Legislative “Analysis” of CA Film Incentive Relies on Hunch…

Legislative “Analysis” of CA Film Incentive Relies on Hunch…

from: Stop-Runaway-Production.com

Legislative “Analysis” of CA Film Incentive Relies on Hunch to Attack Program

California lawmakers should ask themselves a basic question: is the film & TV industry a vital industry the state wants to protect and preserve?  If the answer is yes, the only available means of defense is the California Film & Television Tax Credit.

As the California legislature considers extending the state’s film incentive, film backers were dealt a setback with the release of a 8-page letter from the state’s Legislative Analyst Office (LAO) that, in the words of Los Angeles Times, “has thrown cold water on claims about the credit’s return to taxpayers.”  The LAO was asked by a Senate Committee to evaluate the LAEDC report and the UCLA study on the California film incentive.  Both reports showed a positive return.  For each $1 spent on the program, the LAEDC said the ROI was $1.13 and UCLA said it was $1.04.

In their letter, the LAO cite five issues that “could” affect the results of the two studies:

  • Unknown assumptions embedded in the LAEDC economic models and their failure to consider the benefits of alternative public or private uses of tax credit funds (which could result in the credit program having significantly less net benefit than shown in the studies).
  • In-state film activity that would occur in California without any tax credit (which results in the credit program having less economic and tax net benefits than shown in the LAEDC study).
  • In-state economic and employment activity resulting from out-of-state productions (which results in the credit program having less net benefit than shown in the studies).
  • Crowding out effects (which result in the credit program having less net benefit than shown in the studies in at least some years).
  • Effects of film-related tourism (which would likely not result in significant changes in net benefits in most years).

Based on the issues above, the LAO said the net benefit is “likely much less” than reported.  Translation:  it’s “likely” the LAO doesn’t know what they are talking about.  Indeed, the LAO admits the effects of these five issues are “impossible to quantify”:

While the total effects of these issues are impossible to quantify, their combined effects are likely to be negative in any given fiscal year.

If the effects are impossible to quantify, how does the LAO know anything is likely or not??  The LAO did not offer a study that used a methodology of its own to prove a lower return, they just said “nuh uh.”  Worse yet, the LAO said they spent only a “brief time reviewing” the two reports and they did not bother to contact the authors of either one.  Thus, even on basic due diligence, the LAO failed.  No wonder Sacramento is broken.

In the legislative analysis prepared for the bill seeking to extend the film incentive in last year’s session, the authors cited the seminal anti-film incentive report from the Center for Budget & Policy Priorities authored by Robert Tannenwald to support the arguments against the incentive.  The analysts in Sacramento don’t bother to contact the authors of the various reports, but I do.

I sent the LAEDC study to Robert Tannenwald last year.  Unlike the LAO, Tannenwald has specific expertise regarding film incentives.  After careful review, Tannenwald gave the LAEDC methodology high marks and conceded “California has a larger payoff” than other states.  Unlike the LAO, Tannenwald was unwilling to express with certainty whether the program “pays for itself”:

I have to acknowledge, overall, that film retention in California has a larger payoff than film acquisition by another state. Just not sure the tax credit pays for itself.

Overall, except for the absence of a balanced budget analysis, not a bad study.

Since Tannenwald is “not sure” on ROI, he has the integrity and objectivity to avoid making conclusions based on hunches and speculation like the LAO.   I also took issue with how the LAO cherry picked lines from the UCLA report to attack the LAEDC findings.  Specifically, the LAO highlights every single passage in the UCLA report that suggests the LAEDC may have overstated impact and cherry picks a line (which they emphasize in bold) that makes it sound like UCLA was accusing the LAEDC of lying:

Assumption That All Productions Without a Credit Would Leave “Is Not True.” The UCLA-IRLE study concludes that “while many producers are swayed by the enticement of a tax credit in their production location decision making, the [LAEDC report’s] assumption that all productions that do not receive a credit will leave the state and only productions that do receive a credit will stay, is not true.”

Conveniently left out of the LAO’s letter is any mention of the multiple occasions where the UCLA report suggests the LAEDC was being conservative and actually understated the number of jobs created by more than 300.  As for the “not true” line the LAO seized on, the UCLA report actually confirmed that “ALL” big budget films left the state after not getting the credit and that 91.2% of all applicants “flee absent an incentive”:

While all of the productions that stayed and filmed in California despite not receiving the tax credits were independent productions, all of the bigger budget productions that were made left the state after being put on the waiting list….

91.6% of the tax credit applicants are estimated to flee absent an incentive.

devastating rebuttal letter from Dr. Christine Cooper, a co-author of the LAEDC study, responded to each of the five issues raised by the LAO.  In my opinion, the two standouts from Cooper’s rebuttal (which should be read it its entirety) addressed the the alleged benefit even for films that leave and the preposterous “crowding out” situation:

Fourth, you suggest the possibility that productions receiving tax credits are competing with other (non-qualifying) productions for talent, services or other inputs and thus causing so-called “crowding out” effects that occur when a production encouraged by the credit program to remain in California uses available staff and industry infrastructure that then are not available for use by other productions. These “crowding out” effects, you say: “could defer, reduce, or eliminate altogether the opportunity for those other productions to film here in California.” Though theoretically sound, this is unconvincing on a real-world, real-time and practical level. With approximately two million Californians still out of work, almost 25 percent of them located here in Los Angeles County alone, you will be hard pressed to find that competition for resources is a reason for production shortfalls. In addition to numerous physical production facilities which we know are not overburdened with activity, the Los Angeles region provides an almost limitless supply of “on location” filming options. Consequently, your suspicion “that in some years the crowding out effect would be close to zero” would likely be much closer to reality.

Fifth, it may be technically accurate to claim that when a production is done outside California, some economic activity continues to be generated here. But this economic activity would be short-lived going forward and negligible – at best – when one considers what’s at-stake should we continue to lose increasingly more of California’s deep-rooted film and television production industry to other regions… Yes, a number of other states are not so fortunate and may have to import services from California (and many states are pursuing the development of their own industries by offering credits for infrastructure building in order to hasten the development of local supply and obviate importation), but as these states’ industries grow, any reliance on California talent or services will wane, not increase. Hence, each production that is lured away by competing tax credits is a seed that will land and germinate elsewhere, thereby reducing – not augmenting – the net economic benefits generated here.

The California film incentive and (to a lesser extent) New York’s incentive are the only two state film incentives that I am forced to support.  The US film industry is such a global powerhouse because of the unrivaled concentration of talent in these two places.  Unlike other state incentives, California and New York are using them to protect native industries rather than destroy them in some other place.  The film incentives in California & New York are not a matter of want, they are a matter of need.

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