By Marisa Lupica and Matt Kelly
States have been competing fiercely for movie productions with tax incentives since the early 2000s. Such incentives include cash grants, income tax credits, sales tax rebates, or payroll tax credits. Today, 37 states offer tax incentives for film productions. However, recent economic research shows that film tax incentives fail to substantially increase employment or the number of business establishments. Florida defunded its film incentive program in 2016 after running out of appropriated funds in 2014, but continues to enjoy a healthy film industry.
In 2010, states spent $1.4 billion on film incentives. That same year, Florida’s Entertainment Industry Financial Incentive Program, a sales tax rebate, was created. The Office of Film and Entertainment within the Department of Economic Opportunity administered the program, whose purpose was to “develop and sustain the workforce and infrastructure for film, digital media, and entertainment production.” However, the program had a return on investment (ROI) of only 0.25. For every dollar spent by the state, only $0.25 was generated in new tax revenues. This measure is a best case scenario that assumes qualifying productions would not have occurred in Florida but for the incentive, which is not always true. Because of this low ROI and a failure to significantly improve job growth, Florida’s film tax credit program was defunded last year. But the Office of Film and Entertainment remains in place and future legislatures could potentially revive this failed program in response to political pressure.
Studies cited by proponents of film incentives are usually conducted by economic consulting firms or state governments themselves, and overstate the benefits of incentives. For instance, an economic impact study of Florida’s film incentive program by the Motion Picture Association of America projected an ROI of 5.3 for state tax revenue between 2011 and 2016, much more than the actual 0.25. However, most more sophisticated academic work shows little to no impact from such programs. A 2015 working paper by Tulane University economist Patrick Button found that incentives can influence production location in the film industry because locations are highly substitutable, but they have little to no impact on employment or the number of establishments and “cannot create a local film industry.” A 2017 paper by University of Southern California economist Charles Swenson reported annual employment for each state before and after film production incentives were enacted, and suggested that the impact of incentives is diminished by a “crowding out effect” as more states compete for productions with incentives. Swenson found no direct increase in employment due to incentives, and only a 1 percent increase in the number of establishments.
State governments often advertise other states’ attractions through their incentive programs. From 2012 to 2016 Maryland spent $62.5 million on tax credits to film productions. Most of that money went to Netflix’s House of Cards and HBO’s Veep, both of which are set in Washington DC and prominently feature its historic monuments. Proponents of film incentives argue that movies spur tourists to visit the locations they are set in, but states like Florida that have defunded or eliminated their incentive programs benefit from other states subsidizing films set there. Of the 100 highest grossing films in 2016, three films partially set in Florida received money from other states’ incentive programs (Hidden Figures, Dirty Grandpa, and Ride Along 2). This represents free promotion of the Sunshine State.
The movie Moonlight, named best picture at the 2017 Academy Awards, was filmed in Florida without government incentives. Other high grossing films shot in Florida in 2016 include Miss Peregrine’s Home for Peculiar Children and War Dogs. Allowing firms to make location decisions based on market costs and demand encourages a productive use of resources, while attempting to influence these decisions through selective reductions in taxes risks a misallocation of resources.
The proper role of government in a market economy does not include subsidizing particular industries. Film productions are not a public good that everyone benefits from, at least no more than any other industry. Cutting taxes and reducing regulation for all businesses would avoid opportunities for cronyism, while stimulating growth in the broader economy. Defunding targeted industry incentives like those for the film industry has been a case of evidence-based policy by Florida’s legislature, and eliminating other targeted industry incentives would provide a more even playing field for businesses to compete and grow.