Film Tax Credits No Longer a Smash Hit with States

Published December 12, 2010

In 2010, for the first time since states began directly subsidizing film productions through their tax codes, fewer states will offer film tax credits at the end of the year than at the beginning. BusinessWeek reported on several states’ cutbacks:

“Kansas and New Jersey have suspended their tax credits. Rhode Island has capped subsidies at $15 million annually, and Wisconsin’s are set at a measly $500,000 a year. Arizona’s program is set to expire on Dec. 31. Larry Brownell, head of the Association of Film Commissioners International, which represents 41 of the 42 states offering credits, predicts half the states will shelve their programs within a decade.”

Rush to Subsidize
In 1992, Louisiana enacted a tax credit for filmmakers who lost money on films with “substantial Louisiana content.” Other states jumped on the bandwagon, and as more states added credits, states that already had them made them sweeter. By 2009, 44 states operated government incentive programs for film production: 28 offered tax credits, 17 offered cash rebates, and 3 offered outright grants.

Of the tax credit states, 14 make them transferable, and 15 make them refundable, greatly increasing their value and making it unlikely they’ll pay for themselves.

Nearly $200,000 per Job
The Tax Foundation’s back-of-the-envelope calculation is that states have paid out about $3.5 billion in incentives to filmmakers since 2005. Michigan and Louisiana have proven the most willing to pour their treasure into filmmaker subsidies.

Michigan continues to lose jobs even as it throws money at film productions. The state subsidizes more than 40 percent of a production’s local costs.

In September, Michigan’s nonpartisan Senate Fiscal Agency issued a report on the state’s film tax credits program which concluded, “The nature of the credit and the resulting activity is such that under current (and any realistic) tax rate the State will never be able to make the credit ‘pay for itself’ from a State revenue standpoint, even when the credit generates additional private activity that would not have otherwise occurred.”

Jack McHugh, senior legislative analyst at the Mackinac Center for Public Policy in Midland, Michigan, reviewed the Senate Fiscal Agency report and noted the state’s film tax credits and related subsidies “generated the equivalent of approximately 355 full time jobs in 2009, or 1,542 if ‘indirect’ jobs are also counted. During that year the film incentives’ net cost to taxpayers was $37.5 million.”

He added, “When the agency figures in other factors, the cost comes to $193,333 per job created by the incentives, or $44,561 per job if one includes the estimate of ‘indirect jobs’ created.”

Declining Returns
California’s entry into the film tax credit world last year will make it even harder for other states to attract productions. Whatever “rents” there were for early-adopter states to collect in film production, they’ve now dissipated, says Will Luther, an adjunct scholar at the Tax Foundation and author of “Movie Production Incentives: Blockbuster Support for Lackluster Policy,” a Tax Foundation Special Report.

“Based on fanciful estimates of economic activity and tax revenue, states are investing in movie production projects with small returns and taking unnecessary risks with taxpayer dollars,” he says. “In return, they attract mostly temporary jobs that are often transplanted from other states.”

Skewed Jobs Numbers
Luther notes the job creation numbers may be inflated in another way. “If some of the jobs ‘created’ by film tax incentives are offset by jobs lost elsewhere in the state—that is, if some are just shifts in production to the movie industry from another sector—job creation estimates will be skewed,” he said. “If tax incentives merely allow those already employed to upgrade to a better job, the real gains from job creation are much lower than boosters suggest.”

Luther says a better strategy for long-term real job growth is broad-based tax cuts to the overall tax burden to make a state more attractive for businesses in all industries.

Joseph Henchman ([email protected]) is tax counsel and director of state projects for the Tax Foundation in Washington, DC.

Internet Info

“Movie Production Incentives: Blockbuster Support for Lackluster Policy,” The Tax Foundation:

“Film Incentives in Michigan,” Senate Fiscal Agency: