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April 6, 2015

Repealing Massachusetts' film production tax credits

Exterior of the Massachusetts Statehouse

Robert Tannenwald, adjunct lecturer in public finance and budgeting, was invited to deliver the following testimony on Massachusetts' film tax credits to the state's Joint Revenue Committee on March 31, 2015.

Executive Summary

Massachusetts’ film tax credits should be repealed. They produce too little bang for too many bucks. According to Department of Revenue estimates, each additional full-time equivalent job attributable to the tax credits has cost the Commonwealth over $118,000 in lost revenue. For each dollar of foregone revenue, Bay Staters have gained only 53 cents in personal income. While proponents of film tax credits provide many anecdotes about work generated, most fail to take into account the substantial costs the people of Massachusetts have borne in financing those credits. Moreover, two-thirds of the tax credits’ direct benefits have gone to non-residents. The tax credits are extraordinarily generous: 25 cents on the dollar and transferable to any Massachusetts taxpayer through a secondary market. Because film production is so footloose, producers can play Massachusetts off against other states indefinitely, keeping the Commonwealth in perpetual competitive purgatory.

Note: this testimony reflects the views solely of Dr. Tannenwald and not necessarily those of the Heller School or Brandeis University.

Chairman Kaufman, Chairman Rodrigues, and other members of the Committee,

Thank you for the opportunity to submit testimony on Governor Baker’s proposal to eliminate the Commonwealth’s film tax credits. For the record, I am an economist who has specialized in tax policy for 40 years, 30 of them in state and local taxation. I worked at the Federal Reserve Bank of Boston between 1981 and 2010, retiring as a vice president and Director of the New England Public Policy Center. In 2010, I conducted an in-depth study of state film tax credits while serving as a Senior Fellow at the Center on Budget and Policy Priorities. I have been a member or directed the research of six state tax study commissions in New England (four in Massachusetts). Currently, I teach public finance and budgeting at Brandeis University’s Heller School and write a column for State Tax Notes, a weekly publication widely read by practitioners in state and local taxation.

Our film tax credits have created too few jobs and too little income for our residents at too high a cost. If the Commonwealth wants to create jobs and income for Bay Staters, it can do so in much more cost-effective ways. According to Department of Revenue (DOR) data, each job created by the tax credits and filled by Bay Staters has cost $118,000 in foregone tax revenue. Each dollar of lost revenue has created only 53 cents in personal income.

Film tax credits have stimulated some economic activity. You probably have heard, and will hear more, from many residents who have benefited from subsidized film production, such as actors, carpenters, caterers, electricians, hair stylists, truck drivers, and trailer rental agencies. In addition to benefiting directly, they have spent their additional income in ways that ripple throughout the Commonwealth’s economy.

However, in awarding film tax credits, the Commonwealth has also incurred severe costs. Those costs have also rippled throughout the economy, snuffing out jobs and income. Although those costs are not as visible as the benefits, they are every bit as real. They hit the pocketbooks of households and businesses all over the Commonwealth over many years.

Why Such Heavy Costs?

Film tax credits don’t pay for themselves—they must be financed. According to DOR, Massachusetts has gotten back an estimated 13 cents in revenue on each dollar of film tax credit awarded. Because it must balance its budget, the Commonwealth therefore must cut spending somewhere or raise revenues elsewhere to fill the hole created by tax credits. Spending cuts take teachers out of classrooms and police officers off the street, force fire houses to be shuttered, limit hiring of case workers for child services, and reduce purchases from government suppliers. These are just a few of the negative direct effects of spending cuts used to free up money for film tax credits. Those directly affected cut back their spending, negatively affecting even more people and businesses, propagating a negative economic wave throughout the state’s economy. Thus, in funding film tax credits, the Commonwealth gives to some and takes from others.

Film tax credits are extraordinarily generous. For every dollar put up by film producers, the Commonwealth puts up 25 cents. And the producers get the money whether or not they have tax liability to offset, or whether they are even a taxable entity (for example, WGBH has benefited substantially from film tax credits). Producers can sell their tax credits on a secondary market, where they are snapped up by financial institutions and wealthy individuals, among others. Alternatively, tax credit recipients can get a 90 percent rebate, no questions asked.

From 2006 through 2012, two-thirds of Massachusetts film tax credits directly subsidized out-of-state employees or businesses. In 2012, twenty-four percent of all subsidized spending went to employees earning more than $1 million a year, such as movie stars, directors, and screen writers. All these employees were non-residents. For those earning less, 55 percent of payroll went to non-residents.

Most of the people who decide where films are shot are non-residents with little or no loyalty to the Commonwealth. In their past testimony, their threats have been very clear—if they are going to keep making films here, the subsidies have to keep flowing.

DOR says we have more spending, jobs, and income becaue of film tax credits. Then aren't they successful, worthwhile subsidies?

No, for at least two reasons. First, the DOR study does not take into account the costs of film tax credits awarded from 2006 through 2012 that have been or will be incurred in later years. Many of these tax credits, sold in the secondary market, were “cashed in,” or will be, in 2013 or later. According to DOR, the value of these unused tax credits in 2013 alone was $78 million. The public spending reductions and/or tax increases needed to finance those tax credits, many benefiting financial institutions, have created or will create negative ripple effects throughout the economy. However, there haven’t or will not be offsetting positive effects from film production, because those tax credits were awarded to producers for filming in 2012 or prior years. When this “second shoe” falls, the estimated net benefits from subsidized 2006-2012 film production will shrink substantially.

Second, DOR assumes that the film tax credits awarded during 2006-2012 were financed by across the board spending cuts, cuts in many programs not devoted exclusively to economic development. These include public education, which socializes our children and young adults and helps them to lead a more meaningful life. It does not merely give them skills useful in the labor market. The spending cuts reduced services to those in acute need. It provided public safety so that Massachusetts citizens can live in a lawful, orderly society.

Thus, DOR assumes that resources that otherwise would be allocated to a wide variety of public functions besides economic development are used to subsidize film production. There are costs, then, that are incurred, as well as jobs and income created. The costs have to be compared to the number of new jobs and the value of created income. When one makes those comparisons, as DOR has done, one sees just how wasteful film tax credits have been.

Will film tax credits will eventutally become cost effective creators of jobs and income?

Don’t count on it. The day will never come when the Commonwealth will successfully build a “media cluster”— a combination of media-oriented infrastructure and specialized workers that would make the Bay State an attractive location for film producers without a subsidy. Because film production is so risky and geographically mobile, producers will always need subsidies and have the power to extract them. Producers can play off states against each other indefinitely, threatening to move to states that offer good deals, keeping states like Massachusetts in perpetual competitive purgatory.

Massachusetts can do much, much better in creating jobs. Greater investment in early childhood education, infrastructure, job and worker training, and quality instruction throughout our educational institutions would yield far higher economic returns for our families and businesses than film tax credits.

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