Evaluating the effectiveness of state film tax credit programs - Issues that need to be considered
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Evaluating the
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effectiveness of
state film tax
credit programs
Issues that need to be consideredD
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mPrepared by
Andrew Phillips
Senior Manager
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Quantitative Economics and Statistics
Ernst & Young LLP
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Robert Cline
National Director
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State and Local Tax Policy Economics
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Quantitative Economics and Statisitics
Ernst & Young LLP
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William Fox
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William B. Stokely Distinguished Professor of Business
Center for Business and Economic Research
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College of Business Administration
University of Tennessee, Knoxville
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Commissioned by
Motion Picture Association of Americam
Contents
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1 Executive summary — Evaluating the effectiveness of state film
tax credit programs E.
4 Introduction
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5 The economic development rationale for film credits
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12 Case study of a credit program‘s impact
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15 Comparison of methodologies used in film credit studies
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18 Conclusion
19 Appendix A — Detailed case study of a typcial film production
DExecutive summary
Evaluating the effectiveness of state film tax
credit programs
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Film credits are currently in use in 37 states to attract production Evaluating film credits
activity and create a sustainable film industry over time. As state
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tax shortfalls have grown and budgets have been cut, legislators The following points should be kept in mind when evaluating film
have been forced to weigh expenditures on film credits with those credits from an economic development perspective:
on other types of economic development programs and general
state spending. This report examines the objectives of film credit
programs, explains the methodology that should be used in a
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• The key objective of film credits is to provide state residents with
increased employment and higher incomes in the film and related
industries and from statewide multiplier activity associated with
comprehensive evaluation of the effectiveness of state film credit
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production in these industries. The multiplier activity accounts for
programs and compares the methodologies from a number of
jobs and incomes earned from in-state suppliers to the industry
recent state studies of the effectiveness of film credits.
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and from the spending and respending of the additional earnings
This report describes the rationale for offering production of employees throughout the state economy.
incentives in terms of the broader economic development goals of
• The short-run goal of the credits is to attract specific films
a state. Film tax credit programs create both short-run and long-run
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and productions. Film companies employ in-state and out-of-
economic and fiscal benefits that extend beyond the production
state workers and purchase goods and services from in-state
activities that qualify for the credit. These benefits include
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and out-of-state suppliers. For states without an established
increased tourism, development of film industry infrastructure,
movie production base, initial film productions may have a
such as studios and service providers, and attraction of production
large component of payments to non-residents and out-of-state
activities not eligible for the credit. A comprehensive benefit-cost
suppliers. As the industry develops over time, a greater share of
analysis of film credits should compare tax credit costs to both
movie spending will accrue to residents and in-state suppliers,
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private sector benefits (additional in-state jobs and income) and
which supports the long-run goal of creating jobs and incomes
public sector benefits (higher state and local taxes from a stronger
for a state’s residents.
economy), not just the net change in state tax collections.
Evaluating the effectiveness of state film tax credit programs• From a budget impact perspective, state legislators and • The economic impact analysis should include the increased direct
policymakers may be concerned about short-run impacts of economic activity from film productions, indirect economic activity
film tax credits on state budgets, asking film credits to “pay of in-state suppliers and additional in-state consumer spending
for themselves.” This goal is usually described as requiring triggered by the direct and indirect economic activity.
additional state taxes from film-related economic activity to
• Film credits may also generate economic activities beyond the
exceed the tax credit costs. This short-run budget perspective
productions qualifying for credits. These ancillary activities include
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may conflict with the longer-run economic development
increased tourism and industry infrastructure investment (such as
objectives for film credit programs.
film studios) as the industry expands. Although more difficult to
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• The primary benefits of film credits accrue to the private measure, these benefits should be included in a comprehensive film
sector, not the public sector. An evaluation of the effectiveness credit study.
of film credits must incorporate the private sector benefits into
• If a state analysis of the effectiveness of film credits is done from
the analysis. For example, the number of statewide new jobs
related to expansion of the film industry can be compared to
the net cost of the credit program (credit costs minus additional
E. the perspective of the benefits only to in-state residents, the
economic impact analysis can be limited to the compensation paid
to in-state residents and purchases of goods and services from in-
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state and local taxes from a stronger economy).
state suppliers. Over time, the percentage of the total budget paid
• From an economic development perspective, the relevant to state residents and in-state suppliers should increase as the film
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policy question in evaluating film credits should be, “Do the industry expands.
residents of the state get a good return for their investment?”
• The net cost of a state’s film credit program depends upon its
and not simply, “Does the investment pay for itself in terms of
effective tax credit rate. This is the ratio of credits received to the
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additional state tax collections?” Film credit programs could
total film budget for in-state activities and equals the statutory
still be relatively effective economic development programs
credit rate times the percentage of the total budget eligible for the
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even though the public sector is not a net beneficiary.
credit. Effective credit rates can be substantially lower than the
statutory rates.
Estimating film credit benefits and costs • In determining the net cost of film credit programs, the credit costs
should be reduced by the additional state and local taxes generated
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Based on a review of specific state film credit studies and the
film credit case study including this report, the following key from the increase in employment and income attributable to film
features of a comprehensive study of the economic and fiscal credits. Although all or most of the credit costs will be borne by the
impacts of film credit programs should be considered: state, both state and local governments benefit from the stronger
state economy.
