren’t that impressive:

While there is a net fiscal loss when comparing the net present cost of the Film Tax Credit program ($58.2 million) to the taxes generated by productions directly receiving tax credits ($17.9 million), there is a net fiscal gain to the Commonwealth of $4.5 million when considering all of the revenues generated by the entire industry.

$75 million in tax credits leads to $18 million in new tax revenue from the recipients (the $58 million figure is $75 minus $18). That is not “paying for itself.” And the entire film industry itself nets Pennsylvania just $4.5 million above its subsidies. A road to independent, prosperous industry it ain’t.

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