Ernst & Young and The New Mexico Film Cash Incentive Myth

Ernst & Young and The New Mexico Film Cash Incentive Myth

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Ernst & Young and The New Mexico Film Cash Incentive Myth

Earlier this year, I tried to put the debate over whether film cash incentives “pay for themselves” to bed with a post that showed it’s impossible for any state with an incentive equal to or larger than California’s to come close to breaking even, much less generate more than the cost.  (If you have not read it, stop reading and click on the Film Incentives 101 post to see how film incentives actually work)

Today, I re-watched the New Mexico film incentive debate from last year and was struck by the firm belief among the film backers that their program generated much more revenue for New Mexico than it cost the state, which offers a 25% cash refund on all qualified spending:

Eric Witt, of the New Mexico Motion Picture Association (NMMPA), said the incentive makes money and that if the state eliminates or reduces the incentive, it will have “less money to spend” on things like childcare and schools. State Representative Brian Egolf repeated the same claims.  They also said total industry employment was roughly 12,000 people.  What?  What? What?  It does not make money for the state treasury and it does not employ 12,000 people.  Not even close.

Why would they believe this?  Because they trust a flawed report from Ernst & Young, which was paid for by the New Mexico Film Office.  How could that be biased? Sarcasm aside, the EY report has been discredited by the New Mexico Legislative Finance Committee and the Federal Reserve Bank of Boston, among others.  In plain English, however, I wanted to explain why the 2009 EY report for New Mexico should be frowned upon, if not burned or used for toilet paper.

The EY study used data from 2007, which showed $252.8 million in new production spending (because of the incentive), which resulted in cash refunds that cost the state $47.1 million (also because of the cash incentive).  According to the report, New Mexico made $1.50 for each $1 spent on the program.  If it sounds to good to be true, that’s because it is.

The EY report included the impacts from film spending, infrastructure construction and film tourism.  The inclusion of the infrastructure was fair for that year, because that was when Albuquerque Studios was built, but it was a one-time thing (and 85% of the infrastructure impact that year):

More People Have Tourism Jobs Because of Film than Those Who Actually Work in the Film Industry…Say What??

EY wants you to believe more people got jobs working in the tourism industry (2,839 jobs) because of film tourism than the number of people who actually work making the films themselves (2,220 jobs).  Now, if that’s not ridiculous enough, the actual tourism data EY dubiously relied on will shock even the most fanatical film backer clinging to the EY report.

The tourism survey was based on A.) 2,018 people who stopped at a New Mexico Visitor Information Center (VIC) in November 2008 and filled out a general survey that had tourism questions attached and; B.) 3,116 people who responded (over 40,000 did not respond) to an email survey in order to get a free 2009 Travel Guide, also in November 2008.   In short, this was not a scientific survey by any stretch of the imagination:

  And there you have it.  Most people said the films had “no influence” on their decision to visit New Mexico, almost all of them said they did not extend their stay to visit a film location, most said they would not like to visit film locations and most said they did not want information about how they could visit the locations, even if they wanted to.  To read the entire tourism survey, click the following: NM film tourism survey.

Also lacking is any recognition that the most influential work calculating the impact of film tourism shows certain key ingredients are required.  The film must be a major commercial success, the film must shoot in the place it is set and there is almost always an iconic location involved.  Hence, “Field of Dreams” is often cited, as it was a huge hit, shot on-location in Iowa and featured an iconic location (the magical baseball field where dead players still play the game with Kevin Costner).

The movies mentioned in the New Mexico tourism survey (like “Wild Hogs” or “No Country for Old Men”) do not meet these qualifications.  In fact, few meet any and none meet all.  One of the films mentioned in the survey was “Indiana Jones and the Kingdom of the Crystal Skull”.  Really?  Only the opening few minutes of the film is in New Mexico, and involves the hated scene featuring Indy surviving an atomic bomb detonation by taking cover in a refrigerator.  Hardcore fans of the franchise felt raped by the movie, and especially by that scene.  If anything, it will keep them away from New Mexico, not induce them to visit.

Worth noting, Ernst & Young changed its tune when it comes to film tourism.  In its recent reportabout what should be included in economic impact studies, EY said:

The effect on visitation is most easily measured in locations where the release of a film is the only major event influencing visitation   For example, in the case of the cornfield in Iowa that was home to Field of Dreams,  visitation before the film was released was zero but increased to 65,000 in the years after its release. It is not difficult to determine that these visitors can be easily attributed to the film….

Films that have a material impact on tourism were all successful at the box office and  prominently featured locations suitable for tourism. While film tax credit programs cannot predict which films will be successful at the box office, the credit programs can maximize
their impact on state tourism by providing financial support to films that feature destinations that are potentially attractive to tourists….A film that prominently features a state’s tourism assets but is not widely viewed will have a limited tourism impact. Likewise, a film that is a commercial success but portrays locations in a state as being in another jurisdiction would not generate positive tourism impacts. For this reason, not every production can be assumed to have this level of economic and fiscal impact from tourism…

So, EY is now saying that film tourism cannot be predicted, it can only be quantified and measured after the fact.  In its 2009 New Mexico report, however, EY assumed “100%” of all films produced under the New Mexico credit in 2007 would generate film tourism, which directly contradicts its recent report, which says “not every production can be assumed to have this level of impact”.  What level of impact?  The same level as a film like “Field of Dreams” or “Lord of the Rings”.  Guess what?  NONE of the films that shot in New Mexico in 2007 comes close to satisfying these requirements and, even if they did, EY’s recent report says any impact can only be studied after the fact.