2 | Issues that need to be consideredComparing film credit studies Economic contributions of film credits
Empirical studies of the effectiveness of film credit programs Film credit studies show that credits have generated significant
differ significantly. Studies differ significantly in terms of key private sector benefits in the states in which they have been
assumptions and estimating methodologies, making comparison adopted. These studies have shown that the credit programs
of results difficult. These differences include: have generated thousands of production jobs, increased tourism
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activity, channeled investment in industry infrastructure and
• A number of studies focus on the question, “Does the film credit
stabilized the retention of existing activity. Study results include:
pay for itself?” The answer is often described as the state’s
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(public) return-on-investment (ROI). The studies calculate • In studies that examine the full range of economic benefits
economic benefits and net credit costs but do not explicitly from film credits, the impacts from tourism and capital
evaluate the film credit’s effectiveness in generating more jobs investments can be more significant than the impact of the
and income than alternative economic development programs.
• Studies that include the impacts of capital investment, tourism
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• Significant increases in state tourism can be tied to film
and other ancillary activities resulting from film credits report productions. In some cases, widely viewed films increased
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higher overall job impacts of the film credit programs. tourism to featured locations by more than 25%.
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• The majority of film credit programs estimate the economic and The question of whether the costs of the film credit programs
fiscal impacts of the film credits independent of any other tax or are justified by these economic benefits must be answered
expenditure policy changes. Several studies, however, estimate by comparing the benefit-cost ratios of film credit programs
the additional impacts of offsetting expenditure changes to with those achieved by other available economic development
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balance state budgets. programs.
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Evaluating the effectiveness of state film tax credit programs | 3Introduction
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Film credits are in use in 37 states in an effort to attract Film tax credit programs can create economic and fiscal benefits that
production activity and create a sustainable film industry in each extend beyond the production activities that qualify for the credit.
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jurisdiction. As state tax shortfalls have grown and budgets have These benefits include:
been cut, legislators have been forced to weigh expenditures on
• Increased tourism due to prominent placement of a state’s tourism
film credits with those on other types of economic development
programs and more general state spending. Before undertaking
a comparison of the film credit programs with other types of
E.assets in popular television shows and films
• Development of film industry infrastructure such as studios and
state spending, it is important to understand the objectives service providers
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of film tax credit programs and their potential benefits.
• Attraction of productions not eligible for the credit
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This report describes the rationale for offering production
As states consider their film credit structures, their economic
incentives in terms of the broader economic development goals
and fiscal impacts can be maximized by considering each of the
of the state. The primary benefits of film credits accrue to state
mechanisms by which film tax credit programs can provide benefits
residents in the form of increased employment and higher
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to state economies.
incomes generated by production activities. These private
sector economic benefits must be included in a comprehensive
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benefit-cost analysis of film credit programs.
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4 | Issues that need to be consideredThe economic development rationale for
film credits
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Whether tax credits and other film incentives are good public industry (sound stage construction, catering, transportation,
sector investments must be measured in the context of the hair stylists, etc.) and from the spending and respending of the
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state’s objectives and expectations. Most states have a series of earnings that create demands for other goods and service suppliers
goals in mind for any incentive program, and the specific goals throughout the state economy.
and the importance attached to each vary widely. The result is
that there is no single answer that applies to all states and all
film projects regarding the question of whether incentives are a
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The private sector goals and benefits include both short-run and
long-run dimensions. Short-run goals include attracting specific
films and productions. Film companies employ both in-state and
good investment. Each state must separately determine whether
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out-of-state workers and purchase goods and services from
incentives should be granted based on their objectives and, if so,
in-state and out-of-state suppliers as the movies, TV shows and
the specific structure of the incentive programs needed to achieve
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other productions are filmed. The extent to which in-state jobs
those objectives.
and incomes are created (or sustained) and provide benefits to
In addition to involving multiple objectives, evaluation of the the state where the film is produced depends upon many factors.
benefits and costs of incentives is made even more difficult These include the propensity of production companies to hire
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because some occur in the private sector, some accrue to the in-state employees and to buy goods and services supplied by
public sector, some are qualitative, others are quantitative and in-state companies.
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so forth. The multifaceted dimensions of incentives complicate
Economic benefits to the residents of the filming state are greater if
explicit measurement and make it difficult to combine benefits
employees are hired from within the state and in-state suppliers are
and costs to derive an aggregate, quantitative measure of net
used. The larger the percentage of employees and purchases made
benefits and costs.
in-state, the greater the economic benefits to a state’s residents.
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However, in the short run, there is a “chicken or the egg” problem
State goals for film credits from an economic development perspective. The percentage of
film expenditures that accrue to in-state residents and suppliers
Each state must identify the combination of goals and relative will grow over time as the state’s production base expands, but this
weights that they place on each goal as they consider whether the requires attracting new productions in the short run with possibly
provision of tax incentives for the motion picture industry is good lower short-run, in-state benefits.
policy. The following are specific goals that states are pursuing
when they adopt film credits. Long-run economic development goals include developing the
in-state film production industry (or specific components of the
Create jobs and income industry) so that it generates additional productions and offers an
expanded base of in-state employment and supplier companies.
