An Update on State Film Industry Incentives

The Tax Foundation estimates that states spent almost $6 billion beteween 2000-2010 to attract the motion picture industry.  The trends are eye catching.  In 2000, four states offered incentives to film makers, worth about $3 million.  By the beginning of 2010, those numbers rocketed to 40 states and almost $1.4 billion in subsidies, according to Tax Foundation estimates.  During the year, three more states climbed on board, bringing the total number offering film production incentives in 2010 to 43, per a tally from the Center on Budget and Policy Priorities (CBPP).    

Amidst tight budgets and mixed results, however, some states are reining in their efforts to court Hollywood.   

Recent Moves in Film Production Policy

States that recently eliminated film production incentives include New Jersey, which shut down its $10 million dollar program in 2010, and Washington, which decided to cease its program during FY 2012 budget deliberations.  They are joined by Arizona, Arkansas, Idaho, Iowa, Kansas, and Maine, all of which closed or suspended film production programs between 2009 and this year. 

Film production incentives will remain in Michigan, which recently overhauled its business tax structure and economic development programs.  However, tax incentive spending, including money spent on film tax incentives, will be subject to a ceiling.  According to Michael Finney, head of the Michigan Economic Development Corporation (MEDC), in 2010 the state spent “$300 million on all state development programs, including over $60 million on the film industry, with no annual budget on incentives.”  But now, Finney says, “the governor has proposed spending $50 million for the upcoming year, plus $25 million for film subsidies and an additional $25 million will be available for assisting start-ups and entrepreneurs, a change in strategy that offers broad tax relief to all businesses and requires less in tax incentives.” 

Other states have opted to enhance incentives.  These include Virginia, which just added a new film production tax credit to spur job creation, and Utah, which sweetened an existing tax subsidy.  At present, they are two of 35 states that will continue to subsidize film making in the coming fiscal year. 

Instruments Used to Attract the Industry

Most film and television production subsidies come in one of the following forms:       

Tax credits.  Tax credits reduce income tax liability.  To qualify, companies must generally commit to some minimum amount of in-state production expenditures.  The credit is usually offered as a percentage of these dollars. 

Cash rebates.  Cash rebates provide reimbursements for qualified production expenses.  Some states use cash rebates rather than tax credits to keep a lid on transactions costs, which can arise, for instance, when credits are transferable.  This means they can be sold if their value exceeds the film company’s applicable tax liability.  The sale is often executed through a broker, to whom states that permit transfers must usually pay a fee.           

Grants.  Grants are another type of cash assistance, generally awarded to offset either a) a percentage of the dollar value of qualified production expenditures, or b) all the associated sales and use tax.

Miscellaneous Assistance.  Other assistance includes lodging exemptions, free access to filming locations, and low cost use of government services (such as police officers to direct traffic around an outdoor set).   

Potential Benefits to the States

In return for subsidized production, states seek to reap their own economic benefits, mainly in local economic development.  The idea is that a film production will create new jobs and boost sales at area businesses, as companies rush to fill positions, purchase equipment and acquire other resources to keep filming on schedule.  Benefits will then spread, as spillover effects of the initial “shock” multiply through the local economy.     

In addition to these effects, some film production policies are crafted to achieve second order impacts, like enhanced tourism.  For instance, Louisiana, the first state to offer film production incentives, did so mainly to support projects that emphasized the state’s heritage.  Hawaii’s policy is also more generous toward films showcasing its scenery and culture, granting them up to 33 percent in extra funding in some cases. 

Then there is the notion that film production incentives are cost effective.  Here, the thought is forgone revenue (or direct costs) can potentially be recovered in ancillary tax collections (e.g. income taxes withheld from production workers’ wages, sales taxes on non-exempt expenditures, etc.).     