Also worth noting is that film backer Eric Witt would later become executive director of the Motion Picture Association of New Mexico and, under his leadership, the official position of that group regarding film tourism was/is:

While we assume that some level of tourism is generated through the advertising, mechanisms for accurately assessing a rise in tourism remain unreliable. We support minimizing the impact of tourism in economic studies.

That EY would choose to include this ridiculous “research” is, sadly, not surprising.  In another report, they also claimed vastly overstated tourism impacts for North Carolina because of some google searches for “Nights in Rodanthe”.  Frankly, this type of “methodology” should be grounds enough to dismiss any of their film reports outright.  Without a doubt, it can be eliminated from the EY report for New Mexico.

What EY decided to include and report in its 2009 New Mexico report is disgraceful.  The authors and those who stand by it should be ashamed of themselves and condemned for their dishonesty.

Stripping Out Film Tourism, One-Time Studio Construction & Local Taxes:

Tourism and infrastructure accounted for 5,389 of the 9,209 total jobs reported in the EY New Mexico report and half of the total alleged tax revenue.  Clearly, even according to what Ernst & Young’s latest report said, film tourism in the 2009 report must be disregarded (and spit upon).   And since 85% of the impact for the infrastructure came from the one-time construction of the movie studio in Albuquerque, we can eliminate 85% of that impact as well.

Thus, had the same level of production spending occurred the next year (2008) studied by the EY report (which looked at 2007), the cost would have been the same ($47.1 million) and the state and local revenue (using the EY methodology) would be just $32.2 million, meaning a budget shortfall of $14.9 million.  The alleged “profit” quickly becomes a loss.  It’s also not fair to include local tax revenue in the analysis.  After all, almost all of the production activity is concentrated around Albuquerque, if not in the studio itself.  Further, local taxes do not fund the state treasury that pays for the film cash credit.  Only state taxes pay for the state program.  And New Mexico state taxes alone, according to the EY study, were just $22.6 million from the direct and indirect impacts from production spending.

That increases the shortfall for the state taxpayers to $24.5 million, just for that one year. Wow.  So now it is really losing money.  It can’t be any worse, right?  Wrong.

What About Leakages?:

EY assumed almost all of the compensation paid to above-the-line talent from other states (directors, producers, writers, actors etc.), in addition to imported below-the-line crew whose wages are not eligible for the credit, would benefit New Mexico rather than where they actually live (somewhere else) and spend their wage (also somewhere else).  To do this, they lumped the huge salaries paid to major actors and directors from places like California with wages paid to average New Mexico crew members.

What does this mean?  It means the economic impact and collection of taxes generated by the 2,200 direct production jobs in the EY report was overstated by 40%, assuming all of the out-of-state workers spent their pay where they live.  In short, knock another $4-$6 million off of the revenue.  In 2010, for the record, 80% of the $22 million on wages went to NON-resident actors and performers.

Where does that leave us?  Cost: $47.1 million; Return: under $20 million.  In the best case scenario, according to the Federal Reserve Study, New Mexico got back just 39-cents for each $1 invested.  A loss of 61%.  Finally, none of the reports, including the Federal Reserve study, accounted for obvious leakages.  What the hell are those?

Purchases and rentals imported from out of the state will qualify for New Mexico’s incentive, but must be obtained by a New Mexico entity which re-rents it to the production with a slight surcharge.  What does that mean?  Let’s say the movie needs a prop army tank from a vendor in California who wants $10,000 for the shoot.  A New Mexico entity, often one set up by a local crew member, will rent it from California and then re-rent it to the movie for $11,000 (just an example amount).  When the film wraps, the movie will get a cash refund of $2,750 (25% of the rental cost).  On paper, it looks like New Mexico benefited from $11,000 spent “in New Mexico”, but the reality is $10,000 of it actually went directly to California.

How much such leakage occurs is unknown, since the audits of the production spends are not available for public review.  Given that almost all of the military props, star trailers and picture cars used in “Terminator Salvation”, “The Avengers”, “Thor” and “Indiana Jones 4″ came from California vendors (read the credits people), I would say the leakages are significant.  But unlike Ernst & Young, which assumed 25% of all New Mexico tourism was from films shot in the state, I am not going to give an irresponsible estimate.  It could be less than 1% or it could be more.  But it is there, however small or large.

I wish I could tell New Mexico otherwise, but the film cash incentive costs the State Treasury much more than it returns in new revenue.  That’s not opinion or speculation, it’s just a matter of fact.

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