The key objective of film credits is to provide state residents with The objective is to encourage the in-state development of the
increased employment and higher incomes in both the film and film industry, including pre-production, production and post-
related industries and from multiplier activity associated with production activities. The expanded base will increase economic
production in these industries. The multiplier activity accounts for benefits to a state’s residents from in-state productions, as well
jobs and incomes earned from suppliers to the movie production as provide increased income and jobs from “exports” of services
Evaluating the effectiveness of state film tax credit programs | 5to productions outside the state. A minimum threshold of activity
likely exists before the in-state industry is sustained to the point that The success of states in developing thriving
it is not dependent on attracting the next movie, and instead has a industries may depend on the historical
sustained demand and is generating new productions, attracting film
locations and providing services to film production in other states.
development of the industry, the state’s location
and topological characteristics, the presence of
The long-run development of the film industry requires expansion
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of the set of skilled people in the state, opportunities for actual related industries in the state and the overall
experience and entrepreneurship that lead to successful film regulatory and business tax structure in the state.
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industry businesses that are growing and succeeding in the state.
Entrepreneurial pursuits may be among the most challenging to
foster. The success of states in developing thriving industries may
depend on the historical development of the industry, the state’s
location and topological characteristics, the presence of related
industries in the state and the overall regulatory and business
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Public sector budget impact goal
From a budget impact perspective, state legislators and policymakers
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tax structure in the state. may be concerned about short-run impacts of film tax credits on state
Development of a self-sufficient and sustained industry relies on general fund budgets. Given this concern, they may assert that film
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synergies from expansion of different components of the industry tax credits, for specific productions or all productions for a single
and the making of a sufficient number of movies each year. year, should “pay for themselves.” This goal is usually described as
Synergies can also take place across sectors as the film industry requiring additional state taxes from the productions and related
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is complementary with other industries, including music and statewide economic activity to exceed the value of the productions’
photography. Thus, the benefits derived from the movie production tax credits, and it is almost exclusively focused on the short run.
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industry growth can expand rapidly if strong complementarities exist The tax revenues and expenditures that arise from any economic
so that development of filmmaking also attracts and enhances activity that is stimulated by film credits should be included in the
these other industries and vice versa. analysis of the credits’ effectiveness. However, given the fact that
While states strive to create jobs and income through economic taxes collected by local governments (and potentially expenditures)
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development programs, incentives and other structural differences will also increase due to expansion of the film industry, increased
in tax systems can create different tax liabilities for the firms taxes that offset the initial cost of the credit should include both
depending on their specific industry. These differences can work state and local taxes. Nearly every tax imposed by state and local
to the advantage or disadvantage (at least in a relative sense) of governments will be affected, including personal income taxes, sales
industries and thereby encourage or discourage expansion in a state. tax, excises on fuel, alcohol and tobacco products, corporate income
Some states may believe that taxes should be imposed in a uniform taxes, property taxes and others. The taxes may be based on direct
fashion on all industries; tax features and incentives that create activity at production companies, at their suppliers or undertaken by
different tax burdens for an industry would be viewed as a violation of people who earn their incomes from film production. For example,
this principal. This goal conflicts with the economic development tax revenues can be expected from the sales taxes on non-exempt
objective of using targeted tax credits to encourage the expansion purchases by the production companies, purchases by their suppliers
of a specific industry. States may vary on the value they give to and consumer purchases by those working for production companies
this uniformity goal. and those earning incomes created through the multiplier process.
State and local governments may also collect modest revenues from
fees and charges.
6 | Issues that need to be consideredAlthough tax receipts will be reduced directly by the tax credits on tax feedback effect relative to the cost of film credits. This should
qualified expenditures, incentives are generally given only to the increase the net contribution of the film credit program to state
production companies or are associated with income taxes earned and local government budgets, although it could also entail some
by individuals working directly for the production companies. additional expenditures.
The additional tax liabilities of suppliers and individuals from
the stronger state economy provide offsets to the tax incentives Increase visibility for the state
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provided directly to film productions. The increased economic States expect to obtain public relations benefits as film and
activity from film productions is also expected to generate TV productions are viewed and from news and entertainment
investments and additional spending that do not qualify for the reporting around the productions. Beautiful scenery, the presence
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credits. These include tourism spending, investments in industry of entertainment options and other unique factors of states can be
infrastructure, such as studio construction, and non-credit-eligible highlighted and made very visible to people around the US and the
productions attracted by the expanding film industry.
Additional public service expenditures that arise because of
new film productions may not be paid for directly by the film
E.world in ways that are otherwise very difficult to achieve. Improved
visibility and exposure of a state’s physical beauty can result in
tourism, attract others to produce movies in the state, enhance the
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productions, although productions often pay parking fees, state’s image or even cause firms in unrelated industries to consider
overtime fees for police and location fees for the use of public locations in the state.
