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Film Tax Credit
Film Tax Credit
Film Tax Credit
Michael Thom1
Abstract
Policy makers allocate billions of dollars each year to tax incentives that increasingly favor creative
industries. This study scrutinizes that approach by examining motion picture incentive programs
used in over thirty states to encourage film and television production. It uses a quasi-experimental
strategy to determine whether those programs have contributed to employment growth. Results
mostly show no statistically significant effects. Results also indicate that domestic employment is
unaffected by competing incentives offered outside the United States. These findings are robust to
several alternative models and should lead policy makers to question the wisdom of targeted
incentives conferred on creative industries.
Keywords
economic development, tax, tax incentive
For over a century, state and local policy mak- of targeted incentives shows no sign of abating.
ers have sought to encourage economic devel- Sixty-eight percent of state and local govern-
opment by offering incentives that target ments offered them in 1999; by 2009, it was
specific firms and industries. But targeted 95 percent (Florida 2018). The roots of that
incentives have only recently drawn consider- growth lay in the political environment. Policy
able scrutiny, thanks in part to their escalating makers use incentives to signal proactiveness
cost. For example, Tesla agreed in 2014 to build on the economy, and targeting a specific firm
a factory in Nevada after officials there offered or industry brings greater visibility to their
tax and other incentives valued at US$1.3
billion. Foxconn decided in 2017 to locate new
facilities in Wisconsin in response to incentives 1
Price School of Public Policy, University of Southern
valued at between US$3 billion and US$4.5 California, Los Angeles, CA, USA
billion. Several governments later competed
over Amazon’s HQ2 project with incentive Corresponding Author:
Michael Thom, Price School of Public Policy, University
packages worth as much as US$8.5 billion. of Southern California, 650 Childs Way, MC 0626,
Whether through so-called megadeals or Los Angeles, CA 90089, USA.
other programs that attract less notice, the use Email: mdthom@usc.edu
2 State and Local Government Review XX(X)
area may thus fail to compensate for other costs expanded those services and added corporate
that may be higher in the same area. Competi- tax incentives that were not available to other
tive targeting can also create a zero-sum game sectors (Christopherson and Rightor 2010).
in which one area’s “win” comes at the expense These MPI programs eventually spread to
of another’s loss (Chirinko and Wilson 2008; forty-four states, carried by rising unemploy-
Wilson 2009). ment and domestic competition (Leiser 2017;
Targeting nevertheless endures, and the tar- Thom and An 2017).
gets have evolved. Policy makers in many state Although the number of MPI programs has
and local governments have oriented their eco- declined, investment has not. In 2017, accord-
nomic development strategies toward growing ing to state government reports, over thirty
the “creative class” and building “creative states granted the industry a combined
cities” into a “creative economy” (Florida US$1.7 billion in corporate income tax expen-
2002; Howkins 2001; Scott 2000). The strategy ditures, not including the value of other pro-
is vested in a belief that creative, knowledge- gram services. About 77 percent was
intensive industries—that is, sectors in which concentrated in five high-expenditure states
intellectual property is the output—produce (New York, Louisiana, Georgia, Connecticut,
stable, high-wage jobs that serve as a growth and Massachusetts) that represented only 58
driver and a buffer against economic shocks. percent of expenditures five years earlier.
The argument is especially attractive in areas Cumulative spending in these states rival those
where policy makers have struggled to revive for prominent economic development mega-
economies decimated by losses in manufactur- deals (see Table 1).
ing and other heavy industries. Each high-expenditure state’s MPI program
But the approach engenders an intractable has common features, including location assis-
Catch-22. For all the benefits of a creative tance, advertising, and preferential regulatory
economy, there are drawbacks, among them treatment. Some include sales and transient
gentrification, rising housing costs, and higher occupancy tax waivers and incentives for
inequality. Compared to traditional industry building production-related infrastructure.
clusters, the market for creative labor and cap- States differentiate themselves with corporate
ital is more global and competitive (Florida income tax credits that vary from 10 to 40 per-
2005). And relative to other industries (e.g., cent of production spending, with a typical
agriculture, manufacturing, and natural range of 25–30 percent. Specific information
resource extraction), those built on intellectual on each state’s program is available in
property are less tethered to any one location. Supplement Table S1.
