In Criticizing California Film Incentive, Tax Foundation Ignores Film Business Realities

Posted on April 21, 2011 by

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Last month in Sacramento, the California State Assembly Committee on Revenue and Taxation and the Committee on Arts, Entertainment, Sports, Tourism, and Internet Media held a Joint Oversight Hearing about the California Film and Television Tax Credit.  One of the speakers invited to address the joint committee hearing was Mark Robyn, an economist from the Tax Foundation.  According to Robyn, the Tax Foundation is a “non-partisan, non-profit tax policy research organization” whose aim is to “promote sound tax policy at all levels of government.”

Film Works staff reviewed Robyn’s prepared remarks and found he made some troubling and unsupported claims.  For example, Robyn demonstrated limited understanding of the business realities driving location decisions with the following (emphasis added):

… this claim is based on the false assumption that all the credit recipients would have filmed elsewhere were it not for the credit. This is certainly not true in most states, and especially in California. Many, if not most, of the productions receiving credits would have located in California anyway.  After all it is the home of Hollywood.

Robyn cannot support his position–that incentivized films would stay in state without a credit–because the data, anecdotes, and realities of film financing prove just the opposite.  Film incentives are the number one factor in deciding where productions are made, and incentive-giving states would attract very little filming were it not for the production cost savings their respective programs create.  Furthermore, as the number of other states and nations with film incentives has grown, California’s production activity levels have decreased.

In 2003, for example, just two states (New Mexico and Louisiana) had film incentives and 66% of all MPAA studio features filmed in California.  By 2009, however, over 40 states had film incentives and just 39% of MPAA features filmed in California.  In the Los Angeles region, according to FilmL.A., the number of permitted production days (PPDs) for feature films in 1996 was 13,980.  By 2009, that number had fallen to 4,976, making it the worst year on record since tracking began in 1993.  As seen in the following chart, but for the incentivized feature films, which accounted for 26% of all PPD’s for the year, 2010 would have replaced 2009 as the worst year on record:

To hammer the point home, if the 1,400 PPDs attributed to the incentivized films under the California Film and Television Tax Credit were taken out of the equation, the number of feature PPDs logged in 2010 would have fallen under 4,000 to 3,978 — a breathtaking 72% decline from the high in 1996.  In fact, it’s worth noting that the all-time high of 1996 occurred just one year before the first significant film tax incentive was enacted into law in Canada.  The data could not be much clearer, which makes Robyn’s comments all the more perplexing when he says things like the following:

And it’s not entirely clear what effect the national trend of film tax credits has had or will have on California in the long term. It has probably led some films to locate elsewhere, but it certainly has not devastated California’s industry.

“Not entirely clear”?  The declines are so steep they would be black diamond runs if you could ski them.  For California, the long-term effects of film incentives in other states and nations is very plain.  They haven’t “probably” caused “some” films to locate elsewhere; they’ve DEFINITELY caused MOST films to locate elsewhere.  The cause and effect relationship between film incentives and production activity is undeniable.

It is extraordinarily unlikely that the 137 productions that filmed in Michigan since 2007 chose to shoot there for creative reasons, a favorable climate or a deep and talented film crew base.  The reason 137 productions shot in Michigan since 2007, compared to just a handful in the entire preceding decade, was because of the state’s generous film incentive.  The same applies to New Mexico, Louisiana, Georgia, Massachusetts and so on.

Incentives have also been the dominating factor causing runaway production to go to Canada, despite claims that a favorable exchange rate was the real culprit.  The Canadian government is well aware of this fact.  As seen in the following chart from the Department of Canadian Heritage’s annual report on film activity, the amount of foreign production spending (almost all of which comes from the U.S.) actually increased even as the value of the Canadian dollar went up:

So what did the Tax Foundation get right?  A few items in the report stand out.  For example, Robyn pointed out the unique nature of the California Film and Television Tax Credit, which is designed to prevent runaway production rather than cause it as almost all other states and nations are trying to do:

California is obviously in a unique position among the states. For the most part, you are not trying to lure new businesses and industries to the state, as many other states are doing. Instead California’s film tax credit was implemented as a defensive mechanism to avoid losing business to other states.