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spaces. The public sector expenditures may be relatively modest The advertising value of film and television productions, at a
for the production of individual movies since occasional productions minimum, can be evaluated by comparing the costs of generating
should have little effect on state expenditures. However, similar awareness of a state through paid advertising. For decades,
expenditures for local government services, such as public safety
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states have purchased advertising in magazines and on television
and fire, may increase. In theory, if these expenditures are not to promote awareness of their states as a destination for tourists.
covered by non-tax payments by the productions, they should be
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Examples include Michigan’s “Pure Michigan” campaign, which
included in the calculation of net benefits to the public sector. cost nearly $30 million in 2009; California’s “Find Yourself Here”
In practice, the incremental cost of these types of expenditures campaign, which has cost $50 million annually since 2007–08;
is difficult to measure and is not included in studies evaluating Hawaii’s leisure and sports marketing budget of $44 million in
film credit effectiveness. 2010; Florida’s marketing cost of $23 million in 2002; and Las
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The net fiscal benefit for state and local budgets is generally Vegas’ $87 million spent on advertising in 2009, including its
determined by comparing the cost of incentives to the additional “What Happens in Vegas, Stays in Vegas” campaign.
state and local taxes generated by the film industry expansion. The These advertising campaigns have generated substantial visitation,
net fiscal effect could be positive or negative depending upon both which has in turn generated significant economic impacts as visitors
the features of state film credits and the economic characteristics spend money on restaurants, hotels, transportation and retail
of each production. goods and services.1 While tourism advertising campaigns use a
As pointed out in the discussion of the economic development message tailored to tourists, these advertisements have a limited
goal, there is also an important time dimension that needs to be amount of time in which to convey their messages. For example, a
considered in evaluating the net fiscal impact on state and local typical advertising campaign may feature several images of a state
governments. In the short run, film credits in states with less with a link to a website or other state tourism information source.
developed film industries may have lower net tax contributions In contrast, television and film productions may feature a single
from film credits. However, over time, longer-term growth in the city or state for an extended period of time, creating a deeper
industry is expected to increase the in-state film employment connection with the audience. Although this impact may be a
and multiplier effects that will increase the size of the positive challenge to measure, it should be included in a comprehensive
evaluation of the effectiveness of film credits.
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For example, see “Travel Michigan, 2009 Regional/National Advertising Evaluation,” Longwoods International, (2010), which found that the “Pure Michigan” advertising campaign induced more than
680,000 visits from residents of other states in 2009.
Evaluating the effectiveness of state film tax credit programs | 7Increase tourist spending
Substantial evidence exists documenting the increase in
Films and television shows that successfully showcase locations in tourism at specific sites following the release of several
a state can significantly increase tourism and the associated public films. The tourism effect of films that feature state or
and private sector benefits in those destinations. Tourists may want national parks is most easily analyzed because parks
to visit sites where movies were filmed or where they are currently maintain and publish annual visitation data and significant
being filmed. Attractive settings and interesting sites as backdrops increases in visitation following the release of a film can
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in films may alert or remind tourists of the desirability of visiting be easily correlated to the release of a film featuring that
a particular state. In some cases, visiting sites where movies were location. Examples of impacts include:
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filmed is not sufficient by itself to attract tourists but adds to the
other amenities that a locale offers. Such tourism results in hotel • Last of the Mohicans (North Carolina): There was a 25%
stays, souvenir sales, restaurant visits and many other benefits to the increase in attendance at Chimney Rock Park in the year
following release.4
local economy. Private sector employment and incomes and public
revenues and expenditures can be expected from any expanded
tourism, and the share attributed to film incentives should be included
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Tower was featured in an iconic scene in the film.
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in a comprehensive analysis of credits. There was a 74% increase in visitation (an increase of
Film and television productions can increase awareness of a state more than 116,000 visitors) to Devil’s Tower National
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and its attractions and can create a loyal following of fans who are Monument in the year after the film’s release and an
interested in seeing locations where filming occurred. Even a small additional increase in the year when the film was aired on
increase in tourism resulting from a successful film or television television.5
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production can have a significant impact on a state economy and on • Dances with Wolves (South Dakota): Visits to Badlands
the net benefits of film credits to a state. National Park, which was featured in the film, increased
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The effect on visitation is most easily measured in locations where 14.5% over the prior year in the first full year after the
the release of a film is the only major event influencing visitation.For film was released.6
example, in the case of the cornfield in Iowa that was home to Field of • Field of Dreams (Iowa): The film featured a baseball
Dreams, visitation before the film was released was zero but increased field in a cornfield that had no visitors prior to the release
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to 65,000 in the years after its release. It is not difficult to determine of the film. In the years following the release of the film,
that these visitors can be easily attributed to the film. Determining the visitation increased to as many as 65,000 visits per
increase in visitation to a large city due to a film is much more difficult, year.7
but the potential benefits from tourism are much larger.
• Thelma and Louise (Utah): In the year following the
A recent report that analyzes the impact of Sweden’s film-induced release of the film, visitation to Canyonlands and Arches
tourism industry finds similar results from blockbuster films featuring National Parks increased 22.6% and 13.7%, respectively.8
Stockholm, such as The Girl with the Dragon Tattoo. This film and
other films in the series are estimated to have generated exposure • Steel Magnolias (Louisiana): The film was set in a
worth more than 100 million Euro.2 In New Zealand, Lord of the Rings fictional suburb of Natchitoches, Louisiana. Visitors to
was estimated to have created $42 million of exposure.3 Natchitoches increased 39.7% the year after the film’s
release, according to the local tourist commission.9
2
Cloudberry communications, “Millennium Report.” March 2011.
3
NZ Institute of Economic Research (Inc.), “Scoping the Lasting Effects of The Lord of the Rings” (2002)
4
R. W. Riley and C.S. Van Doren, “Movies as Tourism Promotion: A ‘Pull’ Factor in a ‘Push’ Location,” Tourism Management. (1992) 13(3): 267-274.
5
Ibid.
