“If you scale back now, you probably lose everything”: State Tax Incentives and the Motion Picture Industry

Abstract

IntroductionAt the 2013 MEIEA Summit in New Orleans, Philip Mann and Stephen M. Hamner, both of the Louisiana Economic Development Office, presented An Exploration of Louisiana's Tax Credits for Film and Music, an overview of the past and present initiatives of Louisiana to attract entertainment production projects to the state. While the panel discussion focused specifically on the Sound Recording Tax Incentive program in Louisiana, many states grapple with their own tax incentives for film production. The intent of this paper is to explore the context of these state tax incentive programs for film production by looking at 1) the types of incentives offered to film studios and producers, 2) the ten largest state programs, and 3) the economic arguments pro and con for offering film production tax incentive programs.BackgroundAs Mr. Mann and Mr. Hamner stated, Louisiana was the first state (1992) to offer incentives to lure film production away from the traditional film capitals of California and New York. For the first ten years of its existence, Louisiana's program underperformed (Grand 2006, 792-793), and any film production that had been lured away from Los Angeles or New York typically went to Vancouver, British Columbia. In order to develop North in the 1990s, provincial officials used their own tax incentives and the favorable exchange rate between the U.S. and the Canadian dollars to develop the personnel and infrastructure necessary to offer filmmakers a viable alternative to Los Angeles and New York. However, the early lead that Vancouver had in becoming the third film capital evaporated as other U.S. states began offering programs of their own.1In 2002, and again in 2005, Louisiana retooled its film production incentive program to address the concerns of film producers and to align its programs more closely with the goals of state officials. By the time of Louisiana's 2005 legislation rewrite, fourteen other states were offering tax incentives for film production, worth an estimated total of US$129 million, considerably more than the total of $1 million from five states offered at the time of the 2002 rewrite.As recently as 2010, 43 states offered tax incentives to Hollywood worth an estimated $1.5 billion. Fearing being left behind by regional peers, states were competing with each other to offer the most attractive incentive programs, all with the goal of big Hollywood spending in their states. As the effects of the Great Recession continued and questions about state budget priorities for these types of programs were raised, six states admitted defeat (or reality) and dropped their programs, leaving 37 states to carry on as of 2013.But what were these 37 states carrying on? In many respects, they were carrying on a marketing campaign in which state tax incentives became the latest free or cheap money tool Hollywood used to finance its output (after the drying up of the hedge fund money of the 2000s and the German tax shelters of the 1990s). Boosters for these types of programs presented state legislatures with the evidence of the success of the Louisiana and the New Mexico programs,2 and their burgeoning film projects, as proof positive that state tax incentives could work. State film offices, local production and post-production houses, and local union chapters joined forces with film studios and producers to induce legislators to implement, expand, or extend film production tax incentives.As the states began to offer film production tax incentive programs, the next stage of the competition was set: that of offering increasingly attractive tax incentives to bring Hollywood knocking. The late entrants to the competition, analyzing the programs of the early adopters, tailored their programs to maximize in-state film production potential,3 culminating in the program offered by Michigan in 2008 (since curtailed) that essentially gave qualified productions a 42% credit on film production expenses incurred in a core community (Idelson 2012). …