Film Tax Credits in New England by Darcy Rollins Saas, Policy Analyst

Policy New England Public Policy Center Brief at the Federal Reserve Bank of Boston October 2006 06-3 Hollywood East? Film Tax Credits in New England by Darcy Rollins Saas, Policy Analyst New England Public New England’s villages and seacoast, its The cast: film tax credits and Policy Center character and characters, attract producers incentives in New England of movies, television shows, commercials, Regional incentives for the film production Director and other film and video projects. But such industry vary widely. (See Table 1) Robert Tannenwald work is not just about lovely scenery—it is Qualified productions are eligible for tax also about business. Because production Deputy Director credits in Connecticut, Massachusetts, Carrie Conaway costs help determine where such projects and Rhode Island; for tax credits and wage are made, five of the six New England reimbursements in Maine; and for produc- Staff states now provide tax credits or other tion grants in Vermont. New Hampshire Heather Brome financial incentives to attract producers to offers no additional incentives, claiming its Tom DeCoff film on location. This policy brief discuss- positive business climate alone is suffi- Brad Hershbein es whether these incentives attract more cient enticement. Matthew Nagowski production, and whether they are cost- Antoniya Owens effective in creating jobs. It focuses on the Darcy Rollins Saas use of one major incentive: film tax credits. Five of the six New England Alicia Sasser The little evidence available suggests states now provide financial Bo Zhao that film tax credits do attract film produc- incentives to encourage tion and create jobs in states that have lit- The New England Public Policy tle or no film industry. However, they also local film production. Center is dedicated to enhancing cost states considerable foregone tax rev- access to high-quality analysis on enue. The film production stimulates lit- In general, tax credits relieve taxpayers economic and public policy issues tle additional economic activity in other of the obligation to pay all or part of a tax that affect the region. industries. Consequently, film tax credits liability. Typically, state film tax credits do not “pay for themselves” by indirectly are applied toward the individual or corpo- For more information about the generating additional corporate income, rate tax liability of qualified producers, New England Policy Center, sales, and property tax revenues. Evidence investors, or—in states where the credits please visit: on the benefits of film tax credits to states are transferable—the purchaser of earned, www.bos.frb.org/economic/neppc/ with a large film industry already in place, unused credits. The credit is usually a per- The views expressed are the such as New York, is too scant to enable centage of the total costs (wages and other author’s and not necessarily those analysts to draw firm conclusion. expenditures) of producing a qualified of the Federal Reserve Bank of As more evidence becomes available, project, such as a feature-length film, Boston or the Federal Reserve policy analysts and policymakers should video, video game, television series, or System. evaluate the cost-effectiveness of film tax commercial. Eligibility also depends on credits relative to alternative policies how much production and related spend- designed to promote job creation and eco- ing occurs locally. What expenses and what New England Public Policy Center nomic growth. They should also take into percent of them qualify for tax credits and at the Federal Reserve Bank of Boston account the economic effects of measures how long each credit remains valid after it needed to offset the revenue losses is earned are among the most important federal reserve incurred by film tax credits in order to determinants of these credits’ fiscal impli- bank of boston TM maintain balanced budgets. cations. The plot: are film tax credits To be eligible for the tax credits offered in cost-effective in creating jobs? New England, productions need not be new This question is more complicated than gen- to the state. Presumably, producers already erally realized. In order to answer it, filming in New England and planning to con- one must estimate the fiscal impact of film tinue to do so will be able to avail themselves tax credits and the amount of employment of film tax credits without having to expand that they generate. Another important ques- their activity. tion, asked too infrequently, is: are there “They get more than needed to entice alternative public policies that might be them to come.” Connecticut offers tax more cost-effective in creating jobs than film credits of up to 30 percent of qualified tax credits? production expenses. That amounts to $3 million of tax relief on a $10 million film budget, probably more than the taxes gener- Film tax credits also benefit firms not ated by a typical project of this