How Hollywood Is Ripping Off Taxpayers

Rather than giving the film industry a break, states should consider tax policies that put everyone on equal footing.

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** ADVANCE FOR SUNDAY, FEB. 20 ** FILE - In this Dec. 1, 2009 file photo, A scene made to like a airport screening area is filmed in Ann Arbor, Mich. Michigan's starring role as a darling of the movie industry may be about to end up on the cutting room floor. Gov. Rick Snyder's first budget proposal calls for the elimination of the film tax incentive program _ one of the most generous in the nation _ and orders a $25 million cap on film credits later this year.

Eileen Norcross is a senior research fellow with the Mercatus Center at George Mason University, and lead researcher for the Mercatus Center's State and Local Policy Project.

From Massachusetts to North Carolina, Michigan and Iowa, a similar picture is emerging: Film tax credits don't deliver to state economies what they cost to treasuries and taxpayers.

But against all evidence, the allure of bringing Hollywood to their hometown is strong for policymakers. Last week, Governor Martin O'Malley signed legislation to triple Maryland's film tax credit program from $7.5 million to $25 million for production companies that spend at least $500,000 in the state.

The need to offer tax credits should really prompt policymakers to ask another question. Why do film companies need to be tempted into the state to begin with?

The idea of giving film companies tax credits took off in the 1990s, when the high cost of doing business in California led production crews into Canada. Louisiana policymakers saw an opportunity: In return for tax breaks or credits, film companies could instead bring jobs and business to their state.

Since then, 44 states, the District of Columbia and Puerto Rico have put into place movie production incentives, which try to lure film companies with tax credits, exemptions, grants or rebates. Twenty-eight states offer films tax credits that require companies to spend a certain amount in-state and employ a minimum number of people. In return, companies apply a credit to their income tax based on the percent of expenditures, wages or investments generated in-state due to the production.

[See a collection of political cartoons on the economy.]

But states are finding that it is barely worth the lost revenue. A recent report by the Massachusetts Department of Revenue found that of the $44 million in tax credits awarded in 2011, two-thirds of the $175 million in spending generated due to economic activity went to out-of-state workers, and 47 percent of the wages generated, or $53 million, went to those earning over $1 million.

On net, Massachusetts' film credit program is costing the state more than it delivers. After subtracting payments to out-of-state residents and the budget reductions required to fund the credits, only $39 million in state economic activity resulted. The findings have prompted Governor Deval Patrick to cap the state's program to $40 million in annual credits.

North Carolina's Legislative Services Office analysis shows their film credit program realizes even less impressive returns. In 2011, the state awarded $30.3 million in film credits – reimbursing productions that spent over $250,000 up to 25 percent for qualifying expenses. Yet, the program could only claim about 55 to 70 new jobs. Based on their model, the report claims that if instead North Carolina's business taxes had been reduced across the board by $30.3 million, between 340 and 450 jobs and $14 million in personal income would have materialized.

[Read the U.S. News Debate: Is Obama's Corporate Tax Plan A Good Idea?]

That counterfactual points to the main policy defect with credits. What's so special about film companies? Why not make the rules business-friendly for everyone? As the Tax Foundation points out, the few states that don't award film credits can offer companies something else: lower overall taxes. Nevada doesn't tax corporate or individual income. Delaware has no sales tax. And New Hampshire doesn't levy taxes on wages or general sales.

It's not just that the credits don't really perform as advertised; they also provide an opportunity for abuse behind the scenes. In 2007, Iowa state officials discovered that the state film office's cheerleading for generous tax credits marketed as "half-price filmmaking" was cover for a small scandal. Film credit funds were used to purchase luxury cars for movie producers, receipts and expenses were rarely submitted, contracts were amended—post-approval—to increase credits, and payments went to filmmakers' relatives and to people outside Iowa. The program has since been suspended.

[Read the U.S. News Debate: Do the Rich Pay Their Fair Share in Taxes?]

In Michigan, a recent production may have tried to get around the rules and meet the "putting Michiganders to work" requirement by putting the lead actor's chauffeur to work painting walls.

Despite all of these warning signs, one has to question why Maryland feels the need to spend more tax dollars on this industry while simultaneously debating whether to raise taxes to fund its ever-growing budget. Perhaps rather than giving the film industry a break, Maryland and other states should consider tax policies that put everyone on equal footing.

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