Are film tax credits cost effective?

Tired of seeing Hollywood take its business elsewhere, California is moving to triple tax subsidies for film and TV productions, boosting incentives to $330 million annually and making the state competitive with New York, Georgia and other states that are courting the entertainment industry with ever-richer incentives.

The action is widely seen as necessary to stop thousands of jobs from leaving Southern California, where most studios and production companies are based and would prefer to work if costs are roughly equivalent.

Yet it comes amid growing national debate about the value of film tax breaks and whether they create new jobs, or merely shift work from one place to another. Some fear California’s move may, in fact, escalate a bidding war among states eager to claim a share of the world’s most glamorous industry.

While these tax credits have been highly effective at luring production out of California, their long-term economic benefits have been questioned by several independent studies.

Louisiana has been one of the biggest beneficiaries of so-called runaway production, earning the moniker Hollywood South. But a report for the state’s office of economic development said its film incentives ended up costing taxpayers there nearly $170 million in 2012 — even after the economic benefits were counted.

The Massachusetts Department of Revenue estimated that for every dollar of film tax credits awarded, the state got back only 13 cents in revenue from 2006 to 2011. The net cost to the state was $128,575 for every film job created for a Massachusetts resident.

Michigan, New Mexico and most recently North Carolina have scaled back their incentive programs in one way or another over concerns the cost to taxpayers outweighed the economic benefits.

North Carolina lawmakers recently decided to drastically reduce film incentives on the heels of a state report that found $30 million in tax incentives led to the creation of just 55 to 70 new jobs in 2011.

“Our economists tell us it’s the worst return on investment of any of the tax-credit programs,” said Rep. Paul “Skip” Stam, the Republican speaker pro tem of the North Carolina House of Representatives.

Others point out that the generous subsidies given to Hollywood productions have to be paid for by either cuts in government services or higher taxes on other groups and individuals.

“They don’t pay for themselves,” said economist Bob Tannenwald, who authored a national study on film tax credits for the Center on Budget and Policy Priorities, a group that researches policies affecting low- and moderate-income people. “They have to be financed somehow, so spending has to be cut or taxes have to be raised elsewhere.”

Even the California legislative analyst’s office voiced unease over the program. It pointed out that California’s incentives returned 65 cents in tax revenue to the state for each $1 in film tax credits, disputing findings from the Los Angeles County Economic Development Corp. that the program generated a positive return on investment.

And while expanding incentives may be necessary to protect a “flagship California industry,” the legislative analyst’s office noted, doing so may encourage other states to ratchet up their own credits.

“It is unclear how these sorts of competitions end,” the legislative analyst’s office said in a report this spring. “In responding to other states increasing subsidy rates, California may only stoke this race to the bottom.”

What is clear is that filming is highly mobile, and studios and producers increasingly rely on this so-called soft money to lower their production costs. They routinely expect taxpayers to offset as much as 30% of their qualified production costs. States now pay out about $1.5 billion in film incentives each year, up from a few million dollars a decade ago.

“All you’re doing is moving jobs from California to other states,” said Joe Henchman, vice president for state projects for the Tax Foundation, a Washington organization and frequent critic of tax credits. “We’ve just thrown a lot of public dollars to make that happen. There is no net national gain.”

The Motion Picture Assn. of America, the trade group representing studios, disputes the claims by Henchman and other critics. The group says tax credits have helped build stand-alone filming centers in places such as Georgia, where Britain’s famous Pinewood Studios is building a 288-acre studio with six soundstages.

What’s more, the MPAA says the battle for film production should be viewed on a global scale. Countries including Britain, Canada and Australia — where the California earthquake movie “San Andreas” was recently filmed — have increasingly dangled lucrative incentives before Hollywood. State tax incentives help keep that business here, said Vans Stevenson, senior vice president of state government affairs for the MPAA.

“This is not something that we dreamed up years ago,” Stevenson said. “It’s something that evolved on its own because the states, lawmakers and economic policy people saw this as an opportunity to create jobs and investment, and that’s been borne out. If these programs weren’t working they would be going away.”

Stevenson and other industry supporters also note that spending on movies or TV shows ripples beyond film sets. Crews spend money on caterers, cast trailers, hotels, prop houses and lumber yards.

