Movie production incentives in the United States

Many states provide financial incentives for film and television production.

Movie production incentives are tax benefits offered on a state-by-state basis throughout the United States to encourage in-state film production. These incentives came about in the 1990s in response to the flight of movie productions to other countries such as Canada. Since then, states have offered increasingly competitive incentives to lure productions away from other states. The structure, type, and size of the incentives vary from state to state. Many include tax credits and exemptions, and other incentive packages include cash grants, fee-free locations, or other perks. Proponents of these programs point to increased economic activity and job creation as justification for the credits. Others argue that the cost of the incentives outweighs the benefits and say that the money goes primarily to out-of-state talent rather than in-state cast and crew members. Studies of the costs and benefits of incentive programs show different levels of effectiveness.

History

The development of movie production incentives stems from the perceived economic benefits of filmmaking and television production in the US. In 2010 revenues from television production in the US were estimated at $30.8 billion^[1] while revenues from movie and video production in the US were estimated at $29.7 billion in the same year.^[2]

As the TV and film industries grew through the 1990s, so did concern over runaway productions, TV shows and films that are intended for a US audience but are filmed in other countries in order to reduce production costs. The issue of runaway productions gained further traction after Canada adopted a movie production incentive program in 1997.^[3]

Overall economic losses to the US due to runaway productions are difficult to measure, as the perceived economic benefit of film production could include benefits from tourism in the short and long-term, local job creation, and any number of other benefits. Most methods of measuring such economic benefit apply a multiplier to production costs in order to account for the lost opportunities from taxes not collected, jobs not created, and other revenues that are lost when a film is made outside of the US. A 1999 study by The Monitor Group estimated that in 1998 $10.3 billion was lost to the US economy due to runaway productions.^[4]

Also in the 1990s, U.S. states saw the opportunity to launch their own production incentives as an effort to capture some of the perceived economic benefits of film and TV production. Louisiana was the first state to do so in 2001, and in 2002 passed legislation to further increase the scope its incentives. Over the next three years Louisiana experienced an increase in film and television productions some of which were nominated for Emmy Awards. The perceived success of Louisiana's incentive program did not go unnoticed by other states, and by 2009 the number of states which offered incentives was 44, up from 5 in 2002.^[5] Critics have suggested that the increase in states offering incentives mirrors a race to the bottom or an arms race because states continue to increase the scope of their incentive packages to compete on a national level to not only maximize their individual benefits but also to stay ahead of their competitors.^[5]

Types

• Movie Production Incentives (MPIs): "Movie Production Incentive" is an umbrella term referring to any incentive states offer filmmakers to encourage film production in-state.^[5]
• Tax Credits: Tax credits can remove a portion of the income tax owed to the state by the production company, but since most production companies are limited purpose business entities they often incur very little, if any tax liability.^{[6][7][8][9][10][11]} The use of the word "tax credit" or "tax rebate" often results in public confusion, as they layperson may think the program is a refund of taxes paid by the production, when it is actually based on a significant percentage of the production's actual spend and the amount is awarded regardless of whether the entity pays taxes (which they generally do not) (as explained by Louisiana's Chief Legislative Economist: “It’s got nothing to do with tax...We’re just using the tax-filing process and the Department of Revenue as the paying agent for a spending program. That’s what we’re doing.”)^[6] Production companies must often meet minimum spending requirements to be eligible for the credit. Of the 28 states that offer tax credits, 26 make them either transferable or refundable. Transferable credits allow production companies that generate tax credits greater than their tax liability to sell those credits to other taxpayers, who then use them to reduce or eliminate their own tax liability.^[12] Refundable credits are such that the state will pay the production company the balance in excess of the company's owed state tax.^[5]
• Cash Rebates: Cash rebates are paid to production companies directly by the state, usually as a percentage of the company's qualified expenses.^[5]
• Grant: Grants are distributed to production companies by three states and the District of Columbia.^[5]
• Sales Tax Exemption & Lodging Exemption: Exemption from state sales taxes are offered to companies as an incentive. Many states offer exemption from lodging taxes to all guests staying over 30 days, but these incentives are highlighted for production companies.^[5]
• Fee-Free Locations: An additional incentive states offer is to allow production companies to use state-owned locations at no charge.^[5]

State-by-state

States offering movie production incentives by type as of December 2009^[5]

