This is Part One of a series of articles about state film incentive programs in the United States…..
A few days ago, I posted the new report from the Massachusetts Department of Revenue (DOR) to study the economic impact of the state’s film incentive program. The big story was the 82% decline in production spending from 2009-2010. I said I was going to post some of the more detailed highlights later, but the Film Works campaign was the first to report the real jaw-dropper in the DOR report, which is that the cost-per-job to the Mass. taxpayers under the film incentive program ballooned to over $700,000 in 2010!! If that’s not madness, I don’t know what is. The number is so shockingly high, it may strike many people as so ridiculous that it couldn’t possibly be true. Film Works gave a brief explanation for the high cost:
In 2010, the DOR estimated that each Full-Time Equivalent (FTE) job had a net cost to the state of $712,568!! Ouch! The cost is so unbelievably high, it almost seems too impossible to be true. So, just how did they do the math?
Under the Massachusetts film incentive, there is a lag between the time credits are issued and the time they are redeemed. For example, if $100 million in tax credits was issued in 2006, it could take several years until all of those credits are redeemed. In 2010, almost $91 million in tax credits issued in previous years were redeemed. This $91 million cost to the state in 2010 was much higher than the $58 million in production spending the state raked in that year.
But, there’s another twist to this. Since Massachusetts only generates between 5-15 cents in tax revenue for each dollar of production spending, the $58 million spent by productions in 2010 only generated $800,000 in state tax revenue. Since the state had to forgo $91 million in tax revenue to redeem the credits issued in prior years, and took in only $800,000 in tax revenue in 2010 to cover the cost, the cost to create a single job exploded. In previous years, the cost-per-job in Massachusetts under the film incentive program averaged from $75,000 to a little over $140,000.
This is a simplified explanation that leaves out a discussion of the methodology the DOR uses (like a balanced-budget analysis, factoring out production that would have occurred without the incentive etc.). Film Works was smart to leave out such mechanics, as it would be MUCH too “inside baseball” for its audience, which is the entire public. Indeed, if there is one thing that can be said about film incentive tax credits, it’s that 99% of the population has NO idea how they actually work, and that includes even those who work in the film industry itself. This is a HUGE problem that has allowed film incentive schemes to persist. But If the average American living in any film incentive state understood how they actually worked, my guess is they would not support them and, I suspect, be furious if their state has had one for any length of time.
As fate would have it, the comments to the Film Works article contains a dialogue that proves my suspicion correct. A former Massachusetts-based filmmaker commented on the high cost-per-job in the report and offered a rebuttal that is representative of arguments/rationales that film backers make for for film incentives across the U.S.:
The math is deceptive — Of course, if you tax Joe Gaffer’s income, but give away a tax credit that’s bigger than his income tax, you’re losing money… BUT, if Joe Gaffer is working with Charlie Grip, who’s in from LA, staying at a hotel, buying dinner with his per diem, and grabbing a knick-knack from Quincy Market for the kids, you’re offsetting the cost of the credit.
As a former MA-based filmmaker, I have another particular perspective to add: The particulars of the MA tax credit are such that LOCAL production cang take advantage of it as well. Small productions don’t have as big a footprint, but they can (and often do) draw money from outside the state. Some very rough numbers to consider: If the state provides a $20k tax credit on a $100k film, it’s really losing, say $10k (since the film likely owes payroll tax, and its employees likely owe some income tax — roughly $10k, when all is said and done). For the $10k spent by the state, it’s “buying” an infusion of $100k in to its economy (even if it’s a local investor, the money could easily have gone elsewhere, to other states, even other countries). As that money is spent in the state, roughly 5% goes to sales tax. So now we’re looking at the state spending $5k on this $100k film. Yup, it’s a loss. bummer. But what if that $100k film makes its money back? What if it turns a profit? What if one out of a hundred $100k films becomes a multi-million-dollar phenomenon? Will the state make its money back then? Of the big blockbusters that shot in MA over the last few years, has anyone calculated the income tax collected by the state from those individuals who earn residuals from those films? It’s perhaps a more profound question when it comes to TV series, whose performers can earn quite a bit of income from re-runs, syndication and digital re-distribution.
In response to the filmmakers comment, the Film Works campaign explained how the filmmakers argument failed because of the cost to the taxpayer and his lack of understanding about how the incentive worked:
The money spent on Charlie Grip’s (we like your characters) hotel stay and per diem spending is part of the film or TV production’s budget that is considered qualified spending eligible for the credit. Things like spending from per diems and money on hotels is included in the DOR’s very comprehensive analysis. Since 25% of Charlie’s hotel stay and meals at local eateries are being subsidized at the same 25% rate, Massachusetts taxpayers will pay $7.50 of Charlie’s $30 lobster dinner tab. Unfortunately, film & television productions also get an exemption on sales taxes on things like meals, so none of that $7.50 is offset by sales tax on the lobster meal. The knick-knack, assuming its not purchased with per-diem money, will confer a few cents back to the state coffers. But that’s about it.
