Ben Affleck, the actor portraying the DC Comics vigilante Batman once said, “If you think Hollywood is depressing and corrupt, politics is really depressing and corrupt – and fueled even more than Hollywood by money – if that’s possible.” The fantasy caped-crusader was possibly unaware of the incestuous relationship between the two or he might not have seen a sliver of daylight between them.
A little over two weeks ago, the Texas House debated its committee substitute for Senate Bill 1, the state budget. During that debate, State Rep. Matt Shaheen (R-Plano) proposed an amendment to defund the corporate handout known as the Texas Moving Image Industry Incentive Program. After an additional modification by Rep. Jeff Leach (R-Plano) directing those funds to the Healthy Texas Women’s program, the amendment passed and conservatives rejoiced.
Lost in the momentary celebration was the fact that the program still exists within statute. Two efforts to abolish these problematic handouts on a more permanent basis are working their way through each chamber, Senate Bill 99 by Sen. Bob Hall (R-Edgewood) and House Bill 779, again by Shaheen. The former was granted a hearing in mid-March where dozens of the program’s beneficiaries swarmed the committee meeting to defend their subsidies.
Extensive research has been conducted on the benefits of, and returns on, taxpayer dollars appropriated for the program; however, most of the public discourse centers on flawed, specially commissioned studies that vastly overstate its effectiveness. We’ll address some of the arguments surrounding these subsidies and what the full body of research truly suggests. Let’s go through some of these advocates’ reasoning after a quick recap of the program’s history.
How We Got Here
Though Texas has a long, rich history with the moving image industry dating back almost a century, the Film Industry Incentive Program was only just created as recently as 2005, with that legislature calling it “a grant program for production companies that produce filmed entertainments in Texas.” Texas’ 80th Legislature expanded the statute to include the entire moving image industry, including video games, and expanded it again in 2009 by redefining “underutilized and economically distressed areas,” removing the cap on maximum grant awards and lowering the qualified spending threshold.
From their inception until 2007, the incentives were allowed to be funded from gifts, grants, and other donations accepted by the Texas Film Commission. Subsequently, the 80th Legislature appropriated $22 million for the 2007-08 biennium from the General Fund. The legislature did so again during the next regular session but added another $40 million, bringing total to-date appropriations to $84 million and setting the trend for years to come, with peak annual spending hitting the $95 million mark in 2013.
Proliferation, Efficacy and Waste
Film incentives first took the national stage in the 1990s, when the high cost of doing business in California led production crews to Canada. Louisiana policymakers saw an opportunity to bring business to the state in exchange for tax breaks or credits in 1992, and by 2009 the idea had spread like wildfire to a whopping 44 states.
Source: Tax Foundation
According to a 2012 New York Times investigation, over $80 billion is spent annually by state and local governments on incentive programs. In 2010, states spent about $1.5 billion on film subsidies, an amount that could have paid for the salaries of 23,500 middle school teachers, 26,600 firefighters, and 22,800 patrol officers.
While state competition is a bedrock element of a federalist system and a way to devolve policy responsibilities, the proliferation of film incentive programs has created a horizontal tax interdependence between states, in effect leading to an arms race with taxpayers on the hook. Not only have the quantity of programs increased, but their magnitudes have grown in the form of larger and uncapped incentives. With the expansion, early adopters of subsidies lost their comparative advantage, and new adopters lost any advantage they might have had when new states came in to meet or exceed their incentives.
Some argue that generous subsidies will become unnecessary once the film and media industries create a foothold in the state, and become self-sustaining. This line of reasoning fails to account for external factors like the pressure on film producers to minimize costs in the face of skyrocketing pay for actors and new technologies by shopping for better incentives, and how film production is more geographically mobile due to worldwide communications infrastructure and computerized equipment.
There’s growing evidence that incentives encourage entrepreneurs to act haphazardly, as well. In Louisiana, economic research conducted there suggested that the state could support an additional 15 sound stages at the time of the study. Observers noticed that incentives prompted developers to overinvest in sound stages relative to other things. Seven developments that were underway planned to add 32 more sound stages to the state, resulting in the creation of 17 sound stages beyond what the state needed or was able to support.