	MPIs	Tax credit	Cash rebate	Grant	Sales tax exemption	Lodging exemption	Fee-free Locations
Alabama	X	X			X	X
Alaska	100% local hire	30% base	80% transportation		(No tax)
Arizona	X	X			X
Arkansas	X		X
California	X	X			X	X	X
Colorado	X		X			X
Connecticut	X	X			X	X
Delaware					(No tax)
Florida	X		X		X
Georgia	X	X			X
Hawaii	X	X
Idaho	X		X		X	X
Illinois	X	X				X
Indiana	X	X				X
Iowa*	X	X				X	X
Kansas	X	X				X
Kentucky	X	X			X	X
Louisiana	X	X
Maine**	X		X		X	X	X
Maryland	X		X		X	X	X
Massachusetts	X	X			X
Michigan	X	X	X			X
Minnesota	X		X		X	X
Mississippi	X		X		X
Missouri	X	X
Montana	X	X			(No tax)	X
Nebraska						X
Nevada		(No tax)				X
New Hampshire		(No tax)			(No tax)
New Jersey	X	X			X	X
New Mexico	X	X			X	X
New York	X	X			X
North Carolina	X	X			X	X
North Dakota						X
Ohio	X	X				X
Oklahoma	X		X		X
Oregon	X		X		(No tax)	X
Pennsylvania	X	X				X	X
Rhode Island	X	X
South Carolina	X		X		X	X	X
South Dakota	X	(No tax)	X		X	X
Tennessee	X	X		X	X	X
Texas	X	(No tax)	X	X	X	X
Utah	X	X	X		X	X
Vermont					X	X
Virginia	X			X	X	X
Washington	X	(No tax)	X		X	X
West Virginia	X	X			X	X	X
Wisconsin	X	X			X
Wyoming	X	(No tax)	X			X
District of Columbia	X			X
Puerto Rico	X	X			X	X
Total states	44	28	17	3	28	33	6

 *As of November 24, 2009, Iowa has suspended new registration for incentives pending a criminal investigation into the handling of past film tax credits.
 **Maine's wage rebate is effectively a cash rebate and is considered as such in this table.

Arguments

Pros

Proponents of production incentives for the film industry point to increases in job creation, small business and infrastructure development, the generation of tax revenue, and increased tourism as positive byproducts of the incentives.^[13] Supporters also maintain that MPIs are a net benefit to the states because they attract productions that would have gone elsewhere.

The immediate effect of a tax incentive is the direct production spend for the region in hotel rooms for visiting cast and crew, lumber for sets, food for catering, fuel for trucks and generators, to the secondary expenditures of crew members who go to local restaurants for dinner, the dry cleaners for their laundry, and the need for everyday sundry items from toothpaste to shampoo. These expenses average in the millions of dollars on a typical Studio feature which usually carries approximately a 100 traveling crew members and employs another 100 crew locally.^[14]

Second, if the area did not previously have an existing infrastructure, the production provides hands-on training for local employees to learn the stock in trade of film making and helps to develop the experienced crew base that will make the area more valuable in reducing the number of crew a production will need to import the next time around.^[15]

Finally, as we have seen with Lost, Breaking Bad, The Lord of the Rings, and even Field of Dreams, film tourism has become a significant multiplier of the initial investment by the region in providing increased tourism marketing opportunities at a fraction of the media buy necessary through taking advantage of the extensive marketing efforts by a studio.^[16][17]

In Louisiana, for instance, after the production incentive bill was passed in 2005, the industry grew from supporting 5,437 jobs and having $7.5 million in output in 2003 to supporting 18,882 jobs and producing $343.8 million in output in 2005.^[13] Similarly, according to comptroller Thomas DiNapoli, New York has seen a $7 billion influx into the state's economy between 2004, when the incentives were instituted, and 2008. During that same period, the number of motion picture, video production, and post-production jobs also rose by 14.2%.^[18]

Cons

Those who oppose movie production incentives offer arguments that refute those made by supporters of the programs.

