In Russia, you can see it sucking from your house!

In Russia, you can see it sucking from your house!

from: Stop-Runaway-Production.com

A brand new audit and thorough economic impact analysis of the Alaska film incentive program made for some interesting reading this week.

Just to make it clear, the reading consisted of two separate reports: 1.  the Alaska Legislative Auditor’s report, much of which was an analysis of; 2. the economic analysis report prepared by Washington-based Northern Economics.

Some of highlights that jumped out at me included:

  •   A frank admission that “the program does not pay for itself”
  • 84% of all wages paid from 2008-2012 went to non-residents
  • 60% of all full-time equivalent (FTE) jobs created went to non-residents
  • 54% of all tax credits issued are directly attributable to wages paid to out-of-state residents
  • For every $1 Alaska paid out for a film credit, it got back roughly 8-cents

Despite all of this, the Legislative Auditor’s report claimed the “estimated benefits significantly exceed the costs.”  So, what the Hell is going on here?  How did they arrive at that conclusion?

First, the claim that the “benefits significantly exceed the costs” came from the Legislative Auditor, not the more objective Northern Economics analysis.  It seems clear that the Legislative Auditor is a much bigger cheerleader for the film incentive than the people in Washington at Northern Economics who conducted the economic impact analysis.  Indeed, the Northern Economics report was much more subdued than the Legislative Auditor.  Some would say its boring.  Objectivity tends to lack the zest of spin used by the Legislative Auditor.   So, did Northern Economics make the same sweeping conclusion that the benefits outweigh the cost?  No, they didn’t.  In a very narrow sense, sort of.  What Northern Economics actually said was confined to a very narrow definition of cost vs. benefit.  More on that in a bit.

First, let’s look at how the Legislative Auditor framed and summarized the findings in the Northern Economics analysis.  First, the Legislative Auditor explained the standard methodology used in economic impact reports, which include both the direct production spending AND all of the trickle down and ripple effects that film backers erroneously claim such reports are always missing.  Fact check: trickle down/indirect/multiplier effect are included in virtually ALL film incentive economic studies.

From the Legislative Auditor report:

To estimate the AFPTIP’s economic and fiscal effects, the consulting firm, Northern Economics (consultant), performed an impact analysis for the period July 2008 through February 2012…

The spending has three measurable effects: direct, indirect, and induced:

  • Direct effects are from the direct spending by film production companies on goods
    and services, and employee wages.
  • Indirect effects are from spending by local businesses on goods and services as a
    result of the film production direct spending.
  • Induced effects are from household spending of income earned by individuals as a
    result of the direct goods and services, and wage spending.

With that routine explanation out of the way, the Legislative Auditor transitioned from the realm of fact to the realm of fiction:

The AFPTIP’s estimated benefits significantly exceed the costs. In the consultant’s analysis, net economic impact is defined as the sum of the economic benefits of the program less the opportunity cost. The formula for this calculation is:

[total film production direct spending + the multiplier impact] – [forgone government spending11 due to credits issued + multiplier impact of forgone spending]

So what does this mean?  The Legislative Auditor is deftly redefining cost.  Most would consider the “cost” to be the price tag for the Alaska taxpayers who are paying to subsidize movies as a state budget item like roads or schools.  For the State of Alaska and its taxpayers, the film incentive cost the state over $23 million from 2008-2012 because new revenue generated by the production spending was only $1.3 million.  Put another way, for each $1 Alaska paid out on a film credit, it got back less than 7-cents.  The Legislative Auditor did not want to draw attention to that ridiculously massive loss on investment and decided to define cost another way.

The Legislative Auditor noted that the $23 million cost of the program was outweighed by the alleged “benefit” of a $58 economic impact in the private economy.  Very few benefit, everyone else pays.  But impact is impact, concentrated or not, and that $58 economic impact allows the Legislative Auditor to use this talking point:  “direct spending from AFPTIP approved productions has generated $2 in economic output for every $1 in Alaska Film Production Tax Credits (tax credit) issued”.  Spend $1, get $2.  Sounds great.  And while it’s technically true, its also totally misleading.

Using the same formula the Legislative Auditor used to get the $2 for $1 stat to determine the actual ROI for the taxpayers bearing the $23 million cost, you would get a more disturbing and honest talking point: For every $12 Alaska taxpayers spend on the film incentive, they get back just $1 in new tax revenue.  The $1 gets you $2 BS is destroyed by the honest $1 COST you $12 fact.  Worst 401k ever!

But it’s important to not the Legislative Auditor was misleading, not lying outright.  Let’s see how they were able to to that…

Northern Economic included an “opportunity cost” assessment in their analysis.  What is that?  Since Alaska issued just over $24 million in film tax credits, an opportunity cost assessment recognizes that the state would have spent the money on something else, like education or road construction.  And just as film production spending has a multiplier effect, so too do things like government spending on education.  So, because Alaska spent $24 million on the film incentive, the total economic impact was $58 million.  But Alaska spent the $24 million on something like education, Northern Economics claims the total economic impact would have been $37 million.  Bear in mind that economic impact is a benefit for the private economy, not state coffers.  Either way, this is a cost for the taxpayers.  And either way, there is also an economic impact in the private economy.

Since Alaska would have realized an economic impact of $37 million had it paid for something else, the $58 million economic impact from film production gets knocked down by that amount, leaving the “net economic impact” of $21 million:

As mentioned earlier, the “net economic impact” is not a benefit to the Alaska taxpayers or the state coffers.  Rather, the economic impact is a benefit a very narrow segment of the private economy, specifically the film industry in this case. The number of full-time jobs created for Alaska residents by the film incentive, i.e. the Alaskans who got the primary benefit of the state spending, was just 432 over four years.  Sadly, the biggest beneficiaries were out-of-state residents, who gobbled up 656 (over 60%) of the total FTE jobs created:

Even worse, of the $51.9 million productions spent on wages from 2008-2012, just $8.1 million went to Alaska residents and an obscene $43.7 million (84% of all wages) went to non-residents:

Most of the benefits (jobs and wages) went to people who are not Alaskans.  And because they don’t live in Alaska, they are also not the ones paying for the film incentive.  That bill belongs to the taxpayers in Alaska.  And about that bill, what did Northern Economics say how much it was for again?  Oh, right, $23 million.  For the State of Alaska and the taxpayers who keep the lights on, the actual COST was $23 million.  And for that COST, Northern Economics said the actual net economic benefit to a small sliver of the private economy in Alaska (the film industry) was $21 million.  Let’s recap:  COST=$23 million; “benefit” (to a few in the private economy)=$21 million.    Unless it’s snowing in Hell, the cost of $23 million literally outweighs the “benefit” of $21 million.

It’s arithmetic.  I know we are a politically polarized nation, but can we at least agree that 2+2=4 or that $23 million is more than $21 million?

One last note for Alaska:  stop subsidizing Ice Road Truckers and Deadliest Catch.  I assure you, they can’t runaway to Louisiana or anywhere else in the lower 48.

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