Shortly after an audit of similar incentives, and following a collapse in tax revenue, Iowa Gov. Chet Culver announced the resignation of the sitting director of the Department of Economic Development and the following facts surrounding a scandal:
- Film credit funds were used to purchase a Mercedes and a Range Rover for producers to keep.
- Not a single film’s expenses were adequately documented. Only two of 18 even submitted receipts.
- Contracts were amended to increase credits after approval.
- Large payments were made to relatives of filmmakers with credit funds.
- Payments were made outside of Iowa, when only payments in Iowa were qualified.
“For Every Dollar ‘Invested’ We Get $5 of Economic Activity!”
The most common arrow in their quiver of untruths, proponents of subsidies often point to any number of specially commissioned studies (one in particular by the Texas Association of Business) which commonly refer to the “multiplier” effect of economic activity derived from not only the film and media incentives, but from any of their favorite government spending programs which happen to be debated that day. In short, the argument is that a dollar of spending generates additional demand within a region “circulating through other industries in the supply chain ranging from real estate and wholesale trade, to food services and health care.”
The first mistake here is perfectly illustrated by the Parable of the Broken Window, by French economist Frédéric Bastiat in 1850. Bastiat sought to show how opportunity costs and unintended consequences affect economic activity in ways that are unseen or ignored.
“[W]hen James Goodfellow hands over a hundred sous to a government official to receive no service for it or even to be subjected to inconveniences, it is as if he were to give his money to a thief. It serves no purpose to say that the official will spend these hundred sous for the great profit of our national industry; the more the thief can do with them, the more James Goodfellow could have done with them if he had not met on his way either the extralegal or the legal parasite.”
In the case of film incentives, this is the missing piece from most economic analyses. Advocates of the program commonly cite various economic studies to justify the use of taxpayer funds on film and media handouts on the basis of the multiplier effect. However, what you never hear about is the multiplier effect of taxpayers making their own judgments about how to spend their dollars. One could argue that given this oversight, multiplier effects in either circumstance (as spent by recipients of subsidies versus individual Texas taxpayers) are negating in nature. But even if this observation is overlooked or dismissed, many flaws still exist in the rhetoric surrounding the return on investment from media incentives.
During the hearing for SB 99, Senators Hall, Konni Burton (R-Colleyville), and Don Huffines (R-Dallas) correctly noted that any number of industries would jump at the chance to be before the legislature, in a similar capacity, asking for state support. Arguments for economic impact and multipliers are just as applicable to other sectors as it is for film, television, and video games. In fact, an analysis by the Tax Foundation found that film production has a lower multiplier effect (1.91) than many other regular industries such as a new hotel (1.92), automotive manufacturing (2.25), or a nuclear power plant (2.51).
The Incentives “Pay for Themselves”
Champions of film and other media incentives not only cling to the assertion that the economic activity created by them justifies their existence, but also to the idea that tax revenues from that activity more than offset the cost to the state and taxpayers. However, most lawmakers find only disappointment when confronted by one of any number of studies that show the opposite.
“Film [incentives] don’t pay for themselves, so states have to raise taxes or cut expenditures (to make up the difference. Those snuff out jobs as fast as [incentives] create them.” — Robert Tannenwald, retired Federal Reserve Bank of Boston economist, lecturer at Brandeis University and author of one of the studies on the impact of film incentives.
An independent and in-depth empirical study by the Massachusetts Department of Revenue in 2008 found that the state lost $88,000 in tax revenue for every job created by the Commonwealth’s film tax credit. In addition to generating only 69 cents of personal income for every dollar expended, they found that the state gained only 16 cents in tax revenue returned. Because nearly every state has some form of balanced budget requirement, this means that the remaining $0.84 had to be financed by higher taxes or cuts to other services. Independent studies of film subsidies in other states have found similar costs, ranging from $0.72 to $0.93 per dollar awarded.
