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September 27, 2017

Challenging the accepted wisdom: Are CA film tax credits a good use of public funds?

Jobs are good. Ask any politician. Who could be against jobs? You might as well be against apple pie.

More than likely, that is what Governor Jerry Brown was thinking when he signed the Film & Television Tax Credit Program 2.0 into law. As he said at the time, “This bill helps thousands of Californians, from stage hands and set designers to electricians and delivery drivers.” (excerpted from the Washington Post)

Embed from Getty Images
Gov. Brown signs AB 1839
granting tax credits to Film and Television Producers (9/18/14)
(Note: Getty images requires an ad be displayed in order to use the image. This is an exception to our non-commercial policy.)

The California the Film & Television Tax Credit Program was started back 2009 to stem the tide of runaway production. Places like Georgia, Louisiana, Canada and the UK were luring away productions with generous tax credits and other incentives. (see Jobs and Georgia on my mind). The California Tax Credit Program provided competitive incentives to companies that produced in California.

It appears the program was effective. FilmLA reports that the number of shoot days has increased 50% since 2010, and California Film Commission reports that every for $1M in tax credits there was $8M in direct spending.

Could there be a better use of our tax dollars? Possibly.

This past summer the LA Times published an op-ed piece by Steve Malanga called "When will states get smart and stop subsidizing movies?" (The op-ed was excerpted version of a longer piece published in City Magazine.) Malanga is the managing editor for City Journal*, In case it isn't obvious from the title, Malanga has a conservative, free-market bent. He's also no fan of Hollywood's political activism.

Putting aside his biases, Malanga makes several compelling claims that challenge the accepted wisdom that subsiding films is good for jobs. Here's a recounting of several of the points he makes in the City Magazine article:
  • Film jobs are temporary.
    Historically tax incentives are intended to boost development of businesses that produced permanent jobs. By contrast, film productions tend to produce temporary employment and rarely produce enduring assets to the economic infrastructure.
  • Film companies are mobile.
    A Film production can go to were the incentives are most generous. The mobility encourages bidding wars between states causing tax credit inflation. NFL owners have practiced a similar strategy to obtain public funding for new stadiums (ask San Diego).
  • The number of states offering incentives has grown. The benefits are short-lived.
    The cost of incentive-based competition has gone up. In 2002, 6 states offered incentives. In 2010, 44 states offered incentives. During that period total incentives increased an order of magnitude from $100M to $1.5B

    Malanga cited a recent example from Maryland. The producers of House of Cards threatened to move their production to another state if Maryland refused to provide more incentives. The Maryland legislature increased the incentives by $10M. The result: according to a Maryland legislative report, House of Cards and Veep have received $60.3 million of the $62.5 million credits.

    Similar cases were reported in Louisiana and Florida . Louisiana distributed $1.4B in filming incentives between 2008 and 2105. The Lousiana legislature the capped the program and, despite the prior investments, production dropped 90%. In Florida, an HBO series left when the tax credit program ended.
  • Most jobs go to out-of-state residents. Buying film jobs for residents is expensive.
    A Massachusetts report estimated the state spend over $125K in incentives for every film job that went to a Massachusetts resident. Michigan spend $37.5M in credits for 973 in-state jobs of which 216 were full-time film jobs. New Mexico reported that only 35% of key jobs went to residents.
We should point out the article does not reference source materials, so the reliability of the numbers could not be confirmed. However, if we take Malanga's claims at face value, they raise a challenging question: If most of the jobs are not going to residents of the states that offer the credits, where are those jobs going? California?

Consider this...
If tax credit in places like Louisana and Georgia are used to hire California residents, then, in effect, those tax are providing jobs for Californians. And, according to TurboTax, residents of California must pay tax on out-of-state earnings.**

If we take this reasoning a dubious step further, we can ironically claim that tax credits from places Like Louisiana, Michigan, or Georgia actually produce jobs for Californians. Of course those jobs require travel. However, if Malanga is correct that film jobs are inherently mobile, then the investment to keep California film jobs in California is fundamentally at odds with the nature of the business.

Perhaps we should give other states more credit for doing a lot to keep the California film industry vital and let them make the heavy investments.

* City Journal is a publication of the Manhattan Institute.
** Apparently, out-state-taxes paid on out-state-earnings are deductible. Don't take our word for it.

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