A blistering analysis of California’s Hollywood tax giveaway

One thing Hollywood has been very good at over the last few years is extracting tax incentives from states to move production around the country.

But another thing has always been clear about these incentives: They don’t pay for themselves. In state after state, objective, independent studies have shown that they invariably run in the red, returning pennies and dimes to state treasuries for every buck handed out to producers.

Now California’s independent Legislative Analyst’s Office has added to the data bank. In a study released Wednesday, it calculates that for every dollar California spends on the $100-million annual film subsidy it created in 2009, the state treasury gets back 65 cents.

The LAO does California’s taxpayers a further service by debunking a key study that purported to prove the contrary. One is a supposedly “independent” study by the Los Angeles Economic Development Corp. which, as we observed at the time of its release in July 2011, was quietly funded by the Motion Picture Assn. of America, whose members collect all these lavish subsidies. The LAO shows that the LAEDC’s work, which has claimed to find that the state’s Hollywood subsidies return more in economic benefit than they cost, was every bit as slipshod as we reported.

Although a few states have debarked from the Hollywood handout gravy train, 37 states still offer incentives. That has put tremendous pressure on California to do the same in order to hang on to its role as the nation’s center of film and television production; a measure to expand the state’s subsidy and extend it through 2022 is currently making its way through the Legislature.

The LAO doesn’t overlook the importance of the film industry to California and Los Angeles or changes in the state’s national standing. California’s 107,400 film and production jobs (in 2012) are about 52% of the total nationwide, but that’s a decline since 2004, when it share was 65%. About 94% of those production jobs are in Los Angeles County. They pay higher than similar jobs elsewhere in the country, too, and create thousands of spinoff jobs in related industries.

But the LAO warns that the magnitude and cost of “runaway production” -- the poaching of L.A. jobs by other states and countries -- is hard to measure. Hard figures are difficult to find and vulnerable to self-interested manipulation by the industry. This was a key flaw of the LAEDC report.

Among the risks of expanding California’s Hollywood subsidy, the LAO says, is that it will merely inspire other states to increase theirs in response, provoking a race to the bottom that could cost California taxpayers billions. The state’s incentive, moreover, costs $100 million annually that could be spent on other programs, which conceivably could have a greater economic impact than handing over millions to Hollywood producers. As we’ve pointed out in the past, no study of the supposed virtues of film incentives ever considers how the money might be spent otherwise. Why ever would the film industry want that?

The most important question the LAO asks is why film production should get special treatment from the Legislature. Other industries -- manufacturing, software development -- could also become subject to poaching by other states. “If this were to occur, would California also provide subsidies to retain these businesses? Doing so could be prohibitively expensive.” Could a broader tax incentive program keep Toyota from moving to Texas? We don’t know, because we haven’t tried.

The LAO only touches briefly on one of the major shortcomings of the California program -- it isn’t targeted at productions and services that may need the most help. Digital post-production firms in California have been devastated in recent years. Soundtrack production has moved steadily away, much of it to Britain, having gotten no help from the state.

The analysts’ bottom line is that California has moved blindly into the production subsidy field, lacking any means to evaluate whether its program makes any economic sense. The LAO’s conclusion is that economically, the program’s value is doubtful. The data, it concludes, aren’t going to get any better or more conclusive, because the industry is changing in ways that respond unevenly, or not at all, to tax handouts. So far we have only the industry’s say-so that a state tax subsidy is needed and should be expanded. That’s the scariest Hollywood horror story of all.