But no sooner does Robyn make this statement, which is a positive one Film Works has pointed to in previous posts, he goes on to tarnish the California incentive with a guilt by association argument:

The vast majority of states that have film incentives offer refundable or transferable tax credits, or direct cash rebates for expenses (the only exception is California). In these states the tax incentives have lost all connection to a production’s actual tax liability. These states actually cut a check to companies whose tax credit is greater than their tax liability. When production incentives have no connection to a company’s tax liability, they are really more accurately described as grants. We have refundable tax credits in state and federal income taxes: they are targeted at low-income, needy families. The most well-known is the Earned Income Tax Credit, or EITC. The EITC is appropriately acknowledged by public policy experts as a form of welfare or social assistance implemented through the tax code. Similarly, film tax credits are a form of corporate welfare and have been criticized by policy experts on the right and the left.

The emphasis in the quote above was added.  If California is an exception, then it was inappropriate for Robyn to waste time and potentially confuse state lawmakers by lecturing about problems with other states’ incentive programs.  If anything, one might expect Robyn to praise California for being exceptional, but instead he went on to tell lawmakers that they are “deeply mistaken” about California’s ability to compete in the incentives arms race:

If California lawmakers think they will be able to hold the line on film tax credits and still remain competitive, they’re deeply mistaken. It is naive to think that your credit program will stay competitive when other states (not to mention others countries) have implemented and expanded on refundable, transferable tax credits and direct cash rebates, often at higher reimbursement rates than California is offering. Even by joining the arms race of tax incentives you may never be able to offer enough to win back those productions you have lost.

The California Film and Television Tax Credit is very modest relative to other states and nations, not only in terms of the percentage (20%) but also on what qualifies under the credit.  As Film Works pointed out recently, California’s incentive helps the state’s working families, not the celebrity talent on the silver screen.  Given the 100% utilization rate of the credit, it’s become quite clear producers would rather remain in California despite the availability of much larger and lucrative incentives like Michigan’s 42% or Louisiana’s 30%.

Unfortunately, rather than evaluate the California Film and Television Tax Credit on its own merits and shortcomings, the Tax Foundation used the hearing as an opportunity to voice opposition to film incentives generally.  The specific problems Robyn raised about some state’s film incentives (transferability, refund options, etc.) do not apply in California.   The Tax Foundation advocates for an ideal world where no state or nation has film incentives to distort the playing field.  But this is not the ideal world, it is the real world.  Film incentives are also the only policy option presently available to fight runaway production at any significant level.**  California is not attempting to distort the playing field, it’s trying to level it to protect one of its most valuable industries.  

Robyn does acknowledge that California “has a lot to lose”:

I acknowledge that California potentially has a lot to lose. California still has a legacy and history that you want to preserve. You also want to continue to support and promote the arts in your state. But these concerns are not economic and are hard to quantify.

There is nothing potential about the losses in production activity California has already sustained.  The declines are nothing short of breathtaking.  Robyn is incorrect when he claimed that California’s legacy and history in the motion picture industry were not “economic concerns.”  It is because of the legacy and history of the motion picture industry in this state that we are now blessed with a world-class infrastructure and the most skilled and talented film crews anywhere on earth.  But as the declines show, California doesn’t “potentially” have “a lot to lose”.  California HAS lost a lot.  California IS losing a lot.

Runaway production is not a theoretical problem.

It is real.  It is now. It is devastating.

**Some members in the California film community advocate another solution, which is to have the United States Trade Representative (USTR) file a trade action against Canada arguing their film incentives are in violation of international trade agreements.  In 2007, however, such an attempt was made by the Film and Television Action Committee (FTAC).  The USTR rejected FTAC’s petition, saying it would “not be effective in addressing the Canadian subsidies.”

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