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Time To Say No To Hollywood Tax Subsidies


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If you’ve been following California’s budget news lately, you’re probably aware that the state achieved a sort of budget surplus this year. I say ‘sort of’ because while it’s true that state revenues came in modestly higher than expenditures, the gap doesn’t come close to covering our underfunded public pensions, leftover debt from the last few years of deficits, and deferred maintenance on decaying infrastructure. And don’t forget that this year’s revenue bounce was due to a temporary tax hike and a hot stock market.

Still, this hasn’t stopped state legislators from contemplating an increase in Hollywood’s tax credit program. Currently, California gives $100 million in tax credits for various qualified film and television productions (http://www.film.ca.gov/incentives.htm), but the industry has been lobbying for more for a number of years. And, now, the Milken Institute agrees. They recently released a study that paints a bleak picture of the future of film production in the state unless the incentives to film here are substantially increased and broadened (A Hollywood Exit: What California Must Do to Remain Competitive in Entertainment –and Keep Jobs).

Yet for all the dire warnings, direct threats, and ostensibly worrisome statistics, even a small scratch at the surface of the argument behind increasing this 9-digit boondoggle shows how empty the arguments are and how these subsidies waste taxpayer funds.

Among the grim statistics produced by the authors of the Milken report, their main point boils down to the fact that between 2004 and 2012, California lost 16,000 jobs in the film industry, while our chief competitor in the space (and leading subsidizer of the industry) New York, gained slightly over 10,000. The Milken researchers chose 2004 as their point of reference because this is when the state of New York first ushered in their film tax credit program. They thereby assume that the credits are the reason for the shift.

But correlation does not equal causation, and when digging a bit deeper, that interpretation quickly starts to unravel. First—2004 was not a typical years for California movie production employment. This is an industry that normally sees sharp increases and decreases in employment, for reasons far beyond local incentives. California saw production employment leap by 18,000 from 2003 to 2004 and just as quickly shed them after. To immediately assume that the New York tax credit is the cause of this is a large leap of faith.

Indeed, if you take a longer view, say by looking at the share of total industry employment in each state over a longer period of time, the tax credit story starts to fall apart. The following charts show those very trends by tracking the share of movie production employment as a share of the national total over the last two decades. It’s clear that California has lost a portion of its film industry dominance over the past two decades to other locales in the United States. In the 1990s around 45% of the industry called California home; today it’s roughly 40%. But the state is still dominant.

 

More significantly, looking at the trends, it is clear that most of this loss in market share occurred prior to the establishment of New York’s film credit program, not after. Indeed California’s share has remained more or less stead since 2002. Equivalently, since then Governor Arnold Schwarzenegger enacted California’s film credit program in 2009, little has changed.

As for New York itself, for all the millions of dollars poured into subsidizing the film industry, they have only recovered the share of industry jobs they had prior to the 1990s, roughly 16% of overall industry employment nationally. And while New York’s initial tax incentive program was put into place in 2004, it became very lucrative for the industry in 2008 when the program was ramped up to its current $420 million in available credits. Since then, for the past 6 years, New York’s share of industry employment has grown only modestly—roughly at the same pace as when the incentives were considerably smaller (see the economic impact analyis cited below for a history of the New York program). Again—the timing of the changes don’t match the increases in incentives, undermining the claims that this was an important factor in those changes.

But even if we accept the premise that tax credits can explain the gains in employment in New York (we don’t), nowhere does the Milken report bother to include a cost-benefit analysis of these incentives—is the money truly worth it? The cost benefit analysis done on New York’s program by the Motion Picture Association of America (Economic and Fiscal Impacts of the New York State Film Production Tax Credit) talks about the billions of dollars spent in the state on various movie and television productions. But this is not an appropriate metric because the industry was already well established in the state and was doing a lot of production there long before the idea of tax credits was even suggested. To be accurate, an analysis must consider the marginal impact of the credits—production that would not have occurred without the credit program.

The state government in New York has dished out well over $2.5 billion in film industry tax incentives since their program began in 2004. And for that huge taxpayer payout, New York has ‘stolen’ a total of roughly 10,000 jobs from California using the Milken report’s stilted numbers. Do the math! New York has paid $250,000 for each new job.

But what about the multiplier effects? Motion picture production, like every other sector of the economy, has them. Some analyses have claimed the multiplier for the film industry is 10 to 12—which is a figure that would be tough to arrive at even with creative accounting. According to the RIMSII statistics from the U.S. Department of Commerce’s Bureau of Economic Analysis, the state level job multiplier for the industry is 2.5—higher than many industries, but not that much higher. And of course these multiplier jobs tend to be lower paying.

Using the very best case scenario, New York is paying $100,000 per job for positions that pay on average $60,000 per year. More than likely the returns are much lower than this. The state of New York would probably be financially better off paying a large group of people $80,000 a year to do nothing. And, again, all this only works if we accept that the job shifts are due entirely to the tax incentives—a fact that is not clear from the research.

Additionally, the Milken analysis neglects to include the other side of the equation—that the money being used to subsidize the film industry in New York must come at the expense of higher taxes or reduced public spending on other things such as roads, schools, or public safety. And that loss of spending also has multiplier effects.

So there is little evidence that the incentives actually can explain the changes in employment, and even if they could—clearly the costs far outweigh the benefits.

Of course there are other arguments for subsidies. One is that film production jobs are different because they can quickly move from place to place—and hence have to be subsidized. But then, so can many industries. I’d guess that it would be cheaper for my firm to pick up and move to another state than your typical film production company. All we would have to move are a few computers and some bright people. Governor Brown, where is my check to stay in the state?

If there is any specific industry that might be justifiably subsidized, it certainly wouldn’t be one that can leave quickly once the taxpayer subsidy is gone. It would be one that, once it calls a state home, sticks around for a while so that the state can make up for its initial investment. It should not be an industry that moves as soon as the cash stops flowing—as Maryland recently found out when the production company behind the popular Netflix show “House of Cards” sent the state a letter saying they would leave unless Maryland agreed to increase the millions of dollars in subsidies it already provides (Washington Post: House of Cards Threatens to Leave if Maryland Comes Up Short on Tax Credits). Indeed, the history of state subsidies for film and television production are rife with abuse, broken promises, and little in the way of jobs left behind once the public checks stop flowing.

So, Hollywood, the master storyteller, seems to have used its genius to create one of the greatest fictional stories in public policy—that they somehow deserve to be paid to work in your state. Throw in the glamour of sighting stars who work the sets and perhaps it’s obvious why these film credits manage to get such political traction so easily.

But realistically the idea that government at any level should subsidize any industry flies in the face of basic logic. If every industry had to be paid to stay someplace, there would be no revenue left for the things government is supposed to do—such as support public safety, build infrastructure or educate children. Study after study, in most any industry, has exposed industry subsidization as a net loser for everyone. Scratch away at the various arguments and they pretty quickly disappear, like a movie when the theater lights are turned up.

Ultimately, the only true counter argument the film industry has for being subsidized by California’s taxpayers is that some other state is using their taxpayer money to do it. And the answer to that argument is the same as the one my Mother gave me as a child when I used another child’s actions to justify my own. She would ask, “If your friend jumped off a bridge, would you?” No, I wouldn’t. And the State of California shouldn’t either.

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