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R. W. Riley and C.S. Van Doren, “Movie-Induced Tourism.” Annals of Tourism Research. (1998) 25(4): 919-935.
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Ibid.
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Ibid.
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R. W. Riley and C.S. Van Doren, “Movies as Tourism Promotion: A ‘Pull’ Factor in a ‘Push’ Location,” Tourism Management. (1992) 13(3): 267-274.
8 | Issues that need to be consideredFilms that have a material impact on tourism were all successful that could result from short-run incentives provided to a specific
at the box office and prominently featured locations suitable for production. A calculation of the short-run rate-of-return (however
tourism. While film tax credit programs cannot predict which films defined) on a specific production does not include this broader
will be successful at the box office, the credit programs can maximize economic development perspective.
their impact on state tourism by providing financial support to films
Third, other benefits, such as greater visibility and enhanced
that feature destinations that are potentially attractive to tourists.
tourism, may be more difficult to quantify because they are
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The visibility and tourism impacts of films attracted by film credits, diffused and part of a broader set of campaigns that states
while more difficult to measure, have a disproportionate impact on conduct to build their image. Some analysis of these benefits may
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the net benefits of credits to a state. This is because the additional be possible, but states will ultimately need to make qualitative
in-state economic activities triggered by the films do not result in judgments on the value of some of these benefits.
film tax credit costs. In other words, these activities increase private
The practical challenges in measuring short-run and long-run
sector incomes and public sector taxes at no additional budget cost to
government. As discussed below, these impacts can have a significant
impact on the net benefit calculation for film credits.
E. benefits and costs of film credit programs are discussed in more
detail in the case study section.
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Evaluating benefits and costs
Quantifying and aggregating film credit
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Once benefits and costs are measured, the right question
benefits and costs must be asked in terms of evaluating the film credit program’s
effectiveness. From an economic development perspective, the
Measuring benefits and costs correct question should be, “Do the residents of the state get
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a good return for their investment?” and not simply, “Does the
The benefits and costs from incentive programs, such as film credits, investment pay for itself in terms of state tax collections?”
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should be quantified and aggregated to analyze the expected or
actual impacts of incentives for a state, but states face a series of A large majority of film credit studies explicitly or implicitly
issues in quantifying these benefits and costs and in summarizing ask the question, “Do film credits pay for themselves?” From
this information. First, many of the benefits, the creation of jobs and a benefit-cost analysis perspective, this is too limited a budget
income, accrue to the private sector, but many of the costs, primarily constraint. The studies do not explicitly compare the benefit-
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the tax credit costs, are borne by the public sector. States must cost ratios for other state tax and spending programs designed
decide how to measure, weigh and combine the public and private to increase jobs and income. The studies calculate film credit
sector benefits and costs. benefit-cost ratios but do not compare these ratios to other state
spending programs or tax changes.
Second, the benefits of film credits have both a short-run and long-
run dimension. In the short run, film credits attract new films to a Economic development programs, including film credits, can
state and create jobs, incomes and spending in the state. From an generate substantial private sector benefits in terms of jobs and
economic development perspective, it is the longer-run, dynamic higher incomes, even if they do not pay for themselves in terms
expansion of the film industry that is the primary policy objective. of overall state tax changes. The important policy point is that
The challenge in conducting a comprehensive benefit-cost analysis film credits may be effective in meeting economic development
of film credits is estimating the longer-run, private sector benefits objectives even if the public sector is not a net beneficiary.10
10
In a recent Brookings Institution paper prepared by Timothy Bartik of the Upjohn Institute for Employment Research, “Bringing Jobs to People: How Federal Policy Can Target Job Creation for Economically
Distressed Area,” (October 2010), the author discusses how to evaluate alternative proposals for increasing job growth in geographic areas. He uses empirical estimates of the responsiveness of economic
activity to changes in business taxes to estimate the impact of the job-creating programs on jobs and program costs. He compares the effectiveness of the programs in terms of the government costs per job
created. He estimates a range of $8,500 to $25,000 for the three options he examines. These programs do not pay for themselves in terms of additional taxes generated by increased employment; if they
did, the ratios would be “zero” government cost per job created. The important point he makes is that policymakers need to compare job programs in terms of their relative effectiveness in creating jobs, as
measured by this ratio.
Evaluating the effectiveness of state film tax credit programs | 9As the authors of a recent Massachusetts study noted: “As we • In benefit-cost studies of economic development incentive
have pointed out in previous studies, it is important to place programs, it is generally assumed that the $1.00 decrease is from
film tax incentives in the context of tax incentives generally. other state economic development programs, including targeted
Most studies of tax incentives show that increases in economic tax credits or more general business incentives.
activity induced by the incentives produce tax revenue that is
This is a more targeted version of the balanced budget requirement
lower than the amount of the tax expenditures themselves.
that asks the policy question, “Is the film tax credit more or less
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… Whether a tax incentive program is desirable is not solely a
effective than other state economic development incentives?” The
function of how much revenue it generates, but also whether
benefit-cost analysis in this case requires comparing the economic
the economic activity it causes is judged to be favorable for the
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impact of the film credit to the economic impact of spending
Commonwealth.”11
the $1.00 on another economic development program. This
From an economic development perspective, the right way to approach recognizes that film credit program evaluations are more
evaluate film credits is to compare the benefits received from
using $1.00 for a state film credit program to the benefits of
using the $1.00 in some other way. The challenge is defining
E. realistically evaluated within the framework of a fixed budget for
economic development programs.13
This benefit-cost question, how film credits compare to other
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what the alternative use is. Given that states have to balance
development incentives, is the more practical question that
their budgets, the following are alternatives for paying for a
policymakers should be focusing on as they evaluate state film
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$1.00 increase in net film tax credits:
credits in the context of economic development objectives.14
• The net tax credit cost of $1.00 is offset with an equal increase
in state taxes. In this case, the private sector benefits foregone
Do incentives matter?