Recent Studies on the Economic Effects of Film Incentives

Do film production incentives live up to claims made about their efficacy?  Studies commissioned by state legislatures and other organizations show varying results. Reports from the Center on Budget and Policy Priorities and the Tax Foundation summarize recent works.  Here are a few notes:

Direct Job Creation.  Both reports acknowledge the potential for film productions to create jobs.  However, each expresses some misgivings.  The CBPP report suggests that the best paying production jobs usually go to non-residents (actors and other specialized workers imported from out of state – e.g. Hollywood or New York).  To substantiate this claim, CBPP references a 2009 Massachusetts Department of Revenue study.  According to that assessment, 84 percent all compensation paid to individuals employed in Massachusetts-based productions between 2006 and 2008 flowed to out-of-state workers.  Only 16 percent accrued to Massachusetts residents. 

The Tax Foundation reportclaims that production jobs held by local residents, regardless of what they pay, are often transient given the short-run nature of the film making process.  Thus, without a steady flow of new projects on which to work, continued employment is not a guarantee.       

Multiplier Impacts.  Both reports also address multiplier impacts.  According to CBPP, the Massachusetts study estimated that “ripple effect” jobs created via projects’ initial engagement with local labor and business did go to in-state individuals most of the time (about 88 percent over the time period studied).  However, similar to resident-held production jobs, ripple effect positions accruing to Massachusetts laborers paid lower wages than those earned by out-of-state production workers.  Overall, less than half the compensation paid for work either directly related to film production or created as a result of it flowed to individuals living in the state. 

The Tax Foundation report gets more specific, providing numerical estimates of film production and other multipliers garnered from research performed for the South Carolina Department of Economic Development in 2008.  The study, entitled “Impact Analysis for Film Production in South Carolina,” estimated that while $1.00 film in production expenditures generated about $1.92 in new economic activity, a dollar spent on automotive manufacturing and nuclear power provided a more potent impact, with multipliers of $2.25 and $2.51, respectively. 

Cost Effectiveness. The Tax Foundation also used the South Carolina research to address claims that film production incentives are cost effective.  According to the South Carolina study, $1.00 in forgone film tax revenue resulted in $0.19 of ancillary tax collections.  CBPP cites several more such estimates, ranging from $0.16 cents in the Massachusetts Department of Revenue evaluation to $0.28 cents in an analysis by the Arizona Department of Commerce.  Also referenced is a study done by Ernst and Youngon behalf of the New Mexico State Film Office, which showed that $1.00 lost due to tax breaks generated $1.54 in new revenue.  An analysis by two researchers at New Mexico State Universityarrived at different results, however, estimating that the state’s program generated only $0.14 in new tax collections for each $1.00 lost.  CBPP attributes the discrepancy to methodological differences, indicating that almost a third of new revenue in the Ernst and Young estimates comes from subsidy-induced tourist activity.

Conclusion

Estimating multiplier impacts and tax recoveries is tricky, and existing evidence on the effectiveness of film production incentives as such remains mixed.  However, more will likely arrive in the future, as engaging the movie industry remains a component of most state economic development strategies. 

References

Bal, Navjeet K. (2009).  “A Report on the Massachusetts Film Tax Incentives.”  Department of Revenue, Commonwealth of Massachusetts.

Ennis, Kent, Danka Lisa, and Smothermon,, Jessica (2009).  “Motion Picture Production Tax Incentives Program: Annual Report, Calendar Year 2008.”  Arizona Department of Commerce.

Hefner, Frank (2008).  “Impact Analysis for Film Production South Carolina.”  South Carolina Coordinating Council for Economic Development. 

Henchman, Joseph (2011).  “More States Abandon Film Tax Incentives as Programs’ Ineffectiveness Becomes More Apparent.”

Luther, William (2010).  “Movie Production Incentives:  Blockbuster Support for Lackluster Policy.”  Tax Foundation, Washington, D.C.

Pop, Anthony V. and Peach, James (2008).  “The Film Industry in New Mexico and The Provision of Tax Incentives: A Report Submitted to the Legislative Finance Committee of the

State of New Mexico.”  Arrow Head Center, New Mexico State University. 

Tannenwald, Robert (2010).  “State Film Subsidies:  Not Much Bang for Too Many Bucks.”  Center on Budget and Policy Priorities, Washington, D.C.   

Ernst & Young, LLP (2009).  “Economic and Fiscal Impacts of the New Mexico Film Production Tax Credit.”