Two new studies published by researchers at the University of Southern California could lead many states to draw the curtain on programs granting tax relief to film and TV productions.
The first study, which looks at data from 1998-2013 across 40 states, concludes that most of the incentives “had little to no sustained impact on employment or wage growth” and did not have any effect on states’ gross economic output.
The second study discusses why states provide film tax credits and why some have chosen to terminate such programs. According to the research, 45 states have invested over $10 billion in film subsidies, with 36 continuing to invest in such subsidies.
These findings should be enough to leave a bitter taste in the mouths of those who attempt to sweeten the deal for the motion picture industry. But that has not exactly been the case in many states. In fact, the data reveal that the more money states sink into these programs (even those proven to be poor investments), the more likely it is that they will endure. This is a classic example of the “sunk cost fallacy,” in which good money continues to be thrown at bad policies.
It is also one of the many perverse incentives resulting from corporate welfare in the form of targeted tax preferences. In these cases, although politicians promise job creation and economic opportunity for all, what results is usually only temporary privileges for the well-connected few. One California Assembly member claimed that the state’s film and TV subsidy program would “put tens of thousands of Californians back to work.” Even putting aside the often shoddy and biased economic methodology that produces these jobs estimates, taxpayers should seriously question such statements. Of course, the first thing taxpayers should be skeptical of is whether such jobs ever materialize—something the USC study demonstrates is very unlikely.
But other questions should arise, too: Will these promised jobs be new jobs, or will they simply relocate existing resources? Will they be permanent or here today, gone tomorrow? Will they be concentrated almost entirely in a very specific industry? Will the taxpayer dollars spent on such programs rob other, more pressing budget priorities of funding?
Even further, such tax breaks skew the playing field by distorting investment incentives. For example, California reserved tax credits for films that were runaway successes (including American Sniper, which was the highest-grossing U.S. film of 2014), as well as for those that completely busted. Its investment of taxpayer dollars did not actually depend on the economic outcome of any particular film. An investor guided by market incentives, however, would know better: He or she would make decisions that allocate money more efficiently and would be rewarded appropriately for risk.
State film subsidies therefore lead to neither optimal investment decisions nor compensation of risk for taxpayers. Many politicians may even admit this, but they will argue that it is the “cost” of job creation. As USC’s research proves, however, film subsidies have overwhelmingly failed to deliver on their promises.