The Mind of a Film Backer: What Was True Before Film Incentives is NOT True Now…
I understand where the filmmaker above is coming from, because I also think (or thought) the same way. The positive economic impact that just a single film or television project can have is HUGE. Each year, there are hundreds of movies produced for theatrical release. On average, anywhere from 75 to over 100 of these movies have budgets of $75 million or more, EACH. Such movies rain money in the community in which they are made in a very short period of time. Imagine the impact of one film spending $75 million in 60 days in one place…and then imagine 100 more projects doing the same thing at the same time. Film backers in every state in the nation use a familiar pitch to sell the public and their respective state lawmakers about the many ways filming benefits the economy with spending and jobs. Dave Krieger, a now-seasoned film industry worker in Michigan, made the textbook pitch in a guest column on Detroit’s popular online web magazine “Model D”:
Teamster drivers are re-employed as drivers for the film industry. I have met many former autoworkers that have been retrained to work as electricians, grips, drivers and locations assistants. Hotels are huge beneficiaries of the industry, especially downtown hotels. Sign companies, antique stores, restaurants, lumber yards, and countless other companies have received benefits from these productions.
Producers come in here with the intent of bringing a story and A-list actors. They want to hire local crew, they want to find experienced suppliers; bottom line, they want to spend their money in Michigan. They need to outfit each movie with the help of local merchants. There are many stories of productions helping local companies or bettering their bottom lines when no one else in this state was buying their products.
Take out references to Michigan, and some version of this pitch is made in every state, usually to argue for film incentives. The pitch itself is very true–or at least it was not that long ago. Not that long ago, I would have been in 100% agreement with the film backers, but not now. There is always a “But” in there somewhere, and it’s for the film backers to listen.
What film backers don’t seem to grasp is that the economic pitch they use is much much older than the excessive film tax credit programs that began infecting the US since about 2002. The economic benefits film backers speak about were true in the decades before film tax credits, but not in the years since. The benefits a community reaps from film and TV production are only true when the residents (the taxpayers) do not have to subsidize 25-42% of the project’s budget. The cost of state film incentive programs in the U.S. far outweighs the benefits the film backers speak of.
In Iowa, “Field of Dreams” had a huge positive on the local economy, but only because the taxpayers were not subsidizing a quarter or more of the budget. Indeed, many of the examples pointed to in different states (“Midnight in the Garden of Good & Evil” in Georgia comes to mind) film backers points to while making their pitch comes from a movie the taxpayer didn’t help pay for. The benefits from these films, indeed almost ALL films made in the U.S. over the decades, outweighed the “costs”. Why? Because there was NO COST.
Film Incentives for Dummies–These Things SUCK:
So if movies used to be so be so great for a state’s economy, why do they suck now? In it’s response to the Massachusetts filmmaker, the Film Works campaign did, for perhaps the first time, a fantastic job of explaining how film tax credits actually work and why the “benefits” film backers speak about are erased because of how much film incentives cost the state. It’s important to keep in mind that while some other states may not have some of the same problems with their film incentive as Massachusetts (like the sales tax exemption), the explanation about the transferable or refundable nature of film tax credits is 100% true in EVERY state almost without exception (California, for a change, being the notable exception):
The Mass. film incentive took effect in 2006. From 2006-2010, a total of $1.13 billion was spent on production activity in Massachusetts for 556 different projects (60 films, 286 commercials, 118 television series and 92 documentaries/’other’). Wow….$1.13 billion in spending sounds great, doesn’t it? Not if you keep reading. Of that $1.13 billion, $276 million was paid for by the Massachusetts taxpayers in the form of transferable/refundable tax credits. Even without the film incentive, the state could still have spent the $276 million on something else to stimulate the local economy. But Massachusetts, as we know, chose to spend it on film tax credits. Let’s see how those actually work….
The “transferable and/ore refundable” part of the tax credits is critical, because otherwise they would be worthless to producers/production companies, as they have virtually zero tax liability in Massachusetts. Of the $276 million in tax credits issued to the 556 individual projects, just $7.9 million was used to pay for the tax liabilities of the productions themselves. Over $254 million of the tax credits issued to productions has been sold (“transferred”) to insurance companies ($149 million credits purchased), financial institutions ($47.4 million), corporations ($47.3 million), and wealthy individuals ($9.6 million)—not a collection of popular groups right now. These groups paid from 80-93-cents on the dollar to productions for the tax credits. The productions got $227.1 million in free cash money to spend on their projects and the banks and insurance companies etc. were able to pad their pockets by $26.4 million by using the $254 million in credits (which they only paid $227 million for) to pay their Massachusetts taxes. Looked at in another way, the Massachusetts film incentives is actually a 10-20% tax cut for these banks, corporations and insurance companies. That probably would not sit very well with average middle-class Massachusetts taxpayers. Either way, that is simply the way the program works, nothing but the facts.
In the next post, I will recap how film tax credits actually work and highlight how even some Hollywood producers are starting to come clean with the taxpayers about what a scam film incentives are, despite fleecing them for millions at the same time. I will also talk about an important economic message that film incentives might be able to teach us, which is essentially this: the wealthy individual and or corporate taxpayers in other states who buy film tax credits are showing they are willing to spend their money to get a reduction on their taxes. Does this mean states would be better off lowering taxes on their wealthiest taxpayers (individual and/or corporate) or even all taxpayers? Yes and No. YES with strings attached. NO without them.
