Question: If Film Incentives in Places Outside California are Such a Bad Deal, Why Do Nearly 40 U.S. States Offer Them?

If you’ve been following the rhetoric about film incentives over the past few years, you may have noticed a shift in who’s taking the lead to promote them.

Whereas not that long ago, film commissioners and government types were the ones extolling the supposed virtues of these programs, these days it’s the programs’ direct beneficiaries who are coming forward to argue for their preservation.

This has all led to a great deal of confusion about the cost of film incentive programs versus their benefit.  The big problem is this: when discussing the “benefits” a state receives from enacting a film incentive program, casual observers tend to confuse benefits to the private economy (that is, dollars paid directly to film workers and production-servicing businesses), and benefits to the state government in the form of additional tax revenue.  Examples of this kind of confusion abound, but rather than explain how this confusion plays out, we found a short video on YouTube that offers an illustration.

The following video is a PSA made by New Mexico filmmakers to preserve the state’s 25% film tax credit when lawmakers contemplated dismantling it earlier this year.  At first blush, the film’s explanation of how film incentives work makes sense, and you might find it especially convincing if you happen to work in the New Mexico film and television industry:

While the video argues that film incentive benefits are simple math, it also presents a distorted view of how film incentive programs actually work.  There are essentially three major problems with the video’s portrayal of the film tax credit.

  • Problem 1: The video ignores the cost of the program to state taxpayers.  When filmmakers go to New Mexico and spend $1, the state reimburses them 25 cents in the form of a tax credit.  That means each dollar a filmmaker spends in NM actually costs state taxpayers 25 cents.  The video is correct in that each $1 in salary that is paid to an actor only costs the producer 75 cents because the state covers the difference, but the entity that pays to create the benefit (state government) and the entities that receive the benefit (participants in the state’s private economy) are different groups.
  • Problem 2: Revenue for the economy doesn’t equal revenue for the state.  This is probably the most common logic error supporters make when defending state incentive programs.  The video from New Mexico gives a false impression that the state’s incentive generates money for the state.  According to the father in the video, New Mexico gets 7 cents in tax revenue from each dollar spent on production.  But then he tells us it gets better, combining the 75 cents filmmakers spent in the state with the additional 7 cents in taxes they paid, for a return of 82 cents in all.  The truth is that New Mexico’s state coffers lose money offering incentives, because the yield in the form of new tax revenues is less in total than the payouts made from existing tax revenues.  Instead of an 82 cent gain per dollar spent, New Mexico state coffers actually take a hit of 18 cents for every dollar producers choose to spend in state.  This is real money not available for education and other vital state programs.
  •  Problem 3:  Everyone pays, but not everybody benefits.  The video gives the impression that all of the New Mexico taxpayers who help pay film producers 25 cents on the dollar benefit from having production in state.  This isn’t true in a state with such a small entertainment sector.  What the father in the video probably should have told his son is that just the roughly 3,000 people employed in film production in New Mexico benefit from production spending.  But some make the argument that those people participate in the wider New Mexico economy, creating more jobs through their own spending.  We don’t dispute this.  But even if you include all of the indirect jobs that benefit by the program, the number of New Mexicans who get a share of that dollar is only around 10,000.  That number equates to about one-half of 1 percent of New Mexico’s entire population.  So “New Mexico” doesn’t really get to keep 75 cents or 82 cents.  In fact, the State of New Mexico (the taxpayers) actually lose money.  The state government gets to cough up 18 cents, and most everyone gives up a little in government services so that 0.5 percent of their fellow state residents can collect a tiny sliver of each film production dollar.

Perhaps the worst problem with the video comes at the end.  New Mexico won’t “get nothing” if the state scraps its film incentive.  If the state were to scrap its film incentive program, New Mexico taxpayers would actually get to keep their 25 cent per dollar spent on film production to spend on vital public services.

Finally, as we have pointed out in the past, the problems with film incentives in other states does not apply to California.

 

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