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Do Tax Incentives for the Film Industry Hurt or Help States?

31 Dec , 2010  

Written by B. Walter Irvine | Posted by:

A report rejects the states’ ambitious use of tax breaks to develop the film industry, but the fine print (and everything else) is contentious.

In mid-November, a report released by the Center on Budget and Policy Priorities sharply criticized states’ use of tax incentives to build their respective film industries, including Connecticut, Massachusetts and Michigan. Report author Robert Tannenwald, who was an economist at the Federal Reserve Bank of Boston for 28 years, wrote that the current incentives are not effective and not likely to establish self-sustaining film industries. However, state film offices, film production coalitions and academics have refuted or criticized the report, and a host of issues have come under debate.

One of Tannenwald’s focuses is the number of full-time equivalent jobs created when a film production comes to town because of the tax incentive. “What really matters is the number of jobs created for residents,” Tannenwald said in a telephone call. “That’s what economic development is about.” However, proponents of the incentives say that the jobs that are created are giving people substantial work.

Michelle Begnoche, communications advisor for the Michigan Film Office, acknowledged that “the projects themselves may be a little bit short-term.” But she likened it to the construction industry, where many projects are strung together during the course of a year. In conceiving what constitutes decent work, she indicated, “We need to shift our paradigm a little bit. It’s a different job model.” Sherri McConnell, executive director of Louisiana Entertainment, the Louisiana state office for promoting the entertainment industry, said that the job growth is encouraging. Via a representative, she talked about the growth of the IATSE, an entertainment industry labor union: “If you look at average wages paid to IATSE members, they earn nearly $20,000 more a year than the average annual wage in Louisiana,” she said.

Earlier this year, Professor David Terkla of the University of Massachusetts Boston published a paper with Assistant Professor Pacey Foster about the film industry’s development in Massachusetts. “You need to have these innovative labor-force practices set up,” because film production is so mobile, Terkla said, echoing Begnoche. “Calling these jobs temporary is equivalent to calling plumbing, electrical, construction and other craft-based jobs temporary. In all craft-based industries, employees move from one job to the next (often helped by unions and/or referral networks among skilled craftspeople),” said Foster in an e-mail.

In his report, however, Tannenwald contends that the short duration of work is a weakness in states’ plans to foster development, citing a Massachusetts Department of Revenue study that found that film production work only lasted “at most a few months” and a Michigan State University study that found that in-state film jobs “lasted an average of 23 days” in 2008.

Another question raised by the report is the degree to which wages and salaries from productions actually go to non-residents — often to only a few major players — even if a great number of jobs are created in-state. Begnoche noted, however, that in Michigan there is a $2 million cap on credits for above-the-line salaries, and only 40 percent of those salaries are eligible for the credit. “You can’t drive the people out who make the movies,” she said. Likewise, “Louisiana only grants the extra five percent wage tax credit on wages up to $1,000,000 paid to Louisiana residents,” clarified Sherri McConnell. In his email, Foster tentatively agreed with Tannenwald that “leakage” of money away from the state through salaries paid to non-residents is an issue, albeit a thorny one: “It all depends on how you want to calculate costs and benefits and over what time frame, but the basic point is correct for studio films specifically.”

Then too, there is the question of how much states lose in revenue through tax incentives in order to create jobs. In his report, Tannenwald cited a Massachusetts Department of Revenue study from 2009, writing, “Massachusetts lost $88,000 in tax revenue for every new job created by the Commonwealth’s film tax credit and filled by a Massachusetts resident,” in 2008. According to Tannenwald, “The Commonwealth could have given its citizens a bigger financial boost at a lower cost by repealing its film tax credit, recouping the tax revenue, and sending them checks in the mail.” The Center on Budget and Policy Priorities says it is specifically interested in how policy might “affect low- and moderate-income families and individuals.”

Some state offices have responded by emphasizing that the tax incentives represent an investment, not a short-term way to boost the bottom line. Michelle Begnoche is quoted in a Gannett article saying, “The incentives were not designed to fill the state coffers. They were designed to create jobs, help local businesses, and keep our young minds and talent here in Michigan.”

Part of the argument about the future of the industry is whether states can differentiate themselves among the pack, since more than 40 are already offering some sort of tax incentives. Louisiana and New Mexico were among the first in the current wave, adopting tax credits in 2002, with various other states establishing their incentive programs more recently. Tannenwald is skeptical that their experience suggests anything positive, noting in his report, “In 2009, employment in film and video production fell sharply in both states.”

But states differ in what they offer, including facilities and personnel. One point of contention is whether facilities being constructed are even a positive sign. The Connecticut Production Coalition criticized Tannenwald’s report for not including this factor in his analysis, according to an article published in The Day, a Connecticut newspaper. (The Connecticut Production Coalition did not respond to email inquiries). Begnoche pointed to the arrival of Raleigh Studios as a feature of Michigan that will attract more sustainable growth. But Tannenwald said that the construction of facilities is not the measure he thinks is relevant; instead he focuses on the number of full-time equivalent jobs created.

Regarding the future of those jobs, also in question is whether states have a labor force that will sustain interest in a state without incentives. Tannenwald noted in his report that many productions bring in many people from California or New York, but Begnoche, speaking for the Michigan Film Office, mentioned that Michigan has “a really skilled workforce that’s growing.”

It’s even expanding beyond crews: “We’re getting more Michigan actors involved, building our actor base as well our crew base,” she said. With regards to Massachusetts, Terkla mentioned several ways in which it distinguishes itself from other states. Though he is skeptical of other states’ attempts to build a film industry, “There actually is a nascent industry here,” he said, which is fed by film and media graduates from the wealth of local colleges. He also cited Massachusetts’s high-tech digital and video-game industry as a special advantage, and said that he was surprised in his research by the degree to which there is a specialized “craft” labor force — people who can construct and design sets, do electrical and transportation jobs, and perform technical work like camera and sound support. After filmmakers’ experience doing “high-tech video editing” in Massachusetts, he said, “some of their work will still be shipped here after they left, and that kind of thing is not captured in an analysis like Tannenwald’s.”

Part of Tannenwald’s skepticism is based on the mobility of film production, aided by technology. “Computerized equipment and the development of a sophisticated worldwide communications infrastructure have enabled producers to create, in effect, ‘moving production factories’ that can operate at a wide array of locations,” he wrote, citing a study by an assistant professor at Brandeis University, Kerry Chase. Terkla, however, saw it from almost an inverse perspective, noting that “the old focus of New York and Los Angeles is dissipating because of technology,” so their influence is waning.

Tax incentives continue to create controversy, and it remains to be seen if some states will choose to cut the tax incentive programs. It might only be at that point that these film industries will be put to a real test of sustainability.

Also see: Study Proves Film Tax Credit a Worthy Investment in RI (May 2010) and Say Goodbye to Hollywood? Massachusetts Considers a Cap on Film (March 2010)