Economic outcomes from film tax incentives

The negative narrative on film incentives as an economic development tool seems to be set, but the story contains some interesting nuances.

Film incentives continue to come under fire, with another study calling into question the economic benefits of these programs. This post reviews the study’s results and approach and is part of an occasional series examining reports evaluating state and local economic development incentive programs.

Findings

The study by USC professor Michal Thom examines the effect of state motion picture incentive programs on a set of industry-specific labor and economic outcomes between 1998 and 2013. It considers the different impacts of refundable tax credits, transferable tax credits and sales and lodging tax waivers. Findings include:

• Refundable tax credits motivated short-term wage gains but these were not sustained over time. These credits had no significant impact on motion picture employment, gross state product or industry concentration.

• Transferable tax credits had modest effects on employment growth, and gains increased over time. However, these credits had no significant impact on motion picture industry wages, gross state product or industry concentration.

• Sales and lodging tax waivers had no effect on any of the labor and economic indicators evaluated.

Why it’s interesting

The article on the study in the American Review of Public Administration includes a primer section that provides valuable insights into the characteristics of state film incentives and offers helpful industry context.

The evaluation builds from clearly stated policy goals, which are defined here as attracting “multiple productions that would drive higher employment, wages, and output versus the status quo.”  Accordingly, the measures of merit are change in motion picture industry employment, change in motion picture industry wages, change in motion picture gross state product and change in motion picture industry concentration (measured by location quotient).

The evaluation emphasizes motion picture industry outcomes instead of broad economic outcomes, which is appropriate given the policy goals and avoids a problem we see in other incentive evaluations. Many evaluators struggle to align economic performance metrics with the realistic expectations of what incentive programs can achieve.

It is interesting that the small but significant findings on the positive effects of the tax credits are presented as a negative. The Variety headline and general takeaway is that “Film Tax Incentives Are a Giant Waste of Money, New Study Finds.” The journal article title itself (Lights, Camera, but No Action?) also indicates program failure. I think the notable finding here is that transferable (but not refundable) tax credits have a positive employment impact. This is a topic worth examining further.

Implications

The article concludes with a set of policy implications, summarized here:

1. Policymakers must think carefully about economic development objectives before proceeding with incentive programs
2. Policymakers must pay more attention to incentive design and program oversight
3. Economic development institutions should solicit multiple cost-benefit analyses before acting on incentive proposals – don’t shop for favorable outcomes
4. State governments should pursue greater interstate cooperation.

We whole-heartedly concur that well-defined program goals, good program design and careful cost-benefit analysis are the foundation of good incentive programs that can help economic development efforts achieve hoped-for outcomes.

For more information, check out:

Previous Smart Incentives posts on film incentives

“Lights, Camera, but No Action? Tax and Economic Development Lessons from State Motion Picture Incentive Programs,” by Michael Thom, available from the American Review of Public Administration.

Variety’s article on the study, “Film Tax Incentives Are a Giant Waste of Money, New Study Finds,” available here.