Incentives can create jobs more rapidly, but Because tax credit rates are high, tax credit
those jobs can just as rapidly leave. values exceed most productions’ state corpo-
rate income tax liability. To resolve the differ-
ence, a state designates its credit as either
Chasing Hollywood refundable (i.e., the state issues a cash refund
Incentives conferred on the motion picture for the difference between the credit’s value
industry, including film, television, and com- and the production’s tax liability) or transfer-
mercial production, have been a crucial ele- rable (i.e., the state allows the production
ment of strategies focused on creative to transfer the excess credit to other projects
industry development (Christopherson 2008). and/or allows the production to sell the
Most states and some local governments have excess credit to a third party). Among high-
made relatively low-cost support services, such expenditure states, two have refundable tax
as location assistance coordinated by a credits (New York and Louisiana), two have
taxpayer-funded film office, available to the transferrable tax credits (Georgia and Connecti-
industry for decades. But in the late-1990s and cut), and one allows each production a choice
early-2000s, policy makers in many states (Massachusetts). Regardless of tax credit
4 State and Local Government Review XX(X)
Table 1. Cumulative and Projected Motion Picture Incentive Program Tax Expenditures among
High-expenditure States.
structure, by reducing effective production with markedly lower investment can scarcely
costs, MPI programs theoretically encourage hope to achieve a better outcome. Moreover,
hiring activity that would not have transpired thanks to billions of dollars in investment, the
otherwise, thus encouraging each state’s crea- likelihood of MPI program termination in
tive economy. high-expenditure states is low, suggesting these
programs will remain in effect (Thom and An
2017). Estimating a separate model for each
Research Design state also produces a more nuanced view of
program impacts: It is likely that, despite
Scope implementing a similar incentive scheme, each
The typical method for evaluating MPI pro- state has experienced a different outcome.
grams is a panel study that includes all states
(e.g., Swenson 2017; Thom 2018). While stud-
ies adopting that frame have yielded valuable
Outcome Variable
insights, their results have three limitations. Scrutinizing a tax incentive’s employment
First, they do not consistently account for impact requires careful attention. Analyses
incentive differences across the states. Second, funded by the motion picture industry and some
they rarely produce state-specific findings, from economic development agencies tend to
leaving unresolved the question of whether credit tax incentives for job creation and blame
MPI programs are consistently poor performers a lack of incentives for job losses. But common
or if middling impacts result instead from neg- sense and data from the U.S. Bureau of Labor
ative effects in some states canceling out posi- Statistics suggest another reality. To wit, each
tive effects elsewhere. Third, they do not high-expenditure state reported hundreds, if not
address how incentives offered outside the thousands, of motion picture industry jobs
United States affect domestic employment. before MPI program implementation and the
This study aims to advance understanding of number of jobs varied from year to year. But
MPI programs, and incentives that target crea- both conditions were also present after incen-
tive industries more broadly, by addressing tives were available. This study’s objective is
those limitations. It focuses on the high- thus to determine the degree to which those
expenditure states described in Table 1. Over incentives, rather than confounding factors,
three-quarters of recent tax expenditures drove employment changes.
occurred in those five states, and if employment Consistent with prior research, the outcome
increases have not emerged there, then states variable is the annual percentage-point change
Thom 5
in each state’s motion picture industry employ- combined; and Canada, inclusive of Canadian
ment. The variable is derived from Quarterly federal incentives and provincial incentives
Census of Economics and Wages (QCEW) data offered in British Columbia and Ontario,
on North American Industry Classification Sys- adjusted to their then-current U.S. dollar
tem Code 512110, “Motion Picture and Video equivalents. Canada’s inclusion is essential; it
Production.” This category includes employ- has long been invoked as a competitor for
ment tied to the production of “motion pictures, domestic motion picture industry employ-
videos, television programs, or television ment. The industry, its labor unions, and
commercials.” Given the emphasis on job cre- economic development officials regularly
ation, assessing employment is advantageous use the presence of Canadian incentives,
to the raw number of incented television or film and those available in British Columbia
productions. Evaluating annual employment and Ontario in particular, as justification
changes instead of annual employment totals to expand domestic incentives. Failing to
also avoids one source of endogeneity that do so, they argue, will result in “runaway
states with high employment established an production”—a flight of jobs from the United
MPI program (perhaps as a result of industry States to Canada. Each variable is measured
lobbying) and subsequently continued to report as the annual percentage-point change in
high employment. constant-dollar figures.