• Movie production incentives do not necessarily result in the creation of jobs. Rather, the economic impact is that of a transfer of jobs from one location or state to another.^[5] Additionally, unless the state in question has a consistent stream of productions, the project-based nature of the film and television industry generates short-term jobs that eventually leave specialized laborers out of work.^[5][19]
• States have a tendency to use vague language and refer to successes in other states when advocating in support of production incentives. Critics maintain that information is selected to present positive results, and that states rely too heavily on perceived successes in other states without adequately considering how available resources within the state will impact their respective economies.^[5]
• States often incorrectly use economic measurements, such as a multiplier or an increase in different types of tax revenue, to promote film tax credits. When comparing multipliers across different projects, movie production incentive multipliers tend to be smaller than those for other investment projects (e.g. nuclear power plant, hotels). Revenue from alternate taxes not covered under tax credit policies do not always cover the original cost of the given film tax incentives.^[5]
• Grants require films to pass sensitivity tests^[5] in order to ensure a state is seen in a positive light, which may lead to censorship issues.^[20]
• Politicians focus on immediate, short-term projects because it is politically easier to change these incentive policies. However, a focus on improving baseline tax policies to incentivize long-term private investment in industry would lead to higher levels of job creation, productivity and economic development.^[5]

Critics propose that unilateral or multilateral moratoriums^[21] and federal intervention be used to solve these economic inefficiencies.^[5] For example, in a 2009 article, entertainment attorney Schuyler M. Moore proposed a federal tax credit combined with complete federal preemption of all state-level tax credits in order to halt the states' race into insolvency.^[22]

State-by-state cost–benefit analysis

Some states have attempted to evaluate the economic impact of their movie production incentives to establish whether the benefits outweigh the costs.

Connecticut

In 2008, the Connecticut Department of Economic and Community Development released a report on the economic impacts of the state's film production tax incentive program.^[23] The report concludes the tax incentive program has a "modest" impact on the state's economy, returning $1.07 of real gross state product (RSGP) for every dollar spent (or tax revenue dollar foregone). The report also finds that the program in FY2007 stimulated $55.1 million in film production spending, generated $20.72 million in new RGSP, and created 395 full-time equivalent (FTE) jobs.^[23]

An analyst at the Federal Reserve Bank of Boston reached a different conclusion when reviewing the tax incentive program in 2009, finding that the program does not pay for itself and that the economic benefits are short-lived and easily lost if the program is discontinued.^[24]

In the face of 2011 budget shortfalls, Connecticut state legislators are considering ending the tax incentive program to balance the budget.^[25]

Massachusetts

In January 2011, the Massachusetts Department of Revenue released its third annual report detailing the impact of the state's film tax incentive program, specifically focusing on the productions and tax credits of 2009.^[12]

The report's key findings for 2009 showed:

• 86 productions generated $82.4 million in state tax credits.
• The film tax incentive program generated $10.4 million in new tax revenue, partially offsetting the cost of the tax credits.
• Productions spent $310 million in new spending attributable to the tax credit program.
• Accounting for production spending going to in-state people and businesses versus out-of-state people and businesses, the film tax credit program resulted in $32.6 million in new spending for the Massachusetts economy.
• The film tax incentive program generated additional Massachusetts state GDP of $168.5 million and personal income of $25.2 million.
• The cost to the state for the jobs created by the film tax credit program was $324,838/FTE job.

At a 2011 legislative hearing on the film tax credit program, policy analysts from Massachusetts think tanks criticized the film tax incentive program.^[26] Critics have also complained that much of the tax credit money goes to cover the pay of celebrity actors.^[27] Debate within state government over the value of the tax credits in the face of budget shortfalls led Governor Deval Patrick to attempt to cap the tax credit in 2010. Although this effort was not successful, some point to it as a reason for a decline in film productions in Massachusetts in recent years.^[28]

Michigan

A September 2010 report by the Michigan Senate Fiscal Agency detailed the economics underlying the state's incentive programs.^[29] In particular it found that:

• Michigan spent $37.5 million in FY2008-09 to generate $21.1 in private sector spending, and would go on to spend $100.0 million in FY2009-10 to generate $59.5 million.
• 2008 productions created 216 direct, full-time-equated (FTE) jobs, or 937.3 FTEs if indirect effects (via multipliers) are taken into account. The jobs came at an average cost of $186.519 and $42,991, respectively. Similarly, in 2009, 355.5 direct FTEs were created at an average cost of $193,333 or, again if indirect effects are considered, 1,542.3 FTEs were created at a cost of $44,561.
• Taken together, the report concludes that the net revenue impact on the state was a cost of $30.8 million in FY2008-09, $91.4 million in FY2009-10, $111.8 million in FY 2010–11, and likely to continue to increase over time.

