Do State Film Tax Credits Work?

Folks here have been asking that question since Connecticut authorized tax credits for filmmakers in 2006. The answer, according to a recent Ernst & Young report, depends partly on what you expect from the credits and when.

The credits’ key objective is to create jobs and boost incomes in the film and related industries, the reports states. Here the Ernst & Young report refers to the “multiplier effect,” a measure of how a dollar spent on lumber to build a movie set, for example, ripples through the economy. Analyzing a movie credit’s impact should include “the increased in direct economic activity from film production, indirect activity of in-state suppliers and additional in-state consumer spending triggered by the direct and indirect economic activity” (emphasis added).

But what if these effects are small compare to the tax revenue a state gives up because of the credits? Here’s where the time horizon comes in. Obviously, the “short-run goal of the credits is to attract specific films and productions. Film companies employ in-state and out-of-state workers and purchase goods and services from in-state and out-of-state suppliers.”

But the balance between in- and out-of-state workers and suppliers depends on a state’s history supporting the film industry. And it may take time before that balance starts to tilt in a state’s favor. “For states without an established movie production base, initial film productions may have a large component of payments to non-residents and out-of-state suppliers.” But, “as the industry develops over time, a greater share of movie spending supports the long-run goal of creating jobs and incomes for state’s residents.”

Asking policy makers to take this long-term view is difficult when revenues are tight. “From a budget perspective, state legislators and policymakers may be concerned about short-run impacts of the film tax credits on state budgets, asking film credits to pay for themselves.” But, “this short-run budget perspective may conflict with the longer-run economic development objectives of the credit programs.” (Another question policymakers might consider is how the short- and long-term payoffs of film credits compare with the short- and long-term payoffs of credits for other industries.)

The study lays out the things states should consider when evaluating credits, compares how states have evaluated them, and examines the credits economic impact.