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(the “opportunity costs” of increasing taxes) of the $1.00
should be compared to the benefits of using the $1.00 to Regardless of the film credit program goals that are important to a
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provide the film credit. The policy question in this comparison state, incentives cannot be a good investment unless they actually
asks if the $1.00 has higher benefits in the public or private attract productions that would otherwise be filmed elsewhere or
sector. related economic activity. Achievement of the goals ultimately
In the context of economic development, this question can be depends on their effectiveness in attracting film production to
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answered by comparing the increased state economic activity the state, and knowing the effectiveness requires understanding
(e.g., jobs or income) induced by the film credit (the “benefits”) the causality of what results in films being produced at particular
with the decreased economic activity (the “costs”) of raising locations. Incentives do not enhance a state’s economy if the films
taxes to pay for the credit. would be produced in the state anyway. To be successful, the credit
program needs to encourage a sufficient number of new productions
• The tax credit cost is offset with a $1.00 decrease in state in the state.
expenditures. In this comparison, the alternative is using the
$1.00 to fund state spending.12
11
Navjeet K. Bal, “A Report on the Massachusetts Film Industry Tax Incentives,” p.25.
12
In theory, the analyst can make proportionate adjustments to total taxes or total expenditures or adjust the level of specific taxes and expenditures.
13
For examples of the evaluation of other state tax incentive programs in terms of private sector economic benefits, see Ernst & Young LLP, “The Economic and Fiscal Effects of the Massachusetts Investment
Tax Credit,” and “The Economic and Fiscal Effects of the Massachusetts Research Credit.” Both studies were prepared for The Associated Industries of Massachusetts Foundation, Inc.
14
It should be noted that a common question around all types of economic development incentives is, “Should they be provided to stimulate economic activity in specific industries.” Significant distributional
effects can result from using general tax revenues to generate private sector benefits in an industry. Although distributional effects are always difficult to evaluate, programs should not be discounted solely
because their benefits accrue to a subset of the population.
10 | Issues that need to be consideredLogic suggests that tax credits and other incentives will have their In the short run, productions may be indifferent as to the
greatest effect on a location when the productions could easily be combination of statutory credit rates and eligible expenditures
filmed at many different locations and the primary consideration as long as the effective credit rate is attractive. A production
in location choice is cost differences. With the advent of computer- choosing between two states with identical effective credit
generated imagery (CGI) and other post-production techniques, a rates will not prefer one over the other due to differences in the
film production can be made to appear as if it was filmed virtually definition of qualified expenditures, as long as both states offer
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anywhere. Some films that rely heavily on CGI and other visual-effect a credit with the same dollar value for the production. Likewise,
technology can spend more than 50% of their total budgets on these from the state’s perspective, the only factors at play in the short
effects, creating high-paying jobs and support businesses as a result. run are the activity that is attracted and the total credit cost of
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Taxes and incentives will tend to rise higher on the list of important attracting that activity.
issues in these cases. But, it is often difficult for state officials to
Over the long run, the lower after-credit price of using qualified
determine the degree to which credits influence the location decision
or the most appropriate structure of the credit, including the credit
rate. The lack of this information also presents a challenge for
E. resources (such as in-state labor and suppliers) is expected to
increase the usage of those resources relative to the use of
non-qualified resources. The use of non-resident labor, for
estimating the benefit-cost ratio for film credit programs.
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example, might be reduced by offering a higher credit rate
There are several key factors that determine how “efficient” a state on resident labor. The higher in-state credit rates provide an
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film tax credit program is in generating the desired economic impacts additional incentive to substitute in-state for out-of-state activity.
from production activities. These include the statutory credit rate However, to keep the state attractive to filmmakers, the credit
and the definition of the production expenses that qualify for the rate on qualifying expenses would have to be higher to preserve
credit. Together, these two factors determine the effective credit rate, the effective credit rate on total expenditures.
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which is equal to the amount of credit received by the production as
The challenge of measuring the causal relationship between state
a percentage of its total costs in the state. If a state has a statutory
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incentives and the location of production is not unique to the
tax credit of 30%, and 50% of the spending qualifies for the credit,
film industry. Analysts have studied how business costs affect
the effective credit rate is 15%. The effective credit rate is key to
the location decisions of business firms for many years. The
determining the competitiveness of a state’s film credit. States with
research concludes that the most important factors for a typical
higher effective credit rates are more likely to attract significant
business are transportation of inputs and outputs and access to
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additional production activity than those with lower effective credit
the needed quality and supply of workers.15 For film productions,
rates, all else being equal.
additional considerations enter the location decision, such as the
The gross credit cost, and therefore the economic impact of the availability of studios, climate and appropriate scenery. Among
credit per dollar of credit cost, depends upon both the credit rate the states that have the required assets, productions will often
and the types of spending that qualify for the credit, with some types choose the lowest cost location, considering available incentives
of qualified spending having more “bang for the buck” in terms of and other costs.
economic impacts.
