No Special Economic Effects from State Film Incentives

Published September 4, 2012

State film incentives programs are the feel-good production of the year, or so state economic boosters would have you believe.

“Cronyism for the Cool Kids” wouldn’t have the same vibe, would it? My recent report on North Carolina’s film incentives program (“N.C.’s Film Tax Incentives”) carries the subtitle “Good Old-Fashioned Corporate Welfare,” which it is.

Before states began film tax incentives programs, North Carolina was a popular off-Hollywood destination for film crews. A right-to-work state with a pleasant climate and a range of natural landscape features, North Carolina held significant advantages for movie makers.

For example, from 1983 to 1994, North Carolina was the site of such major feature movies as “Brainstorm,” “Firestarter,” “A Breed Apart,” “The Color Purple,” “Maximum Overdrive,” “Dirty Dancing,” “Weekend at Bernie’s,” “Bull Durham,” “The Handmaid’s Tale,” “Teenage Mutant Ninja Turtles,” “Billy Bathgate,” “Sleeping with the Enemy,” “The Last of the Mohicans,” “The Fugitive,” and “Forrest Gump,” among others.

Incentives Surge

The onset of the incentives changed the movie industry, especially from 2002 to 2009, when the number of states with film incentives programs grew from four to 44. Even lawmakers in California, traditional seat of the industry, felt compelled to use incentives just to stave off what was being called “runaway production.”

North Carolina’s original film incentive program of 2005 was greatly increased after 2009. Now the state offers an open-ended subsidy promising an income tax credit of up to 25 percent of qualifying production expenses, which include the first million dollars’ worth of an employee’s salary as well as employee fringe contributions. It is capped at $20 million per production, and the credits are refundable.

Georgia won the Miley Cyrus movie “The Last Song” sweepstakes because it had recently upped its incentives after being outbid by other states. Meanwhile, North Carolina had outbid Minnesota for the Minnesota-set George Clooney and Renee Zellwegger film “Leatherheads” — one of the reasons Minnesota returned to its “Snowbate” film incentives program. In other words, the incentives pit states against each other in a classic race to the bottom. Meanwhile, they’re competing against Canadian provinces and other nations as well. Who benefits, and what’s the cost?

Movie Stars Over Teachers
The incentives’ biggest beneficiaries are film production companies, of course. The film offices benefit from having more chips at the bargaining table. Local studios, film crew workers, restaurants, hotels, hairdressers, etc., and pro-incentives politicians receive positive press when productions come to town. Tourism is also said to be positively affected by filming, though tourism effects are fickle, unpredictable, and not very powerful.

Because North Carolina’s film tax credits are refundable, when a film production company’s tax liability is less than its credited amount (which happens often), the state pays the difference directly to the company. Critics have decried that as choosing movie stars over teachers.

Incentives in general have the political power of concentrated benefits for a few with dispersed costs to the many. Nevertheless, many states are beginning to question their film incentives programs (including Georgia and “model” states such as Michigan and even Louisiana), and some have suspended or even ended them (including Arizona, Arkansas, Idaho, Indiana, Iowa, Maine, New Jersey, and South Dakota).

Several studies have found film incentives return to state coffers mere pennies per dollar revenue spent. Michigan, for example, received only 11 cents in revenue per dollar revenue expended on film incentives. Louisiana fared slightly better: 13 cents. New Mexico’s was 14 cents; Massachusetts, 16 cents. Connecticut got back only nine cents.

Tacit Admission

Here’s the kicker: Film incentives programs are lawmakers’ sneaky admission that they know lower taxes and regulations are good for bringing in industry. They know it, but they want to direct it, so they support narrowly tailored economic incentives. That way they can choose which companies to bring in, which of course leads to campaign contributions and self-congratulatory speaking gigs at ribbon-cutting ceremonies.

It’s not a big step down for a politician from “You didn’t build that” to “I’m the reason you are here.” And of course the big companies are the ones holding the ceremonies. No one hears when local mom and pop businesses decide to add a new position or two, even though small businesses make up 99.7 percent of the nation’s employers.

For North Carolina, research by the Beacon Hill Institute at Suffolk University found that cutting taxes and regulation across the board — rather than for just a favored industry — would provide “a powerful stimulus for the state’s economy.” By leaving more financial resources in the hands of individuals and businesses, it would increase employment, creating thousands of new jobs. It would attract more investment from local as well as out-of-state businesses, leading to well over a billion dollars in new investment in two years.

Targeted incentives shift production in other industries and, in the case of film incentives, lead to a succession of temporary jobs reliant on continued state subsidies and always under the threat of greater subsidies being passed in other states and nations. Cutting taxes and regulation for all, rather than a favored industry, would lead to greater growth of the state’s economy (and, subsequently, state revenues) through new and permanent job creation — a much more powerful incentive, though without all the ceremony.

Jon Sanders ([email protected]) is director of regulatory studies at the John Locke Foundation in Raleigh, N.C.

Internet Info

N.C.’s Film Tax Incentives, Jon Sanders, John Locke Foundation: