Film Tax Incentives Are a Giant Waste of Money, New Study Finds

Film Tax Credits Are a Waste
Asilvero via Wikimedia Commons

Are film tax credits worth the money? It’s a hotly debated question. Hollywood contends that tax credits create a multiplier effect that stimulates the broader economy, while skeptics say the benefits don’t outweigh the costs.

But a new study from a professor the USC Price School of Public Policy says that argument is beside the point. Professor Michael Thom reviewed the effects of tax credits nationwide, and found that the benefits are almost non-existent.

“The promise was this was going to diversify the economy, that they were going to draw Hollywood out of Hollywood,” Thom said in an interview. “In general, this does not pay off.”

Thom analyzed wages and employment levels within the motion picture industry in more than 40 states where incentives have been implemented. In 18 states that implemented transferable tax credits, employment in the motion picture industry increased by less than 1% per year. In 26 states that implemented refundable credits, there was no measurable effect on job growth. Transferable credits had no measurable effect on wages, while refundable credits did produce short-term wage gains, the study found.

The study, titled “Lights, Camera, but No Action?”, also looked at sales tax and lodging tax waivers, finding no effect on motion picture employment from those incentives. The study also found that none of the incentives had a measurable effect on the share of the motion picture business located in each state.

The findings fly in the face of the conventional wisdom in Hollywood, which is that state tax incentives have resulted in a massive flight of jobs from California to other parts of the country. That argument was central to the California Legislature’s decision in 2014 to expand its tax credit program from $100 million per year to $330 million per year.

In pushing for the credit expansion, legislators relied on research from the Milken Institute. Kevin Klowden, the executive director of the institute’s California Center, was asked to review Thom’s paper. Klowden argued that it was “well done for its limited focus, but misses the bigger picture.” Specifically, Klowden argued that Thom did not adequately distinguish between different types of incentives.

“There are a lot of different states that have thrown money at incentives and they haven’t worked out,” Klowden said. “If all they’re doing is using incentives as a lure and nothing else, then as soon as they go away, local film production takes a hit. What makes things work is you need to invest in and build up the local workforce.”

Klowden argued that states that have provided incentives for investment in permanent infrastructure, like production facilities, have seen the greatest benefits. He singled out New York and New Mexico as states that have been particularly successful.

Thom was not impressed with that argument. “If it’s such a successful industry and a profitable industry, you shouldn’t need a subsidy,” he said. “This is a multi-billion dollar industry.”

In the last couple of years, a handful of states have rolled back or eliminated their incentive programs. In the wake of a number of state-by-state studies showing that incentive programs don’t create benefits commensurate with their costs, Thom wondered why more states have not done away with their programs.

That led him to write another paper, titled “Fade to Black?”, that examines the “rise and fall” of motion picture tax incentive programs. He found that states generally enacted incentives as a response to high unemployment, and also because they were following the example of other states.

“Policymakers look around and say, ‘If five other states are doing something, they can’t all be idiots,’ so they have to do it to,” Thom said. “There’s a lot of peer pressure.”

Thom also looked at states that have eliminated their programs, finding that the smaller the program, the easier it was to get rid of. States that have spent the most on tax credits have generally been the most reluctant to give them up.

“Many have doubled down,” said Thom, adding that regulators and vested interests have become powerful advocates for continuing the larger programs. “The people who voted for that money don’t want to admit fault.”

Thom also noted that few programs include a requirement to analyze the effects of the tax subsidy.

In California, advocates for film incentives are still awaiting definitive data that would show whether the expansion has had a positive effect, Klowden said.

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  1. Jack says:

    Film incentives are mainly just ways for states to promote themselves, they are not a reliable part of the economic engine of an area. If they were, then the industry would not disappear the minute the incentives do. The ones making the most money are those at the top. The producers, the elected officials, and the heads of the unions. Everyone else is just sweeping up the peanuts. You can only run a pyramid scheme so long.

