Tax Incentives

The Upside-Down Math of Film Subsidies


The Upside-Down Math of Film Subsidies

Photograph by David McNew/Getty Images

Since 2009, California has given away $100 million in annual tax credits to companies producing TV shows and movies in the state, in an effort to lure Hollywood back to Hollywood. But as other states have ramped up the competition to offer ever-larger subsidies in recent years (see House of Cards), California’s generosity isn’t keeping up. The state legislature is mulling providing more to the studios, but a new report (PDF) from the nonpartisan Legislative Analyst’s Office (LAO) cautions: not so fast.

Thirty-seven states offer some form of film production subsidy. The LAO calculated that the 10 most active states together spend almost $1.4 billion a year to attract studios. The theory is that the subsidies will pay off by bringing jobs and economic activity. According to the LAO, that may not be true, for several reasons:

The programs don’t pay for themselves. For every dollar California credits studios, it makes back just 65¢, the LAO reports. It says that while other studies may claim better returns on the investment, they usually include revenue that doesn’t flow to the state, such as local sales taxes, and assume everyone who gets a credit would have filmed elsewhere without it.

There could be better uses for the money. The studies also don’t always take into account what amounts to an “opportunity cost” of using money to help the film industry when those funds could be going to other, more cost-effective efforts. “For example, the state could have used the $100 million instead to provide additional funding for early childhood education or inmate rehabilitation,” the LAO concludes.

If films should get subsidies, why not other industries? The LAO says subsidies generally are best used “when an industry’s activities yield distinct societal benefits that would otherwise be produced at a lower than economically optimal level,” such as basic research. By favoring one industry, “all other businesses and taxpayers effectively pay a higher tax rate than they would otherwise.”

Keeping up with other states would be costly. So many studios want a piece of California’s $100 million in tax credits that winners are chosen by lottery. If California were to remove the cap, as other states have done, and not change any other eligibility requirements, it would cost the state an additional $1 billion a year. If it broadened the range of productions that can qualify for the credits—to include large-budget films, for example—the additional credits could cost “several billion dollars” more, the report says.

The LAO doesn’t ignore arguments in favor of offering subsidies: Film jobs generally pay well, and California’s “brand” as the moviemaking capital has value. But if California increases its subsidies to compete with other states, what’s to stop those states from doing the same? As the LAO says, “It is unclear how these sorts of competitions end.”

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Weise is a reporter for Bloomberg Businessweek in New York. Follow her on Twitter @kyweise.

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