Do Film Incentives Make Money for State Governments?

Do Film Incentives Make Money for State Governments?

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Back in November, I had a very animated exchange with the good folks over at the SAGWatch site about the workings of film incentive programs and the cost vs. benefit debate.  I tried to explain how, almost without exception, film incentives do not generate more in state tax revenue than they cost the state.  Almost without exception, they are a net cost to the state.  Despite my best efforts, I was unable to convince some New York-based film industry workers.

I feel a post on the issue is long overdue.  To show how its mathematically impossible for film incentive programs to make more in tax revenue than they cost (or even come close to breaking even), I will use California as the case study.  Of all the major players in the film incentive war, California is in the best position to come close to breaking even and, in some cases, generate some additional revenue in excess of costs.  But, you may ask, if this is impossible….how can it be true in California?

The good folks at the Los Angeles Economic Development Corporation (LAEDC) helped explain the answer last year:

First, the economy of California is large and diversified, allowing households and businesses to obtain most of the goods and services they need within the state, meaning there is less leakage of purchases out of the state and the dollars circulate within the state.

Second, the motion picture and video industry itself is complex and comprehensive in California. Because the supply linkages are well-established, the industry can find all production facilities and requirements within the state, although lower costs elsewhere can impel the purchase of goods and services from outside of California.

Third, the California tax incentives are less generous than those offered in other states – in some cases, substantially less. With a deep talent base and skilled workers at all levels and stages of production, and a full range of supporting infrastructure and companies, California does not need to offer incentives above those (or even equal to those) offered by other states. Instead, smaller incentives that keep California “in the game” can be sufficient, as suggested by the response to the current program.

Fourth, California’s steeply progressive income tax gives the state the ability to recoup its tax credit quickly. Similarly, California’s high sales tax rate will generate more.

In short, because California’s has one of (if not the highest) tax burdens in the nation, it is in the best position to recoup on costs vs. a low tax burden state like Louisiana or Georgia etc.  And because California’s incentive is just 20% for the studio projects and 25% for the independents, it is also much lower than Georgia’s 30% or Louisiana’s 30-35% or even Massachusetts’ 25%.  How so?  Not only is the California credit lower, unlike every other state (with the exception of NY), California only covers the below-the-line costs.  In short, no money for the big names and big talent.  Below-the line costs typically represent 60% of total budget.  In other words, California offers just 20% to 60% of a typical project’s budget, whereas Massachusetts gives 25% to 100% of the budget.  This means the effective rate of California’s film incentive is roughly 12% of a typical project’s entire budget.

If anyone would be in a position to make more money in tax revenue than the film incentive cost the state taxpayers, it’s California hands down.  If they can’t do it, none of the others can.  It’s just that simple.

Not long ago, the LAEDC looked at what runaway production was costing California in terms of lost jobs, economic impact and state tax revenues.  To do this, they employed a very comprehensive economic impact analysis that covered everything including the kitchen sink (in short, all the trickle down effects like lumber, dry cleaning, hiring maids and buying lemonade from neighborhood kids was INCLUDED):

Direct workers are the people who work directly on the production in some capacity: in pre-production, shooting, or post-production. Direct workers thus include everyone “above-the- line” (directors, actors, writers, and producers) as well as everyone “below-the-line” (such as grips, makeup artists, camera operators, security, catering, and transportation personnel). The indirect workers are the people who owe their jobs to the purchases made by the firms and people working on the each production. This includes, for example, the employees of firms that supply vehicles (both for use in a shoot and for daily transportation), equipment rentals and building supplies, as well the employees at the many shops, restaurants and other businesses where the direct workers spend their wages.

For each production, we have reported the combined total earnings of the direct and indirect workers. The total earnings are more – often much more – than the budget total. This seeming contradiction is due to there being more indirect than direct workers. The production company only pays the wages of the direct workers. We have also reported the economic output or total business revenues generated by each production. Economic output is the increase in gross receipts realized by all firms as a result of direct and indirect economic activity associated with the initial production spending.

To be fair, the LAEDC did not include the following in their analysis:

For each of the productions we report the sum of the sales and income taxes generated for the state. The total taxes generated for the state, however, will certainly be much higher. Employed workers will pay state unemployment insurance and California disability insurance. The production and direct and indirect workers will pay state fuel taxes for vehicles used for filming and personal transportation. Profits earned by the numerous firms (from caterers and security firms to equipment rental firms and ad agencies) involved in making the commercial will be subject to state corporate taxes.

To be sure, this would add to the recouped revenue for California.  That said, the economic impact reports from even the most favorable reports film backers cite (the Ernst & Young report in Michigan, for example) that did include such impact showed it to be quite minimal.  Further, since the studios will pay corporate taxes on the revenues from films made outside California IN California (not the incentive state, where the production company llc registers zero profits), it’s California that benefits from this, not so much the others.

Nitty gritty time.  On a relatively modest $17 million budget movie, the economic impact for California is, according the LAEDC, as follows:

If this same $17 million film had qualified for the California film incentive at the 20% rate (applied to 60% of the below-the-line costs eligible for the incentive), the film would have been awarded $2,040,000 in tax credits.  As you can see from the tables above, the cost of the credit would exceed the benefit in new revenue to the state.  Now, assuming California applied the 20% incentive to the 100% of the budget, like every state sans NY, the cost would rise to $3.4 million.  Take this same $17 million film to Louisiana, the cost would exceed $5 million.  Given the lower tax burden and leakage problems, Louisiana is –at best–recovering 12-18 cents on the dollar.  That’s a massive loss and a crappy “investment” by any standard.

On a mid-size $32 million film, the economic impact for California is:

If this $32 million film had qualified for the California film incentive at the 20% rate (applied to 60% of the below-the-line costs eligible for the incentive), the film would have been awarded $3,840,000 in tax credits.  Thus, the bigger the film gets, the better the return seems to be for California.  Here, the film incentive would appear to make money and, worst case, break even.

Similarly, a $70 million film, according to the LAEDC, would generate $10.6 million in taxes and cost, following the formula stated above, $8.4 million in foregone revenue for film incentive tax credits.

However, the fact of the matter is this:  there are very few big budget films produced each year.  Independent films outnumber the majors by five to one each year and the budgets for indy films rarely cracks $15 or even $10 million.  Many are well under $5 million.  A look at the projects produced in Michigan’s once popular film incentive program confirms this point.  The smaller the project, the lower the return.  The lower the return, the greater the cost to the state.

Film backers confuse benefit to the private economy with benefit to the state government and taxpayers, who are the ones footing the bill.  Business revenue in the billions of dollars does not mean the state “is making money” on the film incentive program it pays for.  Even a huge economic impact in the private economy only benefits a very small fraction of a given state’s residents and, to be sure, it does not mean the state is coming close to recouping in its costs.  As I hope this post has shown, film incentives do not make more money than they cost even on the vast majority of projects in California (which has the high taxes for recouping, no leakages outside the state and the lowest effective credit on the market).  Marrisa Redanty of SAGWatch, suck on that.

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