From Zach Patton at Governing

The Value of Movie Tax Incentives
States spend billions on incentives to lure film productions away from Hollywood. Some say it's gone too far.

by Governing's Zach Patton, June 2010


In the 2009 movie Whip It, 17-year-old misfit Bliss Cavender longs to escape the beauty pageants and big hair of her tiny hometown of Bodeen, Texas, by joining an underground roller-derby league in Austin. In the film--actress Drew Barrymore's directorial debut--Bliss stares wistfully across the desolate Texas plains while killing time during her waitressing shift at the Oink Joint, the local barbecue dive that sports a giant pink pig on the roof and a sign touting its signature menu item, the "Squealer."

It's quintessential small-town Texas. Only it's not. It's southeast Michigan. Whip It was filmed almost entirely in and around Detroit. And Ypsilanti, a town near Ann Arbor, stood in for the fictional Bodeen. The Oink Joint was actually Ken's Diner, a shuttered restaurant in the little town of Birch Run, north of Flint. (Thanks to the increased local notoriety, Ken's has since been reopened and rechristened the Oink Joint. The giant pink pig, however, remains in storage.)

If you're wondering why a movie seeking to capture the flavor of Austin and its environs would set up shop in Michigan, it helps to know that for the past two years, the state has been home to the nation's most generous film incentives. Thanks to an aggressive tax-credit plan created by Gov. Jennifer Granholm in 2008, productions that shoot in Michigan can be reimbursed by the state for as much as 42 percent of their expenses.

That was enough to lure Whip It, which originally planned to shoot entirely in the Lone Star State. During filming, the movie's screenwriter told an Austin newspaper that the Michigan deal was just too good to pass up. "For a year, it was going to be Texas, and if it hadn't been for money, it would have been Texas all the way."

The influx of showbiz cash is welcomed by many in Michigan. In a state that's lost nearly a million jobs since 2000 and still suffers the nation's highest unemployment rate, attracting business revenue and creating new jobs--even the temporary, short-term positions associated with movie productions--is seen as a bright spot for the economy. But it's not quite that simple.

Michigan's movie-money measure has drawn all sorts of big-budget Hollywood productions, including Clint Eastwood's Gran Torino in 2008 and 2009's Up in the Air, starring George Clooney. This summer, the state will play backdrop for films starring Hugh Jackman, Pierce Brosnan and Jennifer Connelly, as well as the next installment of the Scream franchise. In the two years since the incentives became available, 89 movies and TV shows have been shot in Michigan. The state's film office says more than 4,000 jobs were created for Michigan crews in 2009, and another 4,000 were created for actors, including extras and day players. In 2007, before the tax credit was offered, film expenditures in the state were $2 million. That rose to $125 million in 2008 and to more than $223 million in 2009. Eastwood proclaimed that the state "will be the new film capital of the world."

Michigan may offer the sweetest deal to moviemakers, but the reality is that almost every state has some incentives designed to attract Hollywood productions. What was unique just a few years ago has quickly become standard. Back in 2002, only five states offered production incentives for film projects. But as of the beginning of this year, more than 40 states do. Arizona, Connecticut, Illinois and Louisiana, for instance, offer 30 percent tax credits or rebates, while Alabama, Maryland and North Carolina offer 25 percent--and on down the line. In fact, these types of incentives have become so de rigeur that even California has felt obliged to get in on the act. Lawmakers last year approved a 25 percent credit for films shot in the Golden State.

All totaled, states distributed $1.8 billion in incentives and tax credits to the entertainment industry from 2006-2008, according to an Associated Press study. "States are trapped," says Robert Tannenwald, an economist and a senior fellow at the Center on Budget and Policy Priorities. "Thanks to the extreme mobility of film production, when one state goes after these movies, another state, if it wants to stay in the game, has to match the deal they're offering."

But as those subsidies have become more widespread and generous, some policymakers are beginning to reconsider the whole idea. In recent months, several states have contemplated reducing the incentives they offer--or eliminating them altogether. Facing unprecedented fiscal pressures, some lawmakers question whether handing out money to Hollywood is the best use of increasingly limited public funds. And there's intense disagreement about the actual economic windfall associated with landing a movie production in your state. After a decade of ever-expanding film incentives, some say it's time to end states' gold rush for the silver screen.

Even in Michigan, where the incentives have brought in such high-profile success stories, the enticements have come under fire from people who say they're unnecessarily generous. The fact is that Michigan still faces a massive $1.6 billion budget gap, and it's been in a fiscal downturn for a solid decade. The state slashed spending on corrections, education and human services. At the same time, it doled out tens of millions of dollars in tax credits--$48 million in 2008, $68 million in 2009 and an estimated $155 million in fiscal 2011. Lawmakers last year debated placing an annual $50 million cap on the incentives that could be paid out. Even Granholm entertained the idea, but remained an avid supporter of the program as it stood. But the film industry and tax-cut advocates rallied, and ultimately no caps were put in place.

State Rep. Pete Lund was one of the legislators fighting for the cap. Lund says he has "no problem" with the basic idea of making tax credits available to film productions, but Michigan's handout is too generous. "I don't think we should be paying their bills," he says. "Is it creating jobs in the state? Sure. What industry wouldn't be creating jobs if the state were paying 40 percent of their bills for them? But you have to wonder how many other jobs we could be creating if we focused on reducing the tax burden on the businesses that we already have."

Michigan's dire economy and generous film incentives make it an extreme case. But the debate that's happened there is being replayed in states across the country. Governors in Massachusetts, Connecticut, Rhode Island, Oklahoma and elsewhere have recently proposed capping or eliminating their tax credits as a way to plug budget holes. Last year in Wisconsin, Gov. Jim Doyle essentially gutted his state's 25-percent no-limit tax incentive, turning it into a $500,000 annual grant program after a state Commerce Department report showed the benefit provided almost no net income for the state.