And when a big Hollywood production comes to town, politicians can visit sets and trumpet the boon to their local economies. There can also be marketing and tourism benefits to states, which are typically mentioned in the end credits. The baseball field in Dubuque County, Iowa, depicted in “Field of Dreams” remains a popular tourism attraction, and fans still flock to Albuquerque to see the sites frequented by character Walter White in the hit AMC series “Breaking Bad.”

Louisiana and New Mexico were the first to launch film incentive programs in 2002, hoping to siphon off the film work fleeing to Canada, where tax breaks and favorable exchange rates made it a go-to location. Today, nearly 40 states offer some form of rebate, credit or grant to the film industry.

The plethora of choices has allowed studios and filmmakers to pit one state against another for the best deal.

When producers of the Netflix Inc. series “House of Cards” threatened to leave Maryland if the state reduced tax credits, Gov. Martin O’Malley in April approved an $11.5-million package to keep the show in the state.

“They say, ‘You need to match this, or you don’t have a prayer of getting production in your state,’” said Henchman of the Tax Foundation.

Film tax credits aren’t tax credits in the conventional sense. Many states will refund the value of the credits to the company even if they don’t have a tax liability in their state. Other states such as Georgia allow producers to sell their credits to corporations such as Apple Inc. and Bank of America Corp., which use them to lower their own tax bills.

Evaluating these programs is tricky. Although states frequently trumpet their economic effect, most don’t reveal the net cost to create the jobs, or they cite research compiled by the MPAA, which has actively lobbied to expand film tax credits nationwide.

That said, there is no doubt that the expansion of incentives has led to a significant transfer of production jobs away from California.

California lost 18,580 jobs in the film and TV sector from 2004 to 2013, a 12% decline, according to federal jobs data compiled by the Milken Institute.

During the same period, arch rival New York added nearly 10,000 jobs, an increase of 23%. New York has seen a surge in production since it increased its film credit in 2008. The state allocates $420 million annually to film productions.

Louisiana, another top film destination, added 2,760 jobs, up 73%. Other film hubs such as New Mexico, North Carolina and Georgia also have seen some job growth, although the gains have been more modest relative to the size of the subsidies.

“Looking at the absolute numbers, it’s clear that California is in slow decline,” said Kevin Klowden, managing economist at the Milken Institute. “This is in stark contrast to the tremendous job growth in other states over the past decade.”

And while some states are scaling back their tax credit programs, others are showing no signs of retreat.

Louisiana awarded $251 million in film tax credits last year. That’s a steep cost for a state with an annual budget of about $25 billion, compared with California’s budget of $156 billion.

A study for the Louisiana Department of Economic Development concluded the state lost more than $12,000 for every job created by the film tax credit. The Louisiana Budget Project, which monitors public policy, said taxpayers paid an average of more than $60,000 per direct film job.

“Unfortunately, the returns to the state on this investment, like many of the movies made here, have been a flop,” the group said.

Yet support for its incentive program remains strong.

Chris Stelly, executive director for Louisiana Entertainment, said the benefits of film production tax credits can’t be viewed from just short-term job gains. Rather, he said, the state is helping create a new industry that will provide jobs and spur economic activity for decades to come.

“The industry now supports many thousands of jobs in Louisiana, and we’ve built up a deep crew base,” he said.

Among last year’s movie releases, there were more major studio films shot in Louisiana than in California, according to FilmLA. Inc. Louisiana had 18 studio films; California and Canada were tied for second place with 15 films each.

Confronted with such competition, many in the industry agree that California had no choice but to bolster its program. A bill to expand funding and qualify more projects was approved by the Legislature on Friday and is expected to be signed by Gov. Jerry Brown next month.

Studio executives and producers say the legislation, which will be in effect for five years starting in July 2015, will make L.A. a much more attractive film location. Despite competition from other states, Southern California is still the place most people in the industry — including A-list actors as well as directors and producers — call home.

“I haven’t shot a movie on our lot in years,” said Fred Baron, executive vice president of feature production at 20th Century Fox. California’s new tax credit will be “great for the community,” he added. “It will just bring back movies.”

Veteran producer Gale Anne Hurd lives in L.A. but spends much of her time in Georgia, where she is executive producer on the hit AMC series “The Walking Dead.” With the expanded credit, Hurd said she would consider filming an upcoming movie and TV series in L.A.

“We can take our rightful place as the home of filmed entertainment as long as we’re competitive,” Hurd said. “We still have the best and most highly trained crews.”

[email protected]