As applied here, MPI program implementa- ITSA offers certain advantages over alterna-
tion is the intervention. Data from each state are tive empirical strategies. Since the model uses
separated into a preintervention phase (i.e., data each state’s preintervention phase as a counter-
from years preceding implementation) and factual, it sidesteps the challenges inherent to
postintervention phase (i.e., data from years other methods (e.g., regression discontinuity
following implementation; see Table 2). To and difference-in-differences designs) that
produce symmetric phases that avoid time bias, require identifying one or more control states
pre- and postintervention phases are of equal without incentives to benchmark against states
length. For example, New York enacted its that have them. Given the dearth of control can-
Film Production Tax Credit in 2004, but appli- didates—only six states never enacted an MPI
cations were not accepted until the latter half of program—and the distinctive nature of each
2004. Since 2005 was the first year in which state’s motion picture industry—from the size
any employment effects were likely measur- of the labor force to the state’s incentive timing,
able, New York’s postintervention phase is tax expenditures, and climate and geographic
2005–2017 or thirteen years in length. Its prein- features that shape production location
tervention phase is also thirteen years in length, choice—those methods are inadvisable. Addi-
1992–2004. The only exception is Louisiana. tional information on this study’s empirical
Its preintervention phase should be 1987– strategy appears in Text 1 Supplement.
2001, but the QCEW does not report industry-
and state-specific data from 1987–1990. Con- Findings
sequently, Louisiana’s preintervention phase Empirical results are reported in Table 3. Each
is truncated by four years. model is a strong fit of the underlying data.
While many ITSA iterations exist, this study Additional goodness-of-fit information is avail-
uses the model developed by Linden (2015), able in Figure 1 Supplement. Turning first to
which utilizes a generalized least-squares the question of how MPI programs impacted
regression that assumes a first-order autore- employment in the five high-expenditure states,
gressive error structure but no heteroscedasti- the results show the answer is “not much.” This
city. Initial diagnostic tests supported both study’s empirical strategy sheds light on three
assumptions. In addition to coefficients for outcomes of interest: b2, which represents the
explanatory and control variables, the model immediate, permanent program impact; b3 ,
estimates additional parameters of interest: the which represents the subsequent, annual effect
annual motion picture industry employment that may add or subtract from b2; and a separate
change prior to MPI program implementation coefficient for tax expenditures.
(b1 ), the program’s immediate employment The results show a statistically significant,
impact (b2), and its impact over time (b3). immediate impact in one state: Connecticut,
Table 3. Impact of Motion Picture Incentive (MPI) Programs and Other Factors on the Annual Change in Motion Picture Industry Employment in
High-expenditure States.