15
States often provide public sector programs that are financed by all taxpayers but which provide benefits to smaller groups of residents. Ultimately, the question becomes, “Do targeted movie credits offer a
relatively high return for economic development expenditures?”
Evaluating the effectiveness of state film tax credit programs | 11Case study of a credit program’s impact
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The economic and fiscal impacts of a state film tax credit program services, and the employment on the production set. This direct
occur through multiple channels. These channels include the activity generates the two other types of economic impacts: indirect
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direct and indirect effects of the qualified production activities, supplier impacts and induced consumption impacts.
infrastructure development, tourism and the potential development
The film production’s purchases of goods and services from in-state
of a cluster of non-qualified production activities reliant on the
industry infrastructure developed to support qualified productions.
This section looks in more detail at these channels using a typical
E. suppliers are referred to as the indirect economic impact. Essentially,
businesses that sell goods and services to film productions expand
to meet the additional demand created by films that were attracted
film production. The example below assumes that the state was
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to the state due to the credit. The final type of impact, the induced
able to attract the typical film production by offering
economic impact, results from spending by film employees on goods
a credit with a competitive effective credit rate.
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and services. For example, a crew member that purchases groceries
and dry cleaning services creates additional induced economic
Impact of production activity impacts at the grocer and dry cleaner.
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A typical film production may incur $10 million or more in costs Each of the economic impacts can be measured using several
for in-state production activities. (A more detailed budget for economic metrics. Two common metrics are labor income
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a typical film production is shown in Appendix A, along with (a measure of the wages, salaries, benefits and other incomes
calculations of the typical production’s impact.) Of this production earned by employees and proprietors of businesses) and employment.
amount, potentially 50% to 60% generates substantial in-state Considering the direct, indirect and induced effects of the production
economic impacts from payments to resident labor and businesses. activities, a typical $10 million film production could generate
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Payments to non-residents may generate some in-state economic nearly $19 million in total economic output, $4.4 million in labor
impacts, but the impact of the consumer spending resulting from compensation and 123 jobs. (See Appendix A for a detailed
these payments (the induced economic impact) would likely be explanation of the calculation of these impacts.) The production
much smaller than for resident labor compensation. will also generate direct, indirect and induced tax effects. For a
The total economic impact of a film production includes three $10 million production, these additional state and local taxes could
components: direct, indirect and induced economic impacts. The total more than $600,000, including taxes on non-residents.
direct economic impact describes the activities associated directly (See Appendix A for a detailed explanation of the tax impacts.)16
with the production: payments to labor, purchases of goods and
16
Note that the ratio of taxes generated per dollar of personal income impact is higher than the US average because the taxes include non-resident individual income taxes (which are generated by income not
included in the personal income impacts) and by sales taxes on purchases of goods and services by film productions.
12 | Issues that need to be consideredAdditional economic impacts of film credits Estimating the impact of tourism from a “typical” film is
challenging because it is difficult to know how many films
The composition of production spending, the state’s economic qualifying for the credit will be both a commercial success and
structure and the parameters of the film credit program will will feature the state in a way that generates tourism activity.
determine the benefit-cost ratio of the film credit program, In North Carolina the television series One Tree Hill and the
measured in terms of credit cost per additional job. If these film Nights in Rodanthe prominently featured North Carolina
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underlying relationships remain constant, this ratio will be fairly locations and had budgets that equaled, on average, 10% of
constant as film spending expands. However, credit-eligible the total statewide production spending during the period they
productions that attract economic activity that does not generate were produced.
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credit costs can change this benefit-cost ratio. As a result, the
Assuming that only 1 out of every 10 dollars of production
calculated benefit-cost ratios are quite sensitive to how these
expenditures qualifying for the credit will generate the type of
ancillary or spin-off impacts are handled, if at all, in the analysis. This
section illustrates how a single film may have an economic and fiscal
impact that extends beyond the impact of production activities. In
E. tourism effects described above, the average for a typical film
would include $3.4 million of tourism spending (10% of the
$34 million above), 31 jobs and $120,000 of state and local
practice, some films will have no additional impacts and others will
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tax revenue, assuming average state and local tax rates.
have impacts far exceeding the examples illustrated below.
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Impact on tourism The composition of production spending, the state’s
If a film is successful in generating tourism, the economic and fiscal economic structure and the parameters of the film
impacts can be substantial. For example, if a successful $10 million
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film production induces 100,000 visitors to a state over several credit program will determine the benefit-cost ratio
years, these visitors would spend approximately $34 million during of the film credit program, measured in terms of
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their visits on lodging, meals, entertainment and other purchases.17 credit cost per additional job.
In a typical state, this spending would create 310 direct and indirect
jobs and $1.2 million of additional state and local taxes.
The ability of a production to create these types of impacts depends
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on its success and the way in which it depicts the state. A film that
prominently features a state’s tourism assets but is not widely
viewed will have a limited tourism impact. Likewise, a film that is
a commercial success but portrays locations in a state as being in
another jurisdiction would not generate positive tourism impacts.
For this reason, not every production can be assumed to have this
level of economic and fiscal impact from tourism, but state film credit
programs are being refined to maximize their economic impact by
focusing on films with the best potential for achieving significant
tourism impacts.