Many generous estimates in tax revenue, boosts to economic activity, and even job creation, are pegged to the fallacy that recipient productions would not have taken place in the absence of the incentives, which is simultaneously highly unlikely and difficult to determine. Another failure of the contention that industry tax generation covers state costs lies in the fact that many companies are not required to pay sales and use tax for film production expenses.
“But The Jobs!”
Texas’ moving picture incentive grant program includes wages in its allowable expenses. Proponents use job creation rhetoric to further defend incentives, but what they fail to acknowledge is that a large portion of the jobs created by these projects are filled by out-of-state residents, especially the highest paying ones. As mentioned earlier, movie-making is an increasingly mobile enterprise, with most of the scarce talent like principal actors, directors, cinematographers and screen-writers being imported. These “top-personnel” non-residents enjoy the best jobs and receive the largest portions of income created by the production. In the Massachusetts study, researchers found that between 2006 and 2008 residents enjoyed only 16 percent of the compensation paid to employees of subsidized productions.
Furthermore, many of the remaining jobs created were temporary and part-time in nature. Often, state officials end up creating temporary positions for construction of sets, hair-dressing, catering, security, sanitation, and transportation services, and many of these weren’t so much created as they were shifted from one part of the state for one purpose, to a different part of the state for another. The Massachusetts report found that “most employees on the projects lasted from a few days to at most a few months.”
A study by Michael Thom, an assistant professor at the USC Price School of Public Policy found that incentives had no sustained impact on wage growth and little effect on employment. According to the data, the average annual percentage change in film production employment remained at or slightly above zero. The Florida Office of Economic and Demographic Research also discovered that the state’s incentives were temporary and included many out-of-state fly-ins. A story from U.S. News and World Report claims that in Michigan, one production may have tried to comply with their program requirements by putting the lead actor’s chauffer to work painting walls.
Underscoring these findings, a report by the Texas Comptroller of Public Accounts made the following observations in “An Analysis of Texas Economic Development Incentives”:
- The Moving Image Industry Incentive Program supports jobs and jobs may be created during each production, however there is no job creation measurement mechanism or jobs threshold tied to the incentive.
- Most jobs created in the Film/TV/Commercials sectors are either temporary, part-time (walk-on) roles, or leave the state upon project completion.
- Spending is on reimbursement for working capital, which has relatively less long-term economic benefit to the state than job creation or capital investment.
- Project benefits tend to be highly concentrated in certain regions (see below).
- Data on jobs created, FTE jobs, spending, grants, grantees, etc. from the implementation of the Moving Image Incentive is not standardized making analysis difficult.
- Cannot accurately determine jobs impact. The variables in the FTE Jobs calculation utilized by the TFC can vary. Notable variables include project budget and length of time.
- There is no cap on incentive amount per project.
Source: Texas Comptroller of Public Accounts
So, now what?
In another study conducted by Thom, entitled “Fade to Black? Exploring Policy Enactment and Termination Through the Rise and Fall of State Tax Incentives for the Motion Picture Industry,” he notes that program characteristics can increase or decrease the likelihood of termination. Citing related research, he observed, “Longer program duration typically means a higher degree of momentum via budget incorporation, stakeholder entrenchment, and greater program visibility, rendering policymakers less likely to seek and achieve termination regardless of circumstances.”
According to Thom’s research, rising unemployment is a key factor in enactment of these policies, and likewise, falling unemployment figures into increased rates of termination of those programs.
Rather than giving the film industry a break, Texas lawmakers should instead consider policies that put everyone on equal footing. Texas did not become a bastion of economic freedom and prosperity by repeating the mistakes of New York, California, or Louisiana. Instead, she became a place of vast opportunity because of a fierce independence and trust in the Texas model of competitive markets and low taxes.
Perhaps no greater summation of the issue came from Matthew Mitchell of the conservative Mercatus Center at George Mason University. In pointing out that states shouldn’t try to create industries where they haven’t grown up naturally, he remarked, “With enough incentives, you can grow oranges in Maine. Would it be wise to do so? No.”