State Film Industry Incentives: A Growing Cronyism Fiasco

Someone should consider making a movie about wasteful state-based film industy subsidies. It has become quite a cronyist fiasco in a very short period of time.

Some background: State and local tax incentives for movie production have expanded rapidly over the past decade. These inducements include tax credits, sales tax exemptions, cash rebates, direct grants, and tax or fee reductions for lodging or locational shooting. In 2002, only five states offered such inducements for movie production. By the end of 2009, forty-five states had some sort of incentives in place to lure film producers.

In 2010, the film industry received an estimated $1.5 billion in financial commitments from these programs. Unsurprisingly, these incentives have proven very popular with movie studios. Of the nine motion pictures that were nominated for Best Picture at the Academy Awards in 2012, five had received taxpayer-funded rebates, tax credits, and subsidies by state governments. “The Help” received a Mississippi spending rebate of $3,547,780 and “The Tree of Life” received $434,253 from Texas. In February 2012, Best Picture-nominee “Moneyball” received as much as $5.8 million from the state of California. It had grossed over $75 million at the box office. More recently, the biopic “Lincoln” received roughly $3.5 million in tax incentives from the Virginia Film Office.

Many state and local governments offer these inducements in the hope of attracting new jobs and investment; other simply seek to bill themselves as “the new Hollywood.” As William Luther of the Tax Foundation notes, “From politicians’ point of view, bringing Hollywood to town is the best of all possible photo opportunities—not just a ribbon-cutting to announce new job creation but a ribbon-cutting with a movie or TV star.” But it seems as if the glamor and prestige associated with films and celebrities have trumped sound economics since there is no evidence these tax incentives help state or local economies.

“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,” noted a 2010 Tax Foundation study. “In return, they attract mostly temporary jobs that are often transplanted from other states.” Studies of specific state incentive programs confirm this finding, almost universally finding miniscule revenue gains for every dollar of film subsidies offered. The adjoining table, derived from a meta-survey of film incentives studies by the Center on Budget & Policy Priorities, illustrates how much revenue was lost per net job created by film tax credits as well as how little revenue each program generated for every dollar of state revenues awarded.

The only two studies that have revealed positive results for such film incentive programs were both conducted by Ernst and Young on behalf of the New York and New Mexico film offices. All others have shown consistent negative returns. (If you exclude those two Ernst and Young studies that were done for the film offices, the average revenue gained across those other programs is just 16 cents for every dollar of subsidy granted to the film industry. Stated differently, that’s an 84% net loss for these programs. Truly astonishing numbers.)

Recently, some states have begun abandoning or limiting film incentive programs or at least taking a hard look at their effectiveness. Iowa, for example, suspended its film program in 2009 after an investigation revealed a scandal involving much waste and abuse. Ten criminal cases were brought and seven people were eventually convicted. Michigan Governor Rick Snyder has also started reining in its film program as evidence has mounted that it has failed to create local jobs and has cost the state a great deal of tax revenue. Check out yesterday’s excellent New York Times article by Louise Story for all the gory details.

In sum, film tax credit cronyism puts taxpayers at risk without any corresponding benefits to them or the state.  Glamor-seeking and state pride seem to be the primary motivational factors driving state legislators to engage in such economically illogical behavior. It’s like “smokestack-chasing” for the Information Age, except in this case you don’t even have a factory left in town after your economic development efforts go bust. This cronyist activity benefits no one other than film studios. States should end their film incentive programs immediately.

Additional Reading:

• William Luther, Movie Production Incentives: Blockbuster Support for Lackluster Policy, Tax Foundation, Special Report, no. 173 (January 2010), at 7, http://taxfoundation.org/sites/taxfoundation.org/files/docs/sr173.pdf
• Robert Tannenwald, State Film Subsidies: Not Much Bang For Too Many Bucks,  Center on Budget & Policy Priorities (Dec. 9, 2010), http://www.cbpp.org/cms/index.cfm?fa=view&id=3326
• Joseph Henchman, More States Abandon Film Tax Incentives as Programs’ Ineffectiveness Becomes More Apparent, Tax Foundation Fiscal Fact, no. 272 (June 2, 2011), http://taxfoundation.org/article/more-states-abandon-film-tax-incentives-programs-ineffectiveness-becomes-more-apparent.
• Louise Story, Michigan Town Woos Hollywood, but Ends Up With a Bit Part, New York Times (December 4, 2012), http://www.nytimes.com/2012/12/04/us/when-hollywood-comes-to-town.html?_r=0.
• Will Wilson, Oscar Night Secret: Tax Breaks for Films Go Undisclosed in Many States, Stateline, Feb. 22, 2012,  http://www.pewstates.org/projects/stateline/headlines/oscar-night-secret-tax-breaks-for-films-go-undisclosed-in-many-states-85899375403
• Carten Cordell & Kathryn Watson, How Steven Spielberg’s Lincoln Benefited from Crony Capitalism, Reason, Nov. 15, 2012, http://reason.com/archives/2012/11/15/how-steven-spielbergs-lincoln-benefited.

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