State Movie Subsidies Are a Flop

Movie studios are threatening to leave Georgia if the recently passed anti-abortion law goes into effect as planned on January 1, 2020. Alec Baldwin, Rosie O'Donnell, Sean Penn and others have pledged to boycott Georgia over the law, but their threats will likely prove hollow. Hollywood producers film wherever they find the right mix of subsidies and tax incentives.

The Peach State offers a sweet deal: refunds of 20% to 30% on production costs for anyone making films, TV episodes, music videos, commercials and videogames in the state.¹ While these incentives pad producers' bottom lines, they do little to benefit Georgians.

Originally, "movie" referred to actors, "people who move," disrupting neighborhoods as they moved around various locations to shoot films. It was a disparaging term. Movies and television were shot almost exclusively in Southern California studios. That changed in the 1990's, as high labor costs driven by inflexible union rules pushed many productions to search for greener pastures. Canada offered a host of filming locations that could readily pass as U.S. cities and towns, as well as a frequently favorable exchange rate. Studios lept at the chance to pay their film crews in cheap Canadian dollars.

Louisiana and New Mexico were the first to launch domestic film incentives in 2002, hoping to capture some of the business fleeing California for Canada. Today, nearly 40 states offer some form of rebate, credit or grant to the industry, costing billions for film incentives. The result is that movies disrupt state budgets with largely mythical claims of economic benefits and threats to leave

Even when they snag a big movie or TV show, however, states often don't see much overall economic benefit to justify the cost. Ostensibly profitable films often fail to earn much revenue over cost. Hollywood is notorious for creative accounting. Among the bookkeeping tricks is to manipulate paper profits away from states where filming took place. Movie makers pay little in state taxes, and states allow them to sell excess credits to corporations or individuals, who can use them at prices ranging from 82 to 93 cents on the dollar to reduce their own taxes.

Movies are increasingly dependent on tax incentives to lower production costs. Hacked emails of Sony's top executives in 2014 disclosed that they were borderline obsessed with identifying and capitalizing on "favorable tax incentives." It was one of Sony's top priorities as they vigorously lobbied states and foreign countries for the best deal, even donating to New York Gov. Andrew Cuomo's re-election campaign because "he has been a strong protector of the film incentive — even amid recent criticism of the program."

Projects that can't find the right mix of subsidies and incentives get canceled. Credits must to be transferable because, "on a unitary basis with other Sony group companies and combined we're in an overall loss position, there is no way to monetize the [California film] credits."²

States that studied their movie credit programs have all discovered dubious, consistently negative economics, even fraud.

Studies by state economic development authorities and film industry lobbyists routinely inflate investment and employment returns. For example, only 4,000 Floridians work in film and television production. Yet in 2015, the Florida Office of Film & Entertainment claimed that film incentives and sales tax credits created 675,000 jobs over 10 years — equivalent to one in fourteen working Floridians owing his job to the state's film incentives.³

Airfare and insurance are creditable though they contribute little to state economic activity. The best jobs invariably go to nonresidents flown in from New York or California. Locals usually get spotty, part-time, and relatively low-paying work as extras, stage-hands, hair dressers, security guards, carpenters, drivers, caterers, sanitation, and movers.⁴

State film bureaus sometimes employ their own creative accounting trying to prove the economic benefit of hosting productions. They multiply movie spending by a factor to report an assumed, unverifiable economic benefit. For 30 years Georgia has multiplied actual production spending by 3.57 so it could boast a $9.5 billion "economic impact" from $2.7 billion in direct film and TV spending⁵ drawn by nearly $400 million of tax credits.⁶ Economic models suggest using a 1.83 multiplier, but even that may be overstated. ⁷

Jobs generated by film credits are very expensive and most are low-wage. Alaska issued $56,517 in tax credits for each full-time equivalent job between 2008 and 2012, with 84 percent of wages paid to non-Alaska residents, and a 2.05 multiplier.⁸ Massachusetts reports spending over $100,000 in tax credits for each new job acknowledging that most jobs last mere days and few jobs last more than three months.⁹

Jobs on movie sets often only last a few days or weeks, yet state officials rarely note this when trumpeting the success of their film incentive programs. A Michigan study found that the average job film industry job in the state lasts only 23 days, reducing a purported 2,763 direct jobs to just 254 full-time equivalents.¹⁰ A background performer hired for one day counts as a "job created." Someone working on several film shoots for a day or two can be counted in the statistics multiple times.¹¹

Film is New York's largest corporate subsidy, costing the state $420 million a year, $6.5 billion over the last 15 years.¹² A study prepared by the Empire State Development agency claimed the program had created 85,835 jobs created in 2017-18.¹³ But the Bureau of Labor Statistics showed only 18,482 new film-related jobs over 14 years. The study counted every working assignment, no matter how short, as a state-funded job,¹⁴

Film credits are subject to fraud, but exposés and convictions are few and far between because states lack sufficient resources to audit claims for credits or prove that services were performed in-state. Filmmaker, Daniel Adams, was convicted in 2012 for inflating expenses on two low-budget films. In addition to prison, he was ordered to pay Massachusetts $4.4 million restitution for improper film credits.¹⁵

Iowa suspended its credit in 2009 amid allegations of improper oversight and abuse resulting in seven criminal convictions. It had issued $26 million in improper credits, out of $32 million total over two years. For example, credits had been used to purchase a Mercedes and a Land Rover for a producer's daughters that were not used on the film project, and credits were claimed for the full purchase price rather than the lease cost during the project. Despite widespread fraud, Iowa didn't claw back any credits sold to others.¹⁶

Louisiana curtailed its program in 2015 after spending more than $1.5 billion since 2002, amid fraud prosecutions for false invoice charges and transfers of money between bank accounts made to look like movie production expenditures.¹⁷ Other states should follow Louisiana's lead.