Internal factors
Change in own-state tax expenditures 0.049 (0.030) 1.108 (0.420)* 0.507 (0.197)* 0.176 (0.098) 0.144 (0.036)**
Change in own-state motion picture industry wages 0.718 (0.253)* 0.780 (0.281)* 0.509 (0.292) 0.424 (0.266) 0.885 (0.652)
Competitive factors
Change in MPI tax expenditures, New York – 0.444 (0.162)* 0.121 (0.097) 0.209 (0.069)* 0.209 (0.057)**
Change in MPI tax expenditures, Louisiana 0.058 (0.157) – 0.077 (0.352) 0.617 (0.348) 0.252 (0.237)
Change in MPI tax expenditures, Georgia 0.073 (0.062) 0.051 (0.287) – 0.408 (0.174)* 0.092 (0.142)
Change in MPI tax expenditures, Connecticut 0.011 (0.034) 0.108 (0.181) 0.166 (0.115) – 0.166 (0.060)*
Change in MPI tax expenditures, Massachusetts 0.016 (0.027) 0.052 (0.079) 0.057 (0.054) 0.170 (0.063)* –
Change in MPI tax expenditures, other U.S. states 0.016 (0.010) 0.151 (0.065)* 0.021 (0.048) 0.048 (0.038) 0.004 (0.026)
Change in MPI tax expenditures, Canada 0.048 (0.040) 0.228 (0.187) 0.063 (0.123) 0.042 (0.102) 0.087 (0.072)
Controls
Change in U.S. motion picture industry employment 0.550 (0.275) 1.692 (1.109) 1.444 (0.969) 1.030 (1.141) 0.626 (0.625)
Change in own-state private-sector employment 1.419 (0.881) 5.119 (5.725) 0.735 (3.082) 1.562 (4.733) 2.047 (3.310)
Employment trends
Pre-MPI program trend (b1) 0.442 (0.512) 9.570 (2.889)** 1.736 (4.001) 3.504 (4.231) 1.604 (2.476)
Initial MPI program impact (b2) 27.754 (12.429) 24.528 (34.617) 37.963 (23.243) 90.803 (20.787)** 14.068 (14.611)
Subsequent program impact (b3) 2.01 (1.665) 10.878 (4.018)** 8.337 (8.915) 7.221 (7.631) 0.477 (4.513)
Model information
Number of observations 26 27 24 22 24
F-score 4.67** 3.13* 6.28** 14.78*** 11.68***
R2 .835 .758 .891 .960 .938
Note: Cell entries are Prais–Winsten regression coefficients; standard errors appear in parentheses. Sensitivity checks are detailed in the Online Supplement.
*p < .05.
**p < .01.
***p < .001.
8 State and Local Government Review XX(X)
where the coefficient is large (b2 ¼ 90.803 or and Georgia), or both (Massachusetts), but—
about 91 percentage points). Two points of con- consistent with Thom (2018)—two of the three
text are important when interpreting this find- states with transferrable credits showed at least
ing. First, the increase is attributable to some employment sensitivity. It may be that
nontax components of the state’s MPI program. because it is more difficult to monetize trans-
The tax expenditure coefficient is not statisti- ferrable credits, productions that wish to realize
cally significant, indicating that larger expendi- those credits’ full value must return to the issu-
tures did not contribute to employment gains in ing state and engage in further economic activ-
Connecticut nor did smaller expenditures con- ity. That, in turn, may drive additional—if
tribute to employment losses. Second, at about trivial—employment gains.
500 employees, Connecticut’s motion picture The results offer evidence of interstate com-
industry labor force was small when the state’s petition, but all coefficients suggest inelastic
MPI program was implemented. That skews the responses. For example, at the national level,
proportionality of an otherwise small improve- employment in Louisiana decreased as tax
ment in total employment. A relatively slight expenditures rose in New York (b ¼ 0.444),
increase of fifty employees would equate to a perhaps because New York’s program was
10 percentage point increase in Connecticut, enacted just two years after Louisiana’s and
for instance, but only a 3 percentage point quickly grew to become the largest. At a
increase in Massachusetts, where the workforce regional level, employment in Massachusetts
is larger. increased as tax expenditures rose in contigu-
The results show a statistically significant ous New York (b ¼ 0.209) but decreased as tax
program effect over time in one state, Louisiana expenditures rose in contiguous Connecticut
(b3 ¼ 10.878 or about 11 percentage points (b ¼ 0.166). But in Connecticut, employment
annually). Unlike Connecticut, the Louisiana fell by an almost identical degree (b ¼ 0.170)
model suggests employment was responsive as tax expenditures rose in Massachusetts. That
to changes in corporate tax incentives (b ¼ finding implies minor labor competition
1.108, indicating each 1 percentage point between Connecticut and Massachusetts, prox-
increase in tax expenditures corresponded with imate states with other shared characteristics
a 1.108 percentage point increase in employ- (e.g., climate and a coastal border).
ment). These findings should also be inter- Three additional findings are worth under-
preted with caution. Due to limited data scoring. First, the results suggest a trade-off
availability, the Louisiana model was estimated between employment gains and wage gains in
using unbalanced pre- and postintervention two states (see also Note 1). Each 1 percentage
phases; if the model is reestimated with point wage increase in Louisiana was associ-
balanced phases, both coefficients lose statisti- ated with a 0.780 percentage point decrease in
cal significance. employment. