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Film Tax Credits Are An Unaffordable Luxury

April 06, 2010

By Josh Barro

New York Governor David Paterson (D) and his Democratic-controlled state legislature are trying to close the state’s $9 billion budget gap, and they don’t agree on much. They disagree about how much spending to cut and which taxes to raise (though all of them want to raise taxes on somebody). But they all agree on one thing: New York should authorize $420 million in tax subsidies for filmmakers, up from $350 million last year.

These programs are a waste of money, and states ought to be repealing them. But as states raise taxes and cut programs in response to the recession, many aren’t touching their film subsidies. Some, like New York, even plan to expand them.

According to a recent Tax Foundation report, 44 out of 50 states offered some sort of subsidy program for filmmakers, usually in the form of a tax credit. Back in 2002, only five states had such programs, but during the last decade a bidding war caused the programs to spread almost everywhere -- even California offers a tax credit for making films right in Hollywood.

Generally, tax credits are awarded as a percentage of production costs or “below the line” production costs, which excludes payments to actors, directors, writers and producers and generally represents about 50% of a film’s budget. If a film has $20 million in eligible expenses, they receive a percentage of that back as a credit.

The credit percentages have gotten more generous over time -- particularly generous programs include New York’s 30% tax credit (plus an extra 5% in New York City) and Michigan’s offer of a 42% credit. And because the credit amounts often far exceed actual tax liabilities associated with film production, 26 of 28 states offering credits make them “refundable” or “transferable” -- meaning a taxpayer with a negative tax liability gets a check from the government.

These programs are economically equivalent to subsidy payments. But because they operate through the tax code, they can be framed as “tax relief” and escape the usual scrutiny that is applied to spending programs.

Why have states caught a fever for which the only cure is cutting big checks to filmmakers? Generally, the programs are sold as job creators. They appeal to politicians who can point to specific films whose production was brought to the state with tax credits.

Last year, David Paterson touted New York’s program as an “enormous success” because it handed out grants more quickly than expected, as though giving away free money were some sort of surprising feat. What industry wouldn’t be keenly interested in a refundable tax credit equal to 35% of the cost of doing business?

The trouble is one of cost -- New York is handing out almost $4 million per production that receives a credit (and presumably at least some of those productions would have shot in New York anyway). These costs are not recouped due to taxes on associated economic activity. While filmmakers hire caterers, extras and other local staff, these investments are temporary and end when production ends. And just as film productions are easy to land, they are also easy to lose grip of, as states like Alabama are learning when their neighbors implement more generous programs.

A 2008 study from the College of Charleston looked at South Carolina’s film incentive program and found that it generated only 19 cents in tax revenue for every dollar in rebates given to filmmakers. Contrary to film boosters’ rhetoric, these programs impose significant costs on state coffers.

So, you would hope that at a time when budgets are stretched, states would be rethinking these programs. But a Tax Foundation report released in January revealed that only one state (Kansas) had put its film credit program on hold because of the recession. This week, Arizona also allowed its program to expire without reauthorization.

In other states, governors have attempted to impose discipline but have been thwarted by star-struck state legislatures. Indiana Governor Mitch Daniels (R) vetoed a film credit program in 2008 but was overridden by a bipartisan legislative majority. In Rhode Island and Massachusetts, Donald Carcieri (R) and Deval Patrick (D) faced similar legislative roadblocks to their efforts to rein in film subsidies.

Meanwhile, New York isn’t the only state poised to expand its film credit program in the face of the recession. In Virginia, the Governor and both houses of the legislature agree film subsidies should be made more generous, though there is debate about how to structure the expansion. North Carolina Governor Bev Purdue (D) has called for her legislature to cough up more money to subsidize movies, and there’s also a move afoot to expand Maryland’s program.

Supporters of the programs warn that movie productions will stop coming if states fall behind in subsidizing them. That’s probably true in some cases. But why does every state need to be a hotbed of movie production? Maine has no auto manufacturing plants, but it’s not out there offering to pay Ford 30% of the cost of each car built. This is because bribing people to do business in your state is not a sustainable way to grow the economy.

Balancing state budgets is a matter of prioritizing the “need to haves” and “nice to haves.” Film credits are, at best, a “nice to have” program, and their costs are nontrivial -- the authorization under consideration in New York equals about 5% of the state’s deficit. Ending the subsidy gravy train for movies could put a significant dent in budget gaps around the country, if state legislators can give up their attachment to Hollywood glamour.

Original Source: http://www.realclearmarkets.com/articles/2010/04/06/film_tax_credits_are_an_unaffordable_luxury_98407.html

 

 
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