magnitude. engaged in production or that would Both types of tax windfalls are especially large in states where unused tax credits can have filmed locally anyway. be sold, as is the case in, Connecticut Massachusetts, and Rhode Island. Film producers and investors sell these tax Fiscal impact. credits because they have already reduced One of the key issues in evaluating the their tax liability to zero without them. fiscal impact of these tax credits is whether Purchasers of the credits use them to reduce or not they meet their mark: do the credits their tax liability, increasing revenue losses of subsidize desired economic activity or do the issuing government. And, while the cash they confer what tax experts refer to as “tax raised from the sale of tax credits could offset windfalls”? There are two possible forms of some of that revenue loss by increasing eco- tax windfalls. First, some credits can end up nomic activity, there is no guarantee that it going to film and television production that will be local economic activity. Film produc- would have happened locally without added tion companies could fund a film in another financial incentives. Second, even though location or increase the salaries of employees tax credits can lead to more local production headquartered out of state. work, the financial incentives may be larger The revenues generated by what is often than needed to attract producers. referred to as the “multiplier effects” can “They would have come anyway.” Film, partially reduce this loss. Film producers television, and other producers came to or earn profits, pay wages, and purchase were established in the region before credits goods and services from suppliers. This and other incentives were offered. As of economic activity, in turn, leads to more eco- 2002, the Economic Census reported that nomic activity, and so forth. In turn, this the New England region supported 766 activity generates revenues from a wide vari- motion picture and video industry establish- ety of sources, such as the personal income ments, employing over 8,000 people. Major tax, the general sales tax, and the property film and television productions shot at least tax. In analyzing the costs and benefits in part on location in the pre-credit era of providing film tax credits, however, include The Stepford Wives (Connecticut), governments must weigh these gains against Empire Falls (Maine), Mystic River additional demands on public services that (Massachusetts), and There’s Something About are generated by the new economic activity. Mary (Rhode Island). The Film Division of the Connecticut Commission on Culture Impact on employment. and Tourism estimated that about $23 mil- Proponents of film tax credits argue that, lion was spent on productions in the because film producers are so footloose, their Nutmeg State between 1997 and 2005. location is especially responsive to site-spe- The Massachusetts Film Bureau lists over 40 cific financial incentives. As a director film- film and television productions shot on loca- ing in Rhode Island put it in a 2006 article tion between 1999 and 2003, before the posted on Backstage.com, film executives state enacted its film tax credit in 2005. “would shoot a movie on Mars if they could 2 get a 25 percent tax break.” Furthermore, it workers. Members of Motion Picture Studio is argued, additional exposure through film Mechanics Local 52, which establishes pay and television can generate long-term eco- rates for film work in the Middle Atlantic nomic dividends for a state by boosting its States, including Connecticut, earn $22 to image as a desirable place in which to live $30 per hour, not including benefits, for and work. work in major film productions. By compari- Gauging the net impact of film tax cred- son, the median hourly wage for full-time, its on employment is fraught with difficul- unionized manufacturing workers in the ties. First, one can not be sure how many Northeast was $14 an hour in 2005, and people the film industry would employ in $16.05 an hour in Connecticut. According to the absence of the tax credits. This is the a 2006 Massachusetts study done for the same obstacle inherent in estimating tax Alliance for Independent Motion Media, the windfalls. Second, the multiplier effects of average annual pay for regular employees in film tax credits, like those of all economic Massachusetts motion picture production activity, are hard to track in a complex, devel- was $52,000 in 2004. In that year, the aver- oped economy like that of the United States. age annual pay of all workers in the The long term impact resulting from Commonwealth was $48,916. Yet, many increased exposure and improved image is jobs in the film industry are temporary and especially difficult to isolate and measure. sporadic. Production of Mystic River, for Third, the additional jobs attributed to the example, lasted just eight weeks on location tax credit may go to individuals hired away in Massachusetts.

Load more