The latest report by the California LAO

Yesterday the California Legislative Analyst’s Office (LAO) issued a new report on the impacts of that state’s 10% tax credit for film and television production. This follows on the heels of a similar report from North Carolina. Both states are debating whether to continue the tax credit programs, and these reports are bad news for supporters of movie production incentives (MPIs) in both states.

The California LAO study avoided clear recommendations for lawmakers, but their key takeaways were:

• States shouldn’t compete for film productions using subsidies
• Since they do compete, California may need to protect its industry by doing the same
• But lawmakers should proceed with caution, since the subsidies are both expensive, and do not pay for themselves

Obviously the admonition to other states is somewhat predictable, given the fact that Los Angeles County alone is home to some 50% of film industry employment nationally. And it is true that film production has declined in the state, both because of general declines in the industry and losses to other states. But the last issue — that the high costs of MPIs are not offset by the economic benefits — challenges more rosy pictures painted by many previous studies, including one from the Milken Institute from February. According to that report:

California should not attempt to capture or keep productions that are looking for the highest possible incentives — that’s a game it can’t win. Instead, the state must facilitate the preservation of the core employment base and production infrastructure, as well as help local filmmakers restructure and adapt to the new age of digital production and distribution… California should ensure enough incentives to balance out its higher costs and the increasing aggressiveness of other states without sacrificing its future. (Klowden et al., 2014)

The LAO study revisits an earlier study by the Los Angeles County Economic Development Corporation (LAEDC), which suggested that “…every $1 of tax credit returned $1.11 in state and local revenue.” The LAO estimated that a more accurate figure would be %0.65 for every $1 spent. In addition to the cautions suggested above, the report points out that film and television production could decline in the state regardless of legislative actions, that subsidizing this industry both sets an awkward precedent and could stoke a “race to the bottom” with other states, and that the effectiveness of MPIs could be difficult to assess in any case.

The California study follows closely a memo by the North Carolina Fiscal Research Division (FRD), which itself was a response to an industry-supported study by researchers at North Carolina State University. Though the memo was more preliminary than the California LAO report, it did find several concerns with the more optimistic results of the NC State report. Similar to the California case, initial calculations suggest that instead of returns of $1.06 and $1.42 for state and state + local for each $1 of tax credit, the FRD found returns of $0.46 and $0.61 per $1 respectively. The 25% tax credit for North Carolina productions is set to sunset at the end of 2014, barring action by the legislature to extend it.

Look for more such dueling studies as increasingly states question the efficacy of MPIs as a tool for employment and economic growth going forward.