Gov. Brown signed the Bill into law.

Do Hollywood tax credits really help the economy?

Capitol's number crunchers wonder if proposed millions in subsidies could be used better elsewhere.

September 06, 2012|Evan Halper

SACRAMENTO — As Gov. Jerry Brown mulls whether to sign into law another round of subsidies for Hollywood production companies, the question that confronts him is how much each job on a movie set is worth to taxpayers.

In Massachusetts, lawmakers recently discovered a similar program was much more expensive than they thought. After years of subsidizing film productions without looking too closely at how that was helping the economy, state officials put it under a lens and found that taxpayers were spending as much as $300,000 to bankroll each position.

For The Record
Los Angeles Times Friday, September 07, 2012 Home Edition Main News Part A Page 4 News Desk 1 inches; 58 words Type of Material: Correction
Tax credit: In the Sept. 6 Section A, an article about the state tax credit for film productions said that the governor was considering a bill by Assemblyman Felipe Fuentes (D-Los Angeles) to extend the credit for two years. Another measure that would do so, SB 1197 by Sen. Ron Calderon (D-Montebello), was also sent to the governor.

Other states that went in for a close-up after dispensing hundreds of millions of dollars in tax breaks found that every public dollar put into the film industry was generating a few dimes, or less, in revenue.

Boosters of California's tax breaks for filmmaking say they cost just $10,000 for each production job that would otherwise disappear from the state, an investment that more than pays for itself when the workers file their tax returns and spend their earnings. But some of Sacramento's most trusted number crunchers say the cost could be considerably higher, questioning whether the tax benefit to production companies provides any economic boost at all.

"Runaway production" -- the flight of some filmmaking to cheaper states -- has played a role in California's double-digit unemployment rate. But as the available government dollars continue to shrink, Hollywood is being challenged to prove that the plan for $200 million more in subsidies that lawmakers sent to Brown last week would not be better spent preserving other kinds of jobs.

"The state is using money it then can't use for other things, like education, transportation and healthcare, which also create jobs and economic growth," said Nicholas Johnson, vice president for state fiscal activity at the Center for Budget Policy and Priorities, a liberal think tank in Washington, D.C. "There is no accounting for what else the state could be doing with those dollars to provide economic growth."

The measure, AB 2026 by Assemblyman Felipe Fuentes (D-Los Angeles), would extend the existing $100 million annual tax break for two years, until 2017. Supporters say the credit, which Brown has until the end of the month to act on, has a "multiplier effect" on the economy.

"It brings so much associated investment and job creation in all the industries that benefit," said Barry Broad, a labor lobbyist and part of a coalition that includes the Directors Guild of America and the Screen Actors Guild, which is urging the governor to sign the bill. "Tourism, hotels, restaurants, equipment rental -- it is just a huge benefit."

Proponents also note that a decade ago only a few states offered tax breaks intended to lure film productions. Now, some three dozen do.

If California withdraws its subsidy, they say, the industry will more quickly migrate elsewhere and harm the industry overall.

The California tax break "impacts the confidence of this industry and whether a talent pool of people will remain here," Broad said.

And the Motion Picture Assn. of America cites a study it commissioned by the major accounting firm Ernst and Young that says the tax credit should not be judged only by the revenue it helps generate in the short term.

"The primary benefits of film credits accrue to the private sector, not the public sector," it says. "The relevant policy question in evaluating film credits should be, 'Do the residents of the state get a good return for their investment?' and not simply, 'Does the investment pay for itself in terms of additional state tax collections?' "

Officials at the association, which is taking the lead for studios in promoting the credit extension, declined comment.

Some of the state government's top tax experts say the industry's claims are overblown. The nonpartisan legislative analyst's office, which both Democrats and Republicans look to for frank and reliably independent financial advice, recently produced a report declaring the proposed credit extension a net loser.

The report said each dollar spent on film tax credits is bringing back less than a dollar to the state treasury and "perhaps well under $1.00 in many years." It also ripped into the much-repeated finding by the Los Angeles County Economic Development Corp. that 20,000 jobs have been created by the tax credit for California film productions, which went into effect in 2009 and has so far cost taxpayers $300 million.

The county report assumed all of the subsidized jobs would not have been created without the credit. The analyst cautioned against that assumption, saying that it meant the benefits of the program may be "dramatically overstated."

Several productions that entered the lottery for the limited tax credits but did not receive them went on to shoot in California anyway, suggesting the credit was not essential to job creation. Five of those productions spent $20 million in the state, the analyst said.

In addition, the California Research Bureau, an independent agency that studies policy issues for the Legislature and administration, last year questioned the assumption that tax incentives in other states were luring California film jobs away.

It produced a study noting that growth in California's film industry exceeded that elsewhere from 2000 through 2009, when other states were most aggressively pursuing incentives and trying to take productions away.

The industry's employment and wage data, it said in a report, "do not provide clear evidence that any significant damage to the state's industry or economy has resulted from efforts by other states to draw movie production away from California."

The Tax Foundation, a conservative think tank in Washington, noted in a review in April that the majority of studies not bankrolled by industry-affiliated groups or local authorities eager to attract productions have found the credit's performance lackluster.

Government studies in Arizona, Connecticut, Massachusetts, Michigan, New Mexico and Pennsylvania concluded that every dollar invested in the tax credit was returning less than 30 cents in revenue, the foundation noted.

Even the staff assigned to the lawmakers who passed the proposal for an extended credit appear ambivalent. Their report noted that two of the states trying to attract California productions with generous incentives -- New Mexico and Louisiana -- saw film employment fall far more precipitously during the recession than in the nation overall.

Their analysis raised the question of whether Hollywood firms that already enjoy numerous tax advantages should get another break and took aim at some of the "opaque" accounting maneuvers used by the studios.

"Forrest Gump," one of the industry's highest grossing productions, showed no profit on the books, the analysis noted.

"Perhaps the highest level of creativity in Hollywood," it said, "is the creative accounting."

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If it's good for Hollywood is it good for other businesses? Will the tax loophole agitators rail against this gift to Obama's friends like Harvey Weinstein?