Monthly Archives: June 2011

End Film Subsidies in Pennsylvania

It is true: Pennsylvania has survived the zombie apocalypse. And though many Pennsylvanians (and, especially, Philadelphians) are angered by this turn of events, I am going to explain why, in the end, it is for the better. I’m speaking, of course, of the new Brad Pitt movie, World War Z, which (as Philly.com reports) will shoot in Glasgow, Scotland even though it is set in Philadelphia. The reason? Uncertainty about the state government subsidizing the film.

Now, let me be clear about something at the outset: I am not, in any way, suggesting that films should not be shot in Pennsylvania. If handled correctly, they can provide jobs and other economic benefits. I would love for more films to be shot in both Philadelphia and Pennsylvania, and I know many people that this would benefit. However, the core idea of this post is that the way the government currently interacts with the film industry does not yield net benefits for Pennsylvania. Gov. Corbett’s budget provides film studios with $60 million in tax credits (down from $75 million a few years ago). Sure, certain parties may benefit from a little extra work, but such activity is temporary and does not offset the billions of tax dollars the state gives away each year. Furthermore, many of the workers on the film crews (especially the highest earners) are imported, not hired from the surrounding area.

Let’s break it down.

-BACKGROUND-

So, why does Pennsylvania provide tax credits for films that come to shoot in the state? Well, the tax credits function as an incentive. Film is a business. Studios, like any company, want to produce their product with the lowest expenses they can afford. That is why Hollywood has “outsourced” to other states and countries. As California becomes more expensive to shoot in, film studios seek cheaper areas and labor. That’s the demand side.

On the supply side, elected officials in Pennsylvania try to lure filmmakers into shooting in the commonwealth because they hope it will stimulate the local economy. The idea is that film crews will need workers, food, a place to stay, etc… and that Pennsylvanians can supply all of this, and it will help out local labor and businesses. Pennsylvania sacrifices such a large amount of tax revenue in order to compete with other states that want to similarly capture film shoots. But is the amount of tax dollars given up worth the temporary benefits the film shoots provide?

-LOST MONEY, LITTLE BENEFIT-

There is a lot of evidence to say that no, the temporary benefits do not outweigh the lost tax revenue. A recent Economist article (“Unilateral disarmament”) summarizes the idea well:

[S]ince virtually all states are at it, the programmes largely cancel out one another; no state gets a lasting advantage. The craze resembles a beggar-thy-neighbour trade war (with mutually destructive tariffs) or the federal tax code with its loopholes for every lobby and thus higher rates for all. In the language of cold-war nukes, it would be mutually assured destruction (MAD). The only winner is the film industry. In essence, a rich bloke in a Brentwood villa gets money from a poor taxpayer in West Virginia.

The Massachusetts Department of Revenue launched a study of the effect film subsidies had on the state’s economy in 2008. The Center on Budget and Policy Priorities notes some of its key findings in its report, “State Film Subsidies: Not Much Band For Too Many Bucks.” Among them is the statistic that “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.” This is clearly an incredibly inefficient way to create new jobs in the state.

There are a few reasons why this occurs. First, film crews import many of their workers, meaning that there are less opportunities for area laborers. Also, those positions that are created are low-paying. Above all, economic benefits are temporary. Caterers may get some work feeding the cast and crew, but once the movie is shot, that’s it.

Likewise, the report also disproves what I will call the ‘rising tide’ argument. That is, the argument that forgoing the tax money in the short term will actually increase tax revenue in the longer run through job creation and economic activity. The Massachusetts report found that for every dollar provided to the film industry, Massachusetts only received 16 cents.

-RACE TO THE BOTTOM-

Film subsidies are clearly an economic hit for the state and taxpayers. And it only gets worse as states compete with each other for film activity. Such competition raises the amounts given to subsidies to higher and higher levels, leading to ever-dwindling benefits for those states. A Tax Foundation analysis found that in prior to the early 2000s, only 4 states had tax incentive programs designed to lure the film industry in-state. And those incentives were relatively low, in $1 million to $3 million range. Those numbers peaked in 2010 at 40 states and $1.396 billion, before dropping a little this year to 37 states and $1.299 billion respectively (Tax Foundation table below).

Tax Foundation Table on Film Incentives by Year

-WHAT THIS MEANS FOR PENNSYLVANIA-

Now, Pennsylvania falls a bit short of the billion mark, but $60 million is still a nice chunk of change, especially when confronted with the huge budgetary cuts Gov. Corbett has made in programs that are actually useful investments, namely education. Clearly, the $60 million would not, by any means, cover the over $1 billion cut from education in the governor’s proposed budget, but it would be a more efficient use of tax dollars.

Painful cuts (or else painful tax increases) will be necessary to solve Pennsylvania’s budgetary woes. That makes it more critical for the government to seek the most efficient and effective use of tax dollars. Education is a useful investment that provides future benefits for the individual and the state. Film subsidies provide some benefits for a few individuals.

Simply put, it does not make sense for Gov. Corbett or the PA General Assembly to preserve these tax credits, especially now that budgetary pressures are forcing the state to make difficult decisions. Yet the budget that the governor presented to the legislature did exactly that — while also seeing painful cuts in critical education programs.

Pennsylvania should join various other states (like New Jersey and Arizona) that have slashed or suspended their film industry subsidies. Competing with those that are pushing forward with high subsidies is a lose-lose situation.

-MISINFORMATION CAMPAIGNS-

So, in the face of all this information, why does Pennsylvania still subsidize the film industry? The simple answer is lobbying. The film industry enjoys these tax credits, and would like to see them continue. It makes the most logical choice: to argue for the continuation of the tax credits. And cursory common sense seems to be on their side. After all, bringing movie production to an area would seem to increase that area’s economic activity. And it does, to some extent. Yet such thinking fails to account for whether a net (or overall) benefit is provided or not. The latter is true.

Arguments for other, more indirect benefits generally fall flat — like ones that claim it enhances tourism. The Philadelphia area already markets itself well, and receives attention for reasons other than films being shot in the area (like its history, night life, etc…). Such claims are highly suspect, as are some “studies” the purport to show the economic benefits of tax credits.

The Tax Foundation notes that:

A recent study concluded that Pennsylvania’s film tax credit produces net benefits of $4.5 million by assuming that any business interacting with the film industry would not exist but for the credit. MPIs create mostly temporary positions with limited options for upward mobility.

-CONCLUSION-

The results are fairly clear. Despite lobbying efforts that claim otherwise, continuing tax credits for the film industry in Pennsylvania is a race to the bottom. It yields no real, lasting economic benefits for the taxpayers or the state, and it drains resources away from more effective investments — namely, education. Gov. Corbett and the PA General Assembly should consider eliminating the tax credits from the budget and using these resources more efficiently.

-SOURCES-

http://articles.philly.com/2011-06-15/news/29656828_1_max-brooks-zombie-survival-guide-credits

http://www.economist.com/node/18805941/

http://www.cbpp.org/cms/index.cfm?fa=view&id=3326

http://pittsburgh.cbslocal.com/2011/03/09/pennsylvania-film-tax-credit-saved/

http://www.prnewswire.com/news-releases/philadelphia-picks-up-14-more-accolades-in-2011-123911104.html

http://www.taxfoundation.org/publications/show/25706.html