Should Virginia taxpayers subsidize the film industry?

Regal Cinemas: 'Welcome Virginia Film Festival'

How should Virginia's relate to the film industry?

The Commonwealth has become a popular location for shooting prestige motion pictures. Steven Spielberg's Lincoln used Richmond as a stand-in for 1860s Washington, and Spielberg used the Shenandoah Valley as a stand-in for Massachusetts in his 2005 War of the Worlds remake. Other movies shot on location here include Gods and Generals, Sommersby, Killing Kennedy, Evan Almighty, Giant, Toy Soldiers, and Swedish Auto (those last four made in the Charlottesville area).

Not simply a location for making films, Virginia often is an early venue for seeing other big movies.

For example, one of the Oscars' Best Picture nominees for 2013, Alexander Payne's Nebraska, had pre-release screenings both at the Virginia Film Festival in Charlottesville, where co-star Will Forte and producer Ron Yerxa discussed the film, but also at the new Middleburg Film Festival, where Yerxa appeared with lead actor (and Oscar nominee) Bruce Dern. The 2013 Virginia Film Festival also screened Philomena, another Best Picture nominee this year. In 2011, eventual Best Picture winner The Artist was a closing night feature at the Virginia Film Festival. Oscar-winning live-action short subject West Bank Story also had an early screening at the 2005 festival in Charlottesville.

It's clear that Virginia has strong ties to the film making industry. But should Virginia taxpayers have to pay for them?

Although Virginia has, for some time, offered substantial tax benefits to movie companies that come here to make films, a bill introduced in this year's General Assembly -- and passed by both chambers -- would expand tax credits to the millionaires who would probably do business here anyway.

According to the summary of HB 460, patroned by Terry Kilgore (R-Gate City) and copatroned by Chris Peace (R-Mechanicsville, the bill

Changes the motion picture production income tax credit by (i) increasing the percentage of qualifying expenses eligible to be claimed from 15 percent to 20 percent, and from 20 percent to 25 percent for productions in an economically distressed areas, (ii) increasing the total biennium cap for all such credits from $5 million to $25 million, and (iii) having the credit expire on December 31, 2023. The bill also requires the Department to publish information regarding the credit regardless if it does not prevent the identification of the taxpayer claiming the credit. The bill is effective for taxable years beginning on or after January 1, 2014.

Does this make good sense as policy? Economists say no.

Even uber-liberal Robert Reich, the Clinton administration's Labor Secretary, agrees that states that subsidize the film industry are making a mistake.

According to Variety, Reich

called the bonanza of states offering production tax credits a “race to the bottom,” as competition sees governments sweetening the pot to try to lure movies and TV shows within their borders.

“These tax credits and tax incentives are a zero sum game,” he said in an interview last week. “They don’t create a single new job. They just move jobs around, and they rob the states of the money they need for education and infrastructure.”

Closer to home, the Mercatus Center at George Mason University headlined an article by one of its scholars, Antony Davies, "The Film Tax Credit Farce." Davies, an economist at Duquesne University, wrote:

According to the nonpartisan Tax Foundation, every independent study of film tax credits has found that the credits are money-losers for the states. Arizona's Department of Commerce calculated that Arizona made back 28 cents in tax revenue for every $1 it “invested” in film tax credits. Connecticut's Department of Economic Development estimated that the state earned 7 cents in tax revenue for every $1 it lost. State agencies in Massachusetts, Michigan, New Mexico and even Pennsylvania's Legislative Budget and Finance Committee found that state coffers received less than 30 cents for every dollar they paid out in film tax credits.

If film production is such a great cash cow, why aren't venture capitalists lining up for a piece of the action? The problem is that the film industry wants special treatment. It wants someone else to shoulder the risk of investment while it keeps the profit for itself. No investor would agree to such a deal, and that is why the film industry has turned to our state government.

Filmmakers know the state can force taxpayers to invest in something taxpayers would never choose on their own.

Some politicians are getting the message that tax credits for the film industry do not bring states the benefits touted by their proponents. Variety quotes another GMU source, economist Eileen Norcross:

Other arguments against incentives hold that they don’t help the states that offer them. In March, the Massachusetts revenue commission issued a scathing report on the state’s tax credit program, which stated that two-thirds of the total $175 million awarded in 2011 went to out-of-state spending. “The critique is that while they appear to bring in short-term temporary activity to a state or community, a lot of those benefits flow to the production companies,” says Eileen Norcross, a senior research fellow at George Mason U. “The people who are hired locally tend to be (in) more low-wage service industry jobs. It provides a temporary economic blip on the radar, and then it’s sort of fleeting.”

In a commentary piece for U.S. News and World Report, Norcross explained the case against film industry subsidies. States, she said, 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.

Why, against all this evidence, are states -- including Virginia -- continuing to transfer tax dollars from poor- and middle-class residents to rich out-of-state film producers?

There's a widely held belief that putting the state's locales on film encourages more tourism. That's dubious. Consider the examples above: Tom Cruise fought Martians in the hills near Lexington, Virginia, in War of the Worlds. But Virginia was never mentioned in the film. Virginia played Massachusetts. Daniel Day-Lewis was Abraham Lincoln while Richmond was Washington, D.C.

Of course, even 50 years after it was made, The Sound of Music still brings tourists to Salzburg, Austria, and its environs, and The Lord of the Rings trilogy became the basis to attract tourists to New Zealand. Those are outlying exceptions, however, with cult followings that films like Evan Almighty and Swedish Auto can't match.

In addition, politicians hopefully believe connections with film producers, directors, and actors bring with them "movie magic," as though having Sally Field or Dakota Fanning in town will result in fairy dust falling on Richmond or Lexington. Even governors and senators are dazzled by celebrity, not to mention delegates and city council members.

As Variety's David Cohen pointed out on public radio's Here & Now,

place after place has discovered these things are rife with corruption and they don't deliver the returns that they expect. But there's always another politician or another city that's willing to be seduced by Hollywood glamour.

It turns out that HB 460 passed both chambers of the General Assembly and was signed into law by Governor Terry McAuliffe on April 6, with an effective date of July 1, 2014.

Too bad the governor failed to listen to his friend Bill Clinton's old friend Robert Reich.  He has helped  Virginia join the "race to the bottom."

Adapted from an earlier post on Bearing Drift.

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