The Oscar nominations are in. Though the nominated films include diverse titles such as American Sniper, Boyhood, and the Grand Budapest Hotel, they all have something in common. All eight films received generous government handouts, financed by taxpayers, during production. These handouts come in the form of film tax credits.
Over at the Washington Examiner, Jason Russell created a table that details the various tax incentives for Oscar-nominated films. American Sniper received $6.8 million from California’s 20 percent feature film tax credit, meaning it is the winner of this year’s e21 Oscar for Best Tax Break. Lead actor Bradley Cooper should remember to thank California taxpayers during his acceptance speech.
Last year, Russell and I calculated that the Wolf of Wall Street won the 2014 Oscar for the best tax break. Since the movie was filmed in New York, it received a 30 percent, fully refundable tax credit. The film’s enormous budget of $100 million means that New Yorkers paid up to $30 million for the honor of having Leonardo DiCaprio and Martin Scorsese film in their state.
Tax credits are more valuable than deductions because, while deductions lower taxable income, credits directly reduce tax bills. When these credits are refundable, states actually pay production companies the difference if the tax liabilities are lower than the amount of the credit.
Film production tax credits do not generate long-term economic benefits for states, and support for these credits has recently waned as the associated costs have become clearer. At their peak in 2010, these incentives cost 40 states a total of $1.4 billion. Last year the number of states offering film tax credits fell to 32.
Though many states have cut back on their film tax credits, or eliminated them completely, some are ignoring the economic costs and instead choosing to seek the film industry’s approval. For example, Michigan extended its film tax credit, which was set to expire in 2017. California has tripled its film credit spending to $330 million, likely in an attempt to keep up with New York’s $420 million limit.
Providing tax breaks specifically to the film industry is an example of the government working to choose winners and losers in the marketplace. State lawmakers could attract almost any industry if they paid for a quarter to a third of its expenditures, but such a policy would be fiscally unsustainable. Positive effects of film tax credits only tell half the story. When something is subsidized, there is more of it—just as taxing something leads to less of it.
Special-interest tax breaks leave the rest of the state’s taxpayers to make up the revenue shortfall. Movie production incentives leave states with less money for fixing potholes, maintaining parks, and staffing fire departments. Either these essential services are cut, or tax rates are raised for everyone else.
Proponents of film tax credits admit that lower tax burdens create incentives for firms to locate in the state and expand. A far better policy would be to lower tax rates for everyone—not just Hollywood. This would lead to a more equitable tax code that sets the stage for sustainable economic growth.
Film is a particularly poor industry to subsidize. When I asked The Tax Foundation’s Joseph Henchman, a long-time proponent of ending film tax credits, why he does not support them, he said, “Every independent study of film tax credits has found that they are not effective at creating permanent jobs or economic development. And, despite the claims of the film industry, they do not pay for themselves.”
Even though a popular film may boost tourism and create the appearance of economic development, film productions only offer short-term employment and most film workers are highly specialized. States that choose to enter the competitive arena of film tax credits are set up for a losing battle. Unless they continually increase their incentives, film companies will simply pack up and move to a state that offers a sweeter deal.
Movie production incentives do little more than give legislators an opportunity to brush elbows with the rich and famous. Star-struck legislators should come back to reality and stop subsidizing Hollywood producers.
Jared Meyer is a fellow at Economics21 at the Manhattan Institute for Policy Research. You can follow him on Twitter here.
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