Dazzled by the stars

Last week, I voted with a surprisingly small minority to curtail the state’s film tax credit, which was expanded under the leadership of former speaker Sal DiMasi. Mike Widmer, the President of the Massachusetts Taxpayer Foundation, has stated that “All the evidence shows that it is a very costly tax credit with minimal economic impact, and the failure to limit it will require deeper cuts in other state programs, including aid to cities and towns.” Governor Patrick had proposed curtailing the credit as part of a recent budget measure.

But the Boston Globe and the overwhelming majority of my colleagues favored preserving the credit. Why? First, the film industry is naturally appealing. Second, the numbers are confusing — for example, one representative supporting the credit made the argument that “If an actor makes $20 million, they pay $1 million in income tax. It’s probably a bargain to get that money and run.” But that’s a losing proposition because, through the film tax credit, the state paid $5 million of that salary.

Couple the quantitative confusion with a with a very effective lobbying campaign by the industry. Representatives heard from local workers in set construction, makeup, etc. who owed their solvency to films attracted by the credit. Many of these individuals would have been unemployed, but for the tax credit. There stories were all truly moving and jobs are certainly paramount.

I heard personally from a number of very good local people about how important the jobs created by the credit were to them. But, on behalf of citizens not in the film industry, I had to ask these film industry professionals: “Where is my bail out?” There are hundreds of thousands of unemployed people in Massachusetts who are receiving no benefit whatsoever from the film tax credit.

A couple of things are crystal clear — first, the film tax credit does generate economic activity in Massachusetts; second, taxes on that activity do not come close to paying back the state treasury for the cost of the credit. So, the credit is an expenditure that does create jobs.

There are many alternative ways that the state could spend money that create jobs and also have lasting benefits for the Commonwealth. How does the credit compare to alternative uses of the funds? The Massachusetts Department of Revenue has analyzed the credit and produced a report including these conclusions:

• 91% of the credit goes to feature films visiting the state (as opposed to local productions) (p.6). Note that the UMass report on this subject documents expanded employment apparently due to these films, but also pre-existing momentum in other production activities like non-fiction documentaries.
• Of all the wages paid directly by enterprises receiving the credit, only 18% were paid to Massachusetts residents, and over 41% went to non-residents who make more than $1 million per film (p.1)
• In 2008, the biggest year analyzed so far, a total of 1,807 full-time equivalent jobs were created, including indirect jobs and multiplier effects. Of these, 1076 went to Massachusetts residents (p.17). (Note that for comparison the UMass study, at page 13, displays employment survey data showing job increases of the same order of magnitude — the data are hard to interpret more precisely though because of reclassifications, mentioned at page 15, inflate the 2008 numbers.)
• In 2008, the cost of tax credits handed out was $112.6 million (p.5), of which approximately 16% (p.20) was offset by new state revenues for a net cost of $94.6 million. Note that this is the value of the credits awarded — they have not, for the most part, been redeemed yet, but they are transferable and will be used when they have the greatest value to their purchasers.
• Doing the math, the credit cost per full-time-equivalent job created for Massachusetts resident was $87,903. The actual wages on those jobs was about $67,775 (p.13) for those actually working directly on films (and probably less for those having indirect spinoff jobs, like people working in hotels, etc.)

In other words, the state tax expenditure per resident job exceeded the direct wages of the average resident job created. So, the credit, on this basis alone, compares unfavorably with any other form of public job spending. When you factor in that most of the output of the film jobs went to serve out-of-state production companies and their personnel instead of creating lasting value for the people of the Commonwealth and when you further factor in that every job created (public or private) also creates multiplier effects (see the Tax Foundation report at page 10), the comparison becomes even more lop-sided.

Some credit advocates have raised the possibility that, with the credit, Massachusetts could become a new hub for film production. This seems like a long shot. Massachusetts, although growing, captured only about 1% of spending on films in 2007 (UMass Report, p.8). According to the Tax Foundation, twenty eight other states are now offering film tax credits and forty-four offer at least some form of movie production incentive. Many other states have the same ambitions as Massachusetts to become production hubs outside Hollywood, for example, Louisiana and Michigan. Given Massachusetts’ unpredictable weather, it seems wishful to think that Massachusetts is going to be a new central home for film production.

It is more realistic to hope that Massachusetts could be a desirable location for post-production technical work. This seems possible given Massachusetts technical depth and given that video post-production is becoming less and less coupled to the location of actual filming as a result of the internet and micro-computing. However, post-production is only eligible for the tax credit if the film was predominantly shot in Massachusetts, so much post-production activity would not be eligible for the credit. In the floor debate, it was explicitly acknowledged that one major hoped-for investment in production facilities was entirely independent of the tax credit.

The recent globe expose of another tax credit program showed the abuse of tax credits for big box retailers like Target, Wal-Mart, Home Depot, Lowe’s, Ikea, Bed Bath & Beyond, and Kohl’s. These are companies that want to come to Massachusetts to reach our markets — they do not need incentives to be here. Moreover, they take sales from existing local businesses.

I believe that the state is, as a general matter, on very shaky ground when it seeks to pick winners and losers in the economy through tax credits. I think we do live in a very competitive environment and have to keep that constantly in mind. We want to create jobs. But, I think we would be better off having lower business tax rates and a simple, stable tax code with few industry specific benefits. We wouldn’t be able to take political credit for feature films, but most of us would probably be better off overall.