  2. vfx watcher says:

    How they came to the conclusion that this had no impact on the employment in CA is baffling. I’ve seen every major feature house in the vfx world relocate out of LA in the last 5 years. For a primer they could just follow this twitter account VFXSoldier Start in 2011 and come to the present day and your head will spin with the sheer number of major vfx studio bankruptcies, consolidations and relocations out of state.

  3. vfxcorporal says:

    The title is deceptive, should include “state”

  4. British scientists have discovered…

  5. VFX_Boom says:

    You’re telling me that after spending $1.5 Billion, Billion with a “B”, over he last 6-8 years, Louisiana still has no viable film industry, that looking back MAYBE it was a bad use of tax payer money?

    Cite all the self serving “Studies” all you want, the long term effects on states such as Louisiana speak for themselves.

    • matteobject says:

      The best part is that La. still owe money on previously issued tax credits, so right now they’re spending $180m a year just paying off the debt from such showcase projects as the last Fantastic Four movie which, I’m sure, was a huge boon to Louisiana tourism as the movie industry keep assuring us is the case.

      Fortunately Ga. has stepped up to fill the void, their subsidies were around $230m in 2013/14, $500m in 14/15 and will be over $600m for 15/16.

      That’s about 3% of the total state budget being spent on subsidies to Hollywood, hopefully the MPAA will give Deal a nice cushy lobbyist position when he terms out in a few years.

  6. Jack Binder says:

    Serious concerns about the bias of the report’s author should be understood. As a member of the Heartland Institute, connection to the Charles Koch Institute, collaborators with the tobacco industry against second hand smoke, the Tea Party and climate change denial, the conservative agenda must be highly considered in the reading of the report and article – which is contradictory to practically every study previously undertaken (demonstrating 2:1, 6:1, etc. economic benefit for each dollar invested in film production as well as the on the ground facts of dramatically increased production in incentivized states (ie. New York, Louisiana, Georgia) and the return of increased production to California.

    • minoton says:

      If any economic gains were truly that bountiful, it would behoove states (provinces, countries) to return 100% of a film’s so-called economic investment. At those odds, it would be like printing money for the state coffers. Fact is, that economic activity does not replenish to the tax payers the amount of taxes spent.

    • matteobject says:

      What utter garbage. Every INDEPENDENT study shows that film tax incentives lose enormous amounts of money, only the studies funded by the film industry itself show net positive returns of “2:1, 6:1” and in one particularly egregious study, 12:1, TWELVE!

      All these incentives do is move jobs around, they don’t actually create them, all the states are doing is buying work from each other.

      • Michael Thom says:

        Thanks, matteobject. Here we have a double-blind, peer-reviewed study on tax incentives that received no external funding and is in no way connected to the Heartland Institute criticized as biased by someone with a vested interest in keeping the subsidies funded. From his company’s website:

        “Film Budget Inc. also can provide film tax incentives analysis services. We advise on the best place to shoot your film and what location to focus your film budget and production upon.”

    • Michael Thom says:

      As opposed to you, Jack, who profits from the subsidies in question.

      • Drew says:

        Michael, if you really think Jack profits directly from subsidies, or that his services wouldn’t be equally in demand whether subsidies existed or not – then you really don’t understand the marketplace.

      • Michael, were you looking at film production jobs specifically, or did you include ALL sectors of the industry? Because the actual production job and wage totals just don’t match some of your claims.

  7. Conscientious Objector says:

    Movies are written, budgeted, staffed, cast, edited and marketed from Hollywood. That has not changed. The states are just back lots. The best a local can hope for is to serve an egg salad sandwich with craft services, or to drive a director to and from the hotel. Here in Georgia at least one giant film facility is in the red. Fortunately they found a buyer. We’ll see what happens.

    • Conscientious Objector says:

      By the way, when you check the state film commission site, they want INTERNS. Free, unpaid interns! Billions of dollars being spent and made, and they’re looking for free labor. Pardon me if I’m not sold on this “Hollywood of the South” thing just yet.

      • matteobject says:

        Well hey, on the plus side, it’s only costing Ga. $600m a year in subsidies, or about $250 per taxpayer per year.

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