Kansas recently suspended its incentives for two years to save money. Although the program was modest compared to others, with a $2 million annual limit on payouts, the lack of any incentives effectively takes Kansas out of the running for attracting any projects, says Peter Jasso, the director of the state's Film Commission. "Just the way the industry works now--you have to have some incentive [to offer] to even start the conversation."

Officials in Iowa have suspended their film-credit program until mid-2013, after an independent audit in 2009 uncovered sweeping problems regarding credit oversight. The state had offered the nation's biggest rebate on film costs, reimbursing 50 percent of in-state spending and touting "half-price" filmmaking. But the audit showed moviemakers had grossly overinflated their expenditure figures and received credits for nonqualifying expenses, such as luxury car purchases. The state fired the head of the film office; he and two other employees await criminal trials later this year. Louisiana was similarly rocked by scandal last year when the state's film commissioner was sentenced to two years in prison for accepting bribes to award inflated credits.

But not all states are scaling back. Alabama, New York, North Carolina, Ohio, Utah and California have created or boosted their film incentives in recent months. And even in Louisiana, despite the scandal, lawmakers actually increased the state's tax credit and made it permanent.

Still, film incentives are increasingly coming under fire. Part of the problem is data. It's hard to get a good handle on the exact impact of an in-state movie production. In most places, the only reports on movie-production revenue and jobs come from the state film office--or the movie industry itself. Objective studies are relatively hard to come by. And even where independent studies of film incentives do exist, the data can easily be interpreted in myriad ways.

Take Massachusetts, which has offered a 25 percent film incentive since 2006 and already has attracted numerous big-name projects and stars, including Tom Cruise, Cameron Diaz, Leonardo DiCaprio and Mel Gibson. The Bay State is one of only a couple that require an annual, independent report on how the incentives are performing. When the most recent report was released by the Department of Revenue in July 2009, tax-incentive opponents said it unequivocally showed the credits weren't working. According to the report, the state paid out $113 million in movie tax credits in 2008, while filming in the state generated $17.5 million in new tax revenue and created about 1,100 full-time-equivalent jobs for state residents.

"That's roughly $89,000 spent by the state creating each new job," says state Rep. Steve D'Amico. "In terms of cost-to-benefit, it's clearly not justified." D'Amico sponsored a bill this year--ultimately unsuccessfully--to reinstate a $7-million-per-film cap that had been lifted in 2007. "Our funds are too scarce for us to be wasting money on economic development that has so little impact."

Looking at the same state study, though, film advocates saw Massachusetts' incentives program as an unqualified success. "We're gratified by the outcome," says Nick Paleologos, a one-time legislator who now heads the state's Film Office. The incentives were never meant to pay for themselves with new tax revenue, he says. Instead, they were intended to bring new spending to the state. Paleologos points to the $452 million spent by movie productions in Massachusetts in 2008. That's evidence, he says, that "the tax credit is working and doing what it was intended to do."

And that figure still doesn't capture the full impact of these productions, he says. For one thing, there's the "multiplier effect"--the money spent by film crews on hotels and food and other services keeps cycling through the local economy again and again. Added to that is the even less quantifiable--but no less important--boost in overall interest in the state. "When Sandra Bullock goes on TV and talks about how great it was to film in Rockport, Mass., it's like having a national celebrity tourism endorser for free." Discounting these kinds of secondary ripple effects misses the big picture, he says. "We may argue about how to count these dollars. But they're real."

Getting good data isn't the only problem. "These film credits have another shoe to drop," says Tannenwald of the Center on Budget and Policy Priorities. He's referring to the fact that in most states, the incentives paid to movie studios are transferrable. That means a film producer can sell unused credits on a secondary market. As a result, the credits could wind up benefiting people who have nothing to do with movies or entertainment. Worse, Tannenwald says, reselling the credits means they may be redeemed years down the line.

In Massachusetts, for example, credits awarded by the state in 2006 might not be redeemed until 2011 or 2012. And the number of the credits being resold is enormous: Of the $166 million in credits given out by Massachusetts from fiscal 2006 through fiscal 2008, $149 million were resold on a secondary market, according to Tannenwald. "It complicates budgeting and forecasting. It's a serious cost to policymakers and to the public in terms of uncertainty." So even if Massachusetts suspended its incentives today, it could still be paying out credits for years to come.

The worry, D'Amico says, is that states' one-upmanship may have created an irreversible system of incentive handouts. Offering these kinds of broad tax incentives to film companies isn't creating a permanent new industry in Massachusetts; it's merely setting the state up to pay an ongoing subsidy it can't easily get out of. Thanks to the constant competition from other states, he says, "these jobs will only persist as long as we continue to offer the credit. It's not as though we're creating jobs. We're renting them. But once you start handing out money, it's really hard to step away."

Despite those concerns and the uncertain economic benefits of film incentives, they remain extremely popular with the public. And that could prove to be one of the biggest obstacles to critics who want to do away with the tax credits. Even in the midst of Iowa's high-profile criminal investigation into its film program, a poll of state residents showed 61 percent still thought the credits were a good idea. In-state movie productions generate buzz, and visits from marquee-worthy celebs can engender no small amount of local pride. That can drown out a lot of talk about job creation and secondary credit markets. "It's hard for people to be rational about this industry," D'Amico says. "Everybody dreams they'll someday be in the movies. Everybody wants to see a celebrity walk down the street."

by Zach Patton


Zach Patton is a GOVERNING staff writer. He writes about a range of topics, including education, social policy issues, and urban planning and design. Patton is also the editor of GOVERNING's Management e-newsletter.