Michael Hiltzik owes the Los Angeles County Economic Development Corporation (LAEDC) and Christine Cooper an apology.  In his recent column in the Los Angeles Times, Mr. Hiltzik goes on record against the California Film & Television Tax Credit Program and assaults the integrity and credibility of the LAEDC and researcher Dr. Cooper, who prepared the organization’s report on the credit.  Mr. Hiltzik’s chief objection to the report stems from who paid for it — the Motion Picture Association of America (MPAA).  Mr. Hiltzik claims that the MPAA’s involvement creates an inherent bias that undermines the study’s objectivity.  But, from Film Works’ perspective, the potential for bias isn’t evidence of it.  To know whether the report is objective or not, we have to look at the report on its merits.

Issue #1 – MPAA Involvement:

Given the variety of methods used to quantify the impact of film incentive programs, it has become a good idea to look at the parties sponsoring each report.  To be sure, any report paid for by the MPAA (or any potentially interested party) should be carefully scrutinized.  As Mr. Hiltzik points out, the MPAA may favor “more and better public subsidies”, but that fact can’t tell us whether film incentives work for the states that have them.  If the LAEDC report were as biased as Hiltzik claims, we could expect its authors to recommend an increase in the value of the California credit, from a 20% tax rebate to upwards of 30-40% and expanding the list of eligible expenditures to include above-the-line talent costs.  But the report does not do this.  Instead, the LAEDC study supports maintaining the California credit at current levels:

the California tax incentives are less generous than those offered in other states – in some cases, substantially less. With a deep talent base and skilled workers at all levels and stages of production, and a full range of supporting infrastructure and companies, California does not need to offer incentives above those (or even equal to those) offered by other states. Instead, smaller incentives that keep California “in the game” can be sufficient, as suggested by the response to the current program.

Issue #2 – Reliability of Findings:

As we pointed out in our recent analysis of the LAEDC report, the findings of the MPAA-sponsored study are consistent with the LAEDC’s years of earlier research on the impact of the entertainment industry and the issue of runaway production.  There’s no evidence that methodology was changed to accommodate the MPAA, and the report authors limit their discussion of things their projection models cannot capture.

For example, while the LAEDC report mentions that tourism in Southern California is related to the entertainment industry, it doesn’t attempt to quantify that impact, much less tie it to the state’s film incentive. Paid researchers from other states have not been so scrupulous.  For instance, an Ernst & Young report on the New Mexico film incentive,  included the impacts from film tourism in its economic impact analysis based on unreliable data, thereby grossly exaggerating the economic benefit of the credit.  Similarly, a report prepared for the State of Georgia includes film tourism in the economic impact analysis.  That report is also plagued by data inconsistencies and highly suspect revenue claims, and fails to disclose a detailed report methodology.  Both studies were sponsored by the MPAA as it turns out, but that’s not why they’re flawed.  Bias alone does not discredit these studies, but the  methods used in them certainly do.

Issue #3 – Cost/Benefit Analysis: 

Unlike other critics of the California film incentive (such as the Tax Foundation, which denies runaway production even exists) Mr. Hiltzik admits that “runaway production is a big problem for California” and says the cause is film incentives in other states and nations.  This is 100 percent accurate. Mr. Hiltzik also acknowledges these film incentives have been used as weapons costing California “thousands of jobs”, cutting “deeply into our status as the worldwide capital of filmed entertainment.”  Mr. Hiltzik even characterizes out-of-work Californian film workers as “victims” and expresses genuine sympathy for their plight.

So what can be done about it, then?  We already know “Film Works” in L.A. like it does nowhere else — because we have the workforce and infrastructure here to support it.  As it turns out, film incentives — the very weapons being used to devastate California –  can also be a remarkably effective defense.  Were it not for the state-incentivized feature films — which contributed 26% of the total feature production days — 2010 would have been the worst year on record for features in Los Angeles.  The presence of incentivized projects not only stopped the decline in local feature production, it is helping reverse it.  Not coincidentally, the City of Santa Clarita enacted its own complimentary incentive to retain production.  As a result, 2010 was its best year on record.

Not all local, state and national film incentives are created equal.  Some are more carefully crafted than others.  Perhaps one of the reasons the California film incentive works so well is that it seeks to target productions most vulnerable to poaching by other states and foreign countries.  Productions such as talk shows, music videos, sporting events, and reality (unscripted) television series are not eligible for the incentive.  The argument that these would film in California regardless may be more applicable.  But that argument can’t be applied to feature films, which are very transient and increasingly filmed outside California.  According to the California Film Commission, sixty-five percent of the projects that qualified for the California incentive were feature films.  Thus, a majority of the incentive funds have been used to support the production the state is most likely to lose.  No incentive program is perfect, but California’s is far from being “obviously flawed,” as Mr. Hiltzik claims.

Issue #4 – Looking to the Future:

Can the California Film & Television Tax Credit be improved?  Mr. Hiltzik believes it could by better targeting at-risk productions.  He slams the LAEDC for failing to address ways California could better stem runaway production:

The LAEDC, which was created by the county in 1981 as an economic development arm and has since turned itself into a kind of economic think tank, could have made itself useful by addressing these questions. It doesn’t, plainly because its patrons at the MPAA wouldn’t want to hear the answers.

For years, the LAEDC has been researching the use of film incentives as weapons used to decimate California’s film and television industry and, since California passed its own incentive in 2009, as a means to protect it.  This was long before the MPAA commissioned them to write the new report.  Like it or not, the incentives game is economic warfare.  Mr. Hiltzik may not want to admit it, but the LAEDC had already “made itself useful” with its past research and, in the report, did so again by offering the following recommendation to improve the current incentive program without increasing the cost by a single penny:

The current tax credit program is limited to productions with budgets under $75 million. This is a policy which encourages larger budget productions to seek locations where tax incentives are not constrained by budget.

Larger productions, however, have commensurately larger impacts. If the program instead were to allow credits to a certain limit to be applied to productions of any size, this may encourage some productions to stay in California. The state would collect tax revenues on all activity associated with the production but would be liable only for tax credits up to the specified limit.

If this change were adopted, then the California Film & Television Tax Credit would finally target the highest-value feature projects most at risk of leaving the state.  Moreover, under the LAEDC’s suggestion, the effective rate for the California film incentive would be less than 10% of qualified costs, making the program more cost-effective for the state than it already is.   The cynical Mr. Hiltzik might view this suggestion as pandering to the MPAA companies.  However, as the LAEDC report notes, the real beneficiaries of the proposed change are California film workers and taxpayers:

. . . for a production budget of $175 million, if a 20 percent tax credit were allocated on qualifying expenditures up to $75 million, the state will pay $15 million in tax credits but state and local governments will receive $26.7 million in tax revenue. In other words, $1.78 in taxes would be generated for each dollar of tax credit allocated. Note that this is almost 80 percent higher than the tax recovery ratio estimated for the approved projects under the current tax incentive program.

In the end, it’s a shame most research on film incentive impacts isn’t as reliable as that of the LAEDC.  That some researchers have resorted to questionable methods to evaluate other states’ programs casts doubt on the results of any subsequent study.  Had the LAEDC’s report been commissioned by the state or another uninterested third-party, instead of the MPAA, it’s doubtful it would have received Mr. Hiltzik’s immediate dismissal.

Film Works, like many others working to protect California’s signature industry, hopes policymakers will see through the rhetoric to the merits of the LAEDC report.  As Mr. Hiltzik’s slanted take illustrates, there’s nothing to be gained from an immediate rush to judgment.