Push for state film credits from Congress

In July 2014, 28 members of Congress sent a letter to members of the California legislature urging them to pass legislation (AB 1839) to extend California's film credits that expire in 2015. The letter notes some dismal data for the California film and television industry, including:

• 52% of production jobs are in California whereas ten years ago, it was 65%.
• In 1997, 16 of the 25 films with the largest receipts were filmed in California while in 2013, only 2 of the top 25 were filmed in California.

A few observations:

• The federal tax law includes a production incentives (IRC Section 181) that expired 12/31/13. Do the members who wrote the letter support extension or permanence of the federal incentive? After all, California is not just competing with other states for production work, but also with other countries. [Additional information on this incentive from the California Film Commission - here.]
• The California Legislative Analyst's Office (LAO) (and others) question the value of film credits. A report from the LAO issued in April 2014 raises many issues including (5/7/14 LAO blog):

1. "Film and television production in California could decline anyway.
2. Responding to other jurisdictions’ subsidies could be very expensive.
3. Interstate and international competition could stoke a “race to the bottom.”
4. For state government, the film tax credit does not “pay for itself.”
5. Subsidizing one industry sets an awkward precedent.
6. It will be difficult to evaluate the effectiveness of the film tax credit."

• The Tax Foundation has also questioned the value of film credits.  Several states have also issued reports reaching similar conclusions.
• Should members of Congress be urging state lawmakers to do something, particularly something that lowers tax revenues (yes, perhaps revenues increase from the film work, but is it enough (see the LAO report) and what is the harm to other industries that, in effect, are subsidizing another industry?).  Of course, "urging" is not as strong as what Congress is saying to state and local governments about their tax base decisions in other ways. The House passed H.R. 3086 (7/16/14) to make the Internet Tax Freedom Act permanent (it expires 11/1/14). This rule prohibits state and local governments from imposing taxes on Internet access fees.
• What about analyzing the film credit against principles of good tax policy? Certainly, it violates the neutrality principle by affecting decision-making about where to shoot a film. It violates economic efficiency be lowering taxes in one industry which in effect raises them in other industries. And, what about the "race to the bottom" argument of the states competing against each other in how much they can provide to the industry?

What do you think?  What might work better to keep film production in the U.S. and in any particular state?

More woes for state film credits

Yesterday's Wall Street Journal (9/23/11) had an entertaining article, "Snooki to Snookered: States' Film Tax Credits Produce Embarrassment" by Eric Felten, points out some of the many problems with state film credits. The article starts off noting that Governor Christie of New Jersey is concerned that his state's film credit is subsidizing Jersey Short that is rife with stereotypes that have offended some residents. According to the article, the governor has threatened to revoke the show's $420,000 subsidy from the state.

There's more including some states being concerned that their credits are producing films unlikely to be Academy Award winners with some featuring cannibals and others cold-blood killers. Per the article: "even the most casual perusal of the productions being funded by state governments finds a preponderance of low-budget gore fests."

For more, see my 3/21/11 post - here.

I think these film credits highlight the fight states are in with each other for any kind of business activity and their willingness to lower the tax bill to be business friendly. The film credits show how this gets out of hand as the subsidies are quite large and the type of activity engaged in might not lead to long-term jobs. That is, the film is made and the company and crew leave. It's not quite as good as getting a manufacturing plant or R&D facility that is likely to stay for a longer time period. Of course, some film credits might lead to creation or growth of film companies in the state, but not always.

The credits violate principles of simplicity, neutrality, equity and transparency too.

What do you think?

Massachussetts Analyzes Its Film Credits

Like many states, Massachusetts offers tax incentives for film production activities in the state. The Massachusetts Department of Revenue issued a required report this month analyzing the costs of the credit and its economic effect on the state.

The film incentives "are composed of a tax credit equal to 25% of a film’s production and payroll costs and sales tax exemptions for film productions." And, it is refundable! If the credit exceeds the producer's Massachusetts tax liability, 90% of the remaining credit is refunded. Credits can also be transferred or sold to other taxpayers. Non-wage spending does not have to be from Massachusetts vendors, but can be from out-of-state provided the items purchased are used in Massachusetts. The report notes that the state does not get as much economic benefit when producers purchase supplies and other items from out-of-state vendors.

Another assumption made to determine the economic impact to the state is that "non-resident wages and salaries generate little additional economic activity in the Commonwealth. As is the case in most other studies, we assume that none of the (above-the-line) wages of those earning $1 million or over is spent in Massachusetts because virtually all their local expenses, including lodging, food, entertainment, and miscellaneous expenses, are typically covered in the production budgets. There is greater uncertainty about what portion of other non-resident wages and salaries ... is spent locally. However, because lodging is provided and meals are catered or otherwise covered by per diems for these non-resident employees, we assume that only 5% of wage and salary payments to non-residents earning less than $1 million per production (which includes a portion of above-the-line employees who are paid high salaries) is spent in the Commonwealth."

The report also notes that for 2009, the roughly $82 billion of credits claimed (representing about $330 billion of spending) included about $11 billion of spending that likely would have occurred even without the credit. The report also notes:

"The largest category of new spending was wages and salaries, where $194.7 million in new spending was generated, with $42.3 million, or 22% paid to Massachusetts residents, and $152.3 million, or 78%, paid to non-residents. Of that amount, $82.0 million, or 42.0% of total new wage spending, was paid to non-resident actors earning over $1 million per production. "

Well, big surprise, that statement - that the state had issued a tax credit to help subsidize $82 million of salaries paid to non-resident actors who earn over $1 million per production, generated a lot of press coverage. For example, the Minneapolis-St.Paul Star Tribune published an article on January 12, 2011 - "A quarter of Massachusetts' film tax credits in 2009 helped cover the wages of Hollywood stars," by Steve LeBlanc of Associated Press. This article has more information about the credit, recent law changes and that many people still like the credit because it helps bring film production to the state that otherwise would not happen.

And worse yet of course is that these non-resident actors aren't going to spend much of their salary in Massachusetts. The report notes though (page 21) that it likely received about $4 million of state income taxes on these actor's salaries.

It will be interesting to see if the report and bad press it got nationally will lead to lawmakers changing the credit or even eliminating it. The credit is an example of how state competition leads states to do things that might not make a lot of sense. Does every state need to subsidize film production? (Click here for a list from the Screen Actors Guild.) Even California - home of Hollywood, offers such credits. Isn't there any other industry (not already given tax credits) that states want to subsidize? Could funds be used to improve infrastructure to make the state more business friendly? Can subsidies be used to help in-state businesses grow?

And can the credit be modified to better encourage the film production companies to spend in the state? Why not only allow in-state spending to be included in the calculation? And, why refundable?

Tax policy considerations:

• Equity - a tax credit for one industry and not others is not equitable. Companies with similar income levels can pay drastically different tax amounts if some qualify for a tax credit not available to the others.
• Simplicity - any special rule that is only available to a subset of all taxpayers makes the tax law more complex because rules are needed to define the special category of taxpayers, expenses, etc.
• Neutrality - film credits are intended to affect decision-making - to encourage film companies to produce in a particular state.
• Economic growth and efficiency - this is what the Massachusetts film credit report was trying to analyze. It is not easy because another aspect of the affect of the credit on the state is what the state could have done with the money instead of subsidizing one industry. Also, is film production the type of industry the state most needs? Does it lead to long-term employment of residents?

The film credit doesn't do well when evaluated against principles of good tax policy.
What do you think?