Thursday, February 26, 2009

Governor is right-film industry tax credits are costly and ineffective

When Universal Pictures reached an agreement with the Wisconsin Department of Commerce to produce "Public Enemies," the Johnny Depp film about 1930s gangster John Dillinger, the film makers and their supporters were ecstatic. They projected the production would spend up to $20 million in the state while receiving tax breaks worth only $3.9 million. Quite a deal.

But when the "Public Enemies" production packed its bags last year, state taxpayers gave the movie company back almost every penny it had invested in Wisconsin.

The Wisconsin Department of Commerce reports that film makers spent only $5 million, 25% of the promised investment, but were paid $4.6 million in incentives, $700,000 more than projected.

$2.7 million was spent on the salaries of non-Wisconsin residents who worked on the film - almost twice what was paid in salaries to Wisconsin residents employed by the production.

At a time when tens of thousands of Wisconsin workers are losing their jobs and the state is struggling with a $5.7 billion deficit, taxpayers covered $450,000 of director Michael Mann's $1.8 million salary. They weren't on the hook for the stars' salaries only because they are not eligible for the tax credit program. But those who provide services including hair and makeup to the stars were included. And all of those working for Depp were brought in from out of state.

This program is a boondoggle. It creates few jobs, doesn't generate revenue and has a very small multiplier effect.

Governor Doyle who says the credits cost too much and don't create permanent jobs has proposed eliminating the program.

Wisconsin's budget is riddled with tax expenditures like this one that fail to deliver promised jobs and economic activity, but contribute to the state's $5.7 billion budget deficit.

Legislators should support Governor Doyle effort to eliminate this program.

Wisconsin's experience is not unique.

Forty states now offer to pay 25 percent to 40 percent of film production costs. Taxpayers around the country are reimbursing producers for everything from crewmember meals to movie-star salaries. But there is little evidence that such handouts are fiscally sound.

One of the best studies on film industry tax breaks comes from Louisiana's Legislative Fiscal Office. Louisiana experienced an explosion of film production after enacting a tax credit in 2002—from around $20 million a year to the present $350 million. But Louisiana recovered just 18 percent of $121 million in film credits awarded in 2006.

As for the jobs, the report projected that Louisiana's tax credit would generate, at most, around 3,000 jobs and said the economic impact outside the film industry was "likely to be modest." For every dollar of revenue lost to the tax credit, only 15 to 20 cents was recovered in associated business.

With its 25 percent subsidy on in-state production expenses, Massachusetts experienced significant leakage as much of the money it paid went for the salaries of out-of-state movie stars, who spent very little in Massachusetts. The Massachusetts Budget and Policy Center recently reported that the film subsidy rate is five times higher than what the state offers for developments in blighted areas.

Even more troubling, a report by the New Haven-based think tank Connecticut Voices for Children projects that Connecticut's tax credits would reduce the state's revenues by $118 million in fiscal year 2009.

Rhode Island, Michigan and Louisiana have all made moves to rein in overly generous subsidies, concluding they have not delivered all the promised jobs and revenues.

Competition between states to attract film companies generates a race to the bottom as states offer larger and larger incentives to lure film producers. The United States has become in the words of the Incentives Office, a consulting firm in Santa Monica, Calif., the New Bulgaria, a reference to what was once the film industry’s favorite low-cost production site. The movie houses make out like John Dellinger, but taxpayers are left holding the bag.

The Tax Foundation summed up the problems with subsidizing the film industry:

...many legislators see these tax give-aways as a way to attract business to the state, taking credit for creating new jobs but ignoring the tax policy implications. Tax breaks for any industry make the tax base smaller and the tax code less neutral...

Ultimately, the main beneficiaries are not taxpayers but lawmakers. Every incentive package ...allows lawmakers to make public announcements taking credit for "new jobs." Location-based incentives can therefore be thought of as a market transaction between lawmakers and film companies. Lawmakers purchase favorable media coverage for themselves, film companies accept payment for filming in economically unprofitable places, and taxpayers finance the deal. It's hard to see how that's good policy.

The glamour of movie-making may be hard for policymakers to resist, but they could better serve their constituents by simply watching a movie at the local movie theater and leaving Hollywood in California.


Vic said...

What is the old saying? We'll lose money but we will make it up in volume.

I believe that this is Ted Kanavas' main piece of legislation. He has rarely had a editorial that doesn't mention this law and his efforts to get it passed.

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