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

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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