N.M. Film Subsidies Bring Poor Return

Published August 1, 2009

New Mexico may be the site of many film productions, but recent studies call into question the claimed benefits to the state’s economy.

With New Mexico taxpayers spending nearly $60 million a year on subsidies to the film industry, and with states competing with each other to attract film productions, the issues of job creation and overall economic benefit loom large.

New Mexico’s film program is viewed as a national model and such an important part of the state’s economic development efforts that three government bodies have completed separate studies of the program in the past year.

Two of those reports tear apart the third, a glowing study by consulting firm Ernst & Young that concluded New Mexico receives a surprising $1.50 return on each taxpayer dollar spent.

‘Wildly Unrealistic Assumptions’

“There are some wildly unrealistic and undocumented assumptions in the Ernst & Young study,” said economist Gerry Bradley of the left-leaning New Mexico Voices for Children. “We are involved in a race to the bottom with dozens of other states, dreaming up more and more extreme film incentives. It is time to take a deep breath and pull back from the brink.”

Bradley reached that conclusion after reviewing the other two studies.

The first, commissioned by the Legislative Finance Committee and conducted by the New Mexico State University-affiliated Arrowhead Center, determined the film subsidy program generated a return of only 14 cents for every dollar spent.

Because Gov. Bill Richardson (D) prizes the film subsidy program, the governor’s office and the Film Office (which the governor controls) did their own study. Months after the Arrowhead Center report showed New Mexico’s film subsidies to be an economic loser, the Ernst & Young report claiming a $1.50 return on each taxpayer dollar spent was released in January of this year.

Inflated Salary Figures

A follow-up analysis comparing both studies was undertaken by the Legislative Finance Committee. That study shot several holes in the Ernst & Young analysis.

Instead of looking at payroll data, the Ernst & Young study used data collected from online and telephone surveys of the film industry, the analysis found. Ernst & Young then added in the income of millionaire movie stars, producers, and directors, some of whom make 100 times or more the income of a film crew member.

Ernst & Young also excluded the cost to taxpayers of making interest-free loans to Hollywood. At a simple annual interest rate of 5 percent on a $15 million loan (the largest given out under the program), taxpayers are giving up $750,000 in interest annually.

On a six-year loan, the loss to taxpayers is $4.5 million.

‘Twilight Zone’ Assumptions

“It is clear to me that Ernst & Young were told to come up with a report that backed the film industry incentives, and that is what they did,” Bradley said. “The film incentives study done by Arrowhead at NMSU is a careful and well-researched study that makes its assumptions clear.”

While the finance committee’s study sat on the shelf garnering little media attention, investigative reporter Jim Scarantino of the Rio Grande Foundation publicized the report with his own analysis, “A Modern Spaghetti Western: Shooting Holes in the Ernst & Young Study of Film Industry Subsidies.”

Scarantino argued, “Ernst & Young’s data was based on assumptions made in the Twilight Zone. New Mexicans should rely on the Legislative Finance Committee and other nonpartisan public servants before spending millions to subsidize the film industry.”

Unions Among Beneficiaries

The head of the local film industry labor union, Jon Hendry of IATSE Local 480, wrote in a blog posting, “Ernst and Young are the 7th largest private employer in the country and their research carries a little more credibility than the Arrowhead Institute.”

Given the structure of the subsidy program and New Mexico’s lack of “right to work” laws, the film industry’s many labor unions have been among the biggest beneficiaries of the subsidies.

New Mexico’s film subsidy package includes a 25 percent Film Production Tax Rebate on all direct production expenditures, including New Mexico labor, subject to taxation by the State of New Mexico. This is a refund, not a credit, on the full amount of the expenditure, not just the tax portion. There is no minimum spending requirement and no maximum subsidy amount.

New Mexico also offers a loan of up to $15 million per project (which can represent 100 percent of the budget) for qualifying feature films or television projects.

Private Investment at Risk

Jason Hariton, vice president for operations at Albuquerque Studios, points out his company built a $91 million studio with zero government (state or local) money or tax breaks. The company’s studio was used to film the summer blockbuster Terminator Salvation.

But Hariton and other New Mexico film advocates worry a removal or sharp reduction of film subsidies could cause film work to go elsewhere, jeopardizing private investments. For New Mexico, finding a way to reduce the program’s cost without killing the industry is a complicated issue.

Paul J. Gessing ([email protected]) is president of the Rio Grande Foundation in Albuquerque, New Mexico.

For more information …

“A Modern Spaghetti Western: Shooting Holes in the Ernst & Young Study of Film Industry Subsidies”: http://www.riograndefoundation.org/new/articles/?EC=ReadArticle&ArticleID=280

“The Film Industry in New Mexico and the Provision of Tax Incentives,” Arrowhead Center of New Mexico State University: http://www.nmlegis.gov/lcs/lfc/lfcdocs/film%20credit%20study%20TP&JP_08.pdf