Rhode Island

Supporters of the film tax credit in Rhode Island are urging state officials to maintain the program, pointing to a study showing the program created more than 4,000 jobs in the state between 2006–2009.^[30] Critics of the program say the ubiquity of incentives in most states have diminished Rhode Island's competitive advantage and that the funds would be better spent elsewhere.^[30]

References

1. "IBISWORLD US Television Production Market Research Report". IBIS World.
2. "IBISWorld US Movie & Video Production in the US". IBIS World.
3. "Canada Film Capital Tax Credit Overview". Canada Film Capital. Retrieved 20 March 2011.
4. "US Runaway Film and Television Production Study Report" (PDF). The Monitor Group. 1999. Archived from the original (PDF) on December 6, 2008. Retrieved 20 March 2011.
5. Luther, William (January 2010), "Movie Production Incentives: Blockbuster Support for Lackluster Policy", Special Report, Tax Foundation (173): 4–20
6. http://blogs.theadvocate.com/specialreports/2014/12/02/giving-away-louisiana-film-tax-incentives/
7. http://www.pewtrusts.org/en/research-and-analysis/blogs/stateline/2012/12/14/tax-breaks-for-sale-transferable-tax-credits-explained
8. http://massbudget.org/report_window.php?loc=The%20Massachusetts%20Film%20Tax%20Credit.html
9. http://www.huffingtonpost.com/2015/05/18/states-film-tax-credits_n_7306342.html
10. http://www.syracuse.com/news/index.ssf/2013/03/ny_keeps_public_in_dark_as_fil.html
11. http://www.wsj.com/articles/group-backed-by-koch-brothers-takes-aim-at-tax-credits-for-films-1458934367
12. "A Report on the Massachusetts Film Industry Tax Incentives" (PDF). Massachusetts Department of Revenue. 2011. Retrieved 8 August 2013.
13. "Alabama Entertainment Industry Incentive Act of 2008 HB356 (Companion Bill SB404)" (PDF). Retrieved 6 March 2011.
14. David, Mari-Ela (December 6, 2010), Hawaii's Film Industry Seeing Record Numbers
15. An Unexpected Bright Spot For Unions, May 21, 2013
16. Cha, Francis (February 22, 2013), Hollywood: World's most dramatic travel agent?
17. Watt, Brian (October 24, 2014), 'Sideways': 10 years later, hit film still makes waves in Santa Ynez Valley economy
18. Szalai, Georg (13 October 2010). "N.Y. film tax credit is economic driver". The Hollywood Reporter. Retrieved 6 March 2011.
19. Grand, John (March 2006), "Motion Picture Tax Incentives: There's No Business Like Show Business", Special Report, Tax Analysts: 5
20. Propp, Wren (May 2003), State Council Keeps Movie Money Clean, Albuquerque Journal
21. Burstein, Melvin L.; Rolnick, Arthur J. (1994), "Congress Should End the Economic War Among the States", Annual Report, Federal Reserve Bank of Minneapolis (9): 3–19
22. Moore, Schuyler (29 May 2009). "Commentary: Could federal tax credit end economic war among states?". The Hollywood Reporter. Retrieved 31 March 2014.
23. "The Economic and Fiscal Impacts of Connecticut's Film Tax Credit" (PDF). Connecticut Department of Economic and Community Development. 2008. Retrieved 5 April 2011.
24. Weiner, Jennifer (2009). "Cost-benefit analysis of Connecticut's film tax credit" (PDF). Federal Reserve Bank of Boston. Retrieved 5 April 2011.
25. Hladky, Gregory (25 January 2011). "Time to End Connecticut's Film Tax Credits?". The Fairfield Weekly. Fairfield, CT.
26. Mohl, Bruce (5 April 2011). "Negative reviews for film tax credit". CommonWealth Magazine. Boston.
27. Leblanc, Steve (13 January 2011). "State tax credits help cover stars' pay". Associated Press. Boston.
28. Shea, Andrea (22 February 2011). "At Oscar Time We Ask: Is the Mass Movie 'Boom' Over?". WBUR. Boston.
29. Zin, David (September 2010). "Film Incentives in Michigan" (PDF).
30. Klepper, David (24 March 2011). "Filmmakers urge RI not to end film tax credit". The Associated Press. Providence.