Contrary to myth, the "movies" do not bring prosperity through jobs and growth. States would be much better off viewing "movies" as flops and repealing wasteful subsidies for film incentives.

A federal court will soon decide the fate of Georgia's abortion law. Meanwhile, the Peach State's film, television and digital entertainment tax credit program is too sweet to pass up.

¹ OCGA §48-7-40.26. Tax credit for film, gaming, video, or digital production in Georgia.

² "Hacked Sony E-mails Show Executives Closely Tracking Film Incentives," State Tax Notes, 22 Dec 2014.

³ Jared Walczak, "Testimony on Film Tax Incentives before the Florida Senate Appropriations Committee on S.B. 1204, 21 Apr 2014," Tax Foundation, April 2015; Based on The Florida Office of Film and Entertainment annual reports available at FilmInFlorida.com, particularly the FY 2013-2014 reports at "Florida Office of Film and Entertainment Fiscal Year 2013-2014 Annual Report" showing 66,718 jobs created by the sales tax exemption (pg 9) plus 51,130 jobs created by financial incentives (pg 17), total 117,848 jobs created. The Tax Foundation is a vocal critic of film incentives, see "Tax Foundation: Film Tax Credits."

⁴ Robert Tannenwald, "State film subsidies: Not Much Bank for Too Many Bucks," Center on Budget and Policy Priorities, 17 Nov 2010.

⁵ April Hunt, "Claim on economic impact of Ga.'s film industry needs context," The Atlanta Journal-Constitution, 7 Aug 2015, C.1; "Georgia's film industry generates $9.5 billion economic impact in fiscal 2017," Atlanta Business Chronicle, 10 Jul 2017.

⁶ "Georgia Tax Expenditure Report for FY 2018," Fiscal Research Center of the Andrew Young School of Policy Studies at Georgia State University, December 2016, p. 23.

⁷ "Georgia’s movie miracle relies on special effects and spurious assumptions," Carolina Journal, 3 Aug 2018; "What is IMPLAN? IMPLAN is an economic impact assessment software system."

⁸ "Alaska Film Production Tax Incentive Program: Select Performance Issues," Department of Commerce, Community, and Economic Development, and Department of Revenue, Audit Control Number 08-30066-12, 8 Aug 2012, available at Tax Analysts, Doc 2012-21585.

⁹ "Report on the Impact of Massachusetts Film Industry Tax Incentives Through Calendar Year 2015," Massachusetts Department of Revenue, 23 Mar 2018, (for 2006 to 2015, one Massachusetts-resident job created for every $102,888 in film incentive).

¹⁰ David Zin, "Film Incentives in Michigan," Michigan Senate Fiscal Agency, September 2010, p. 29.

¹¹ Massachusetts found that the state spent more on credits than the industry actually spent in the state and the average new movie job cost nearly $119,000 in tax credits. Amy Pitter, "A Report on the Massachusetts Film Industry Tax Incentives," Massachusetts Department of Revenue, 21 Mar 2013).

¹² "Even After Amazon, Lawmakers Won't Touch NY's $6.5 Billion (And Counting) Film Subsidy Program," Gothamist (part of WNYC), 17 Apr 2019; "The long life of New York's film and TV tax credit," Times Union, 9 Apr 2019.

¹³ "Economic Impact of the Film Industry in New York State 2017 & 2018," Prepared for: Empire State Development by Camion Associates.

¹⁴ "Even After Amazon, Lawmakers Won't Touch NY's $6.5 Billion (And Counting) Film Subsidy Program," Gothamist (part of WNYC), 17 Apr 2019.

¹⁵ Daniel Adams was convicted in 2012 for illegally otaining $4.7 million in Massachusetts film credits, sentenced to two to three years in state prison (served 21 months), followed by 10 years of probation, and ordered to pay $4.4 million restitution. "Convicted filmmaker gets up to 3 years, told to repay state," Boston Globe, 11 May 2012; "Director Daniel Adams Launches $50 Million Film Fund After Serving Prison Time for Tax Fraud," The Wrap, 2 May 2016. Adams utilized tax credit financiers to advance money in return for tax credits in the future. " Director Indicted in $4.7M Film Tax Credit Scheme," Accounting Today, 15 Dec 2011.

¹⁶ "Seduction: The Disaster Story of Iowa’s Film Tax Credit," Iowa Fiscal Partnership, Policy Brief, 8 Oct 2009; Billy Hamilton, "Anatomy of a Muddle: The Iowa Film Tax Credit Scandal’s Long Fade-Out," State Tax Notes, 20 Aug 2012; "Filmmaker acquitted on fraud charge in tax credit scandal," USA Today, 11 May 2017; "Elgin Enters Guilty Plea in Film Office Criminal Case," Iowa Office of the Attorney General, 5 Aug 2011.

¹⁷ Tyler Bridges, "New study of Louisiana film tax credit program again finds expensive, 'significant hit' to budget," The Advocate," 10 Apr 2017; United States of America v. Hoffman (CA-5, 2018); Steve Spires, "Four things to know about film subsidy reform," Louisiana Budget Project, 28 Apr 2015.

A version of this article (without footnotes) was originally published in The Wall Street Journal on July 20, 2019, p. A15.