Retaining the Film Tax Credit: Two Thumbs Down for Taxpayers

MARCH 17, 2011 | Commentary by KATRINA ANDERSON, NICHOLAS FETT

Behind the lens of Gov. Tom Corbett's budget, the focus is largely on putting taxpayers first and fostering economic growth. But at a time when the director should be yelling, "cut," to all handouts, retaining Pennsylvania's $60 million film tax credit program tells those who exist on corporate welfare that the show will go on.

Intended to lure movie producers to the commonwealth, the film tax credit offers politically-chosen film producers up to 25 percent of production costs in tax credits.  As a bonus, companies can sell the remainder of their tax credit if it exceeds what they actually owe in taxes.  No wonder they call it Tinseltown!

Supporters of the tax credit argue that it creates jobs, pumps hundreds of millions into the economy, and that the demise of the credit will drive the film industry from Pennsylvania forever. The facts, however, direct a very different picture.

Contrary to claims that FTC programs "pay for themselves," the economic output of film production is minor. The Tax Foundation found that incentives for film production typically generate about 20 cents in taxes for every $1 in credit. According to the Bureau of Labor Statistics, Pennsylvania currently employs around 8,000 people in the "Motion picture and sound recording industries," which only represents about 0.2 percent of the state workforce.

Moreover, the jobs created by film productions in the commonwealth are often seasonal jobs, unlikely to provide long-term growth. For instance, a security company in Pittsburgh may see increased demand for their services during production, but this is only a temporary shift.    

Furthermore, the film industry would continue in Pennsylvania without the tax credit.  Most of the FTC underwrites economic activity that would have occurred anyway. While the industry argues the FTC has generated $525 million in economic activity, the estimate fails to distinguish between movies that came to Pennsylvania because of the film tax credit and productions filming here regardless.

A legislative-commissioned study of Pennsylvania's FTC—conducted by a Hollywood consulting firm—admitted that the majority of film productions in the state did not even apply for the tax credit.  In fact, the film industry has seen little growth since the enactment (and subsequent expansion) of the credit. Taxpayers are simply subsidizing temporary employment within film production that likely would exist anyway.

Admittedly, it's hard to argue economics against the "I saw Denzel Washington at Starbucks" factor; but taxpayers are simply not getting a good return at the box office. While, lawmakers and residents see the effects the industry has in their neighborhoods, they're not seeing how the money could have been used if it wasn't given to the film industry.  In part, this is because the narrow tax incentive does little to improve the overall economy.

This corporate welfare for Hollywood studios shifts economic activity from one area to another, picking and choosing which industries to subsidize.  A tax break for the film industry requires higher tax rates on everyone else, hindering job creation in every other sector of the economy.  

Whether you are talking about $35 million for M. Night Shyamalan's latest flop or $22 million for the Denzel Washington thriller Unstoppable, Pennsylvania's FTC isn't generating real economic growth.  This is why, with good reason, other states like Iowa, Arizona, and Kansas have already suspended their film incentive programs.

While Gov. Corbett pledged not to raise any taxes, he could have ended the FTC program and kept his pledge by lowering taxes elsewhere. For instance, Pennsylvania could cut the corporate tax rate, or expand the state's successful Educational Improvement Tax Credit—which would potentially benefit all business.

As we try and close the curtain on more than $4 billion budget gap, the state should make its business climate competitive for all businesses by ending special treatments for certain industries and lowering taxes across the board. Let's hope the governor and General Assembly will agree the FTC belongs on the editing room floor.

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Katrina Currie is a Research Associate and Nicholas Fett is a Research Fellow with the Commonwealth Foundation (www.CommonwealthFoundation.org), an independent, nonprofit public policy research and educational institute based in Harrisburg.



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