Is it a Wrap for Movie Subsidies?
By Zach Huitink, CSG Research Assistant
Hollywood isn’t the catch it once was. But due to the country’s faltering economic recovery, many states are reining in efforts to court moviemakers from the star-studded city.
Take Alaska, for example. Last year, the state offered filmmakers the tax assistance equivalent of 44 cents on the dollar; that’s the most generous state subsidy for moviemakers. This year, legislators postponed debate on a bill to extend the program; its fate will be decided in the 2012 session.
Alaska isn’t alone. New Jersey shut down its $10 million program in 2010. Likewise for Washington, which opted to close its program this spring. Arizona, Arkansas, Idaho, Iowa, Kansas and Maine have all closed or suspended tax incentive programs for motion pictures since 2009. A number of other states are contemplating similar action.
This comes after a decade of booming growth in tax credits for moviemakers. In 2000, four states offered tax credits to offset film production expenses. By the end of 2010, that number had rocketed to 43.
Joe Henchman, vice president of legal and state projects at the Tax Foundation in Washington, D.C., has tracked the flurry of suspensions, closures and scale backs with keen interest.
“We have seen the peak in 2010,” he said of the prevalence of tax assistance for moviemakers. “First, the evidence suggests (tax incentives) do not produce sought-after effects; second, they have been deemed a lower priority by policymakers, who are trying to allocate scarce resources in a time of fiscal stress; and third, they must be extremely generous given the fierce competition among states for production industry business.”
His last point is of special note. Louisiana, the first state to offer tax incentives for filmmakers, established its program in 1992. Minnesota came on board in 1997, followed by Missouri in 1999 and New Mexico in 2002. New Mexico’s entry into the tax incentive game seems to be the tipping point.
In the five years after that, states flocked to film tax credits. As the space grew more crowded, each entrant had to make its deal sweeter than the last to have any chance of bringing in a major motion picture. Existing players responded in kind, setting off what Henchman and his colleagues have dubbed an “arms race.”
The fierce competition in which states engage to bring Hollywood home can be attributed, in part, to nature of the industry itself.
So says Bob Tannenwald, an economist and senior fellow at the Center on Budget and Policy Priorities. According to Tannenwald, states must fight hard to attract movie business because of its “extreme geographic mobility.” Since production operations can move so easily from one place to another, Tannenwald said, film companies “can make very credible threats to leave a state if the incentives offered are not what they want.”
tates risk losing jobs if a film company leaves . A commonly held belief is that attracting a movie project 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 state economy.
But a ssessments of that trickle effect show varying results.
Tannenwald recommends skepticism of the studies, as he sees drawbacks in many of those done so far. One drawback is those studies’ reliance on the ability of film tax incentives to generate second-order impacts, notably tourism. The idea is that when a film portrays a state in a positive light, visits to that state will increase, benefitting business.
“Studies should avoid making overly generous assumptions about indirect effects, especially tourism ,” Tannenwald said. “The empirical evidence upon which these conclusions (regarding tourism) are based is weak as, for example, it is taken from surveys with very low response rates.”
Tannenwald points to other flaws in analyses of film tax incentives’ performance. For instance, how do states pay for the credit?
“Studies should account for how the tax credit is financed,” Tannenwald said, because “the revenue forgone via film tax credits has to be made up elsewhere, either in tax increases or spending cuts. Both depress the economy and cut off the incentive’s stimulus effect .”
Of the stimulus that remains, Tannenwald said, good assessments “distinguish between the benefits that accrue to residents and nonresidents.” That’s because, “more than almost any other incentive, film tax incentives create benefits for nonresidents.”
Results of a 2009 study commissioned by the Massachusetts Department of Revenue echo this claim. Among other findings, the report found 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.
However valid the criticism, Amy Lillard does not believe policymakers should dismiss film tax incentives. Lillard is the executive director of Washington Filmworks, Washington state’s central point of contact for potential movie projects.
Of economic impact studies, there is a temptation to “compare apples and oranges,” said Lillard. “Our program offers a 30 percent rebate on qualified, in-state production expenditures. That’s it. We do not provide assistance for money spent out of state.”
Lillard and her staff are working feverishly to keep the Washington’s production program running after the legislature discontinued it this spring. They have raised $3.5 million to offset funding shortages. Still, Lillard said, the next year will be a challenge .
“We lie between Oregon and Vancouver, British Columbia, both of which have very competitive programs and great scenery ,” she said. “It will make attracting new ventures tough.”