17
Spending per visitor varies by state. This estimate assumes a conservative average spending level of $340 per visitor. Typical per-visitor spending in New York City is more than $1,000.
Evaluating the effectiveness of state film tax credit programs | 13Industry infrastructure investment
Successful film credit programs that have attracted
Successful film credit programs that have attracted major
productions have also attracted major investments in new studio major productions have also attracted major
facilities. In Georgia, studios including EUE/ScreenGems, Tyler investments in new studio facilities.
Perry, and Raleigh Studios invested a combined $135 million in
facilities from 2008 to 2010.18 In New York, Kaufman-Astoria
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Studios expanded its Queens studio at a cost of approximately projects ($157,000 of output per worker) and a typical multiplier for
$22 million while Steiner Studios at the Brooklyn Navy Yard is construction activities (output, income and employment multipliers
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investing $85 million to expand. Studios in Connecticut, New between 2.0 and 2.1) and typical levels of state and local taxes
Mexico, and Michigan have also made significant investments in (relative to statewide personal income). Based on this level of
new facilities and equipment due to an increase in film production economic activity and taxes generated, the benefits per film equate
resulting from those states’ incentives.
It is difficult to determine how many film productions must
E. to four jobs and more than $23,000 of state and local taxes per film.
Overall economic impact of a typical film production
be attracted to a state in order to generate a major studio
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investment, but if such an investment occurs once during the Considering the ancillary benefits associated with film productions,
first five years of a credit program that supports 50 productions such as tourism and industry infrastructure development, the total
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per year, each film supported by the program could be credited economic impact of the hypothetical production could reach as high
with 1/250th of the total impact of the studio investment. A as $23 million of economic output, $5.7 million of income and 159
state must reach a critical mass of productions to attract a studio resident jobs. This level of economic activity would be expected to
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investment, and not every state will be able to do so. Those that generate $751,000 in state and local taxes. Compared to the level
are able to attract a significant amount of production activity may of resident personal income and job impacts reported earlier (and in
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realize this benefit. Appendix A, Table A-4) for the film production alone, the addition of
tourism and infrastructure impacts adds almost 24% to the statewide
A studio investment of $80 million would generate more than
economic impacts of the typical production.
1,000 total (direct and indirect) jobs and $5.8 million in total
state and local taxes, based on typical multipliers and national
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average state and local tax levels. These estimates are based
on typical ratios of employment to spending for construction
18
“Economic Contributions of the Georgia Film and Television Industry,” Meyers-Norris-Penny, February 2011.
14 | Issues that need to be consideredComparison of methodologies used in film
credit studies
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A number of studies over the past decade have evaluated the costs Analyses that include this balanced budget constraint offset a
and benefits of film tax credit programs. Each of these studies portion of the positive economic impacts of the film credit program
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uses the standard tools employed by economists to estimate the by the estimated negative impact of a reduction in state spending.
economic effects of film tax credit programs but the studies differ As discussed earlier, this is one way to impose a balanced budget
in terms of their perspective and comprehensiveness. Thus, they constraint by assuming that the state’s total budget is fixed and
produce a wide range of results. E.the film credit is “paid for” by reducing general state spending.
Because it is impossible to know what expenditures will be reduced,
analysts typically assume that all government spending would be
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Key study perspectives and assumptions reduced proportionately to fund the credit. While this is a simplified
Many of the analyses of film tax credit programs begin by asking way to model the net impacts of imposing a balanced budget
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a single question, “Does the film credit ‘pay for itself’?” The constraint, it does not provide legislators with any information
studies then proceed to address this question by analyzing the about how effective film credits are compared to other targeted
economic impact of the productions qualifying for the credits and economic development programs.
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estimating the resulting “feedback” tax impacts. The costs of the Another difference in perspective is how studies address the
tax credits are then compared to the additional taxes generated by question of the extent to which activity claiming the film tax credit
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new economic activity to calculate a net tax cost. In most cases, would have occurred in the absence of the program because all
the studies examine only the film productions claiming the credit studies are based on assumptions rather than precise analysis.
and do not focus on the ancillary benefits of the program, such For example, the Massachusetts DOR study assumes that all feature
as increased tourism, the creation of a stronger film industry or films produced in the state occurred because of the credit program,
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investments in new studio facilities. but that nearly all commercials and a portion of television series
Studies published by the Michigan Senate Fiscal Agency, the and documentaries would have occurred in its absence. Based on
Connecticut Department of Economic and Community Development the amount of production spending in each category, the study
(DECD) and the Massachusetts Department of Revenue (DOR) assumes that 7% of the total activity receiving the credit would have
include a “balanced budget constraint,” which imposes the occurred in the absence of the program and that these productions
requirement that each dollar of credit earned must be balanced did not generate any new state economic activity.
in modeling the economic impacts by a corresponding dollar
decrease in state expenditures on other programs.19
19
David Zin, “Film Incentives in Michigan,” Michigan State Senate, Senate Fiscal Agency, September 2010; Navjeet K. Bal, “A Report on the Massachusetts Film Industry Tax Incentives,” Commonwealth
of Massachusetts, Department of Revenue, July 2009; Stanley McMillen, Kathryn Parr, and Troy Helming, “The Economic and Fiscal Impacts of Connecticut’s Film Tax Credit,” Department of Economic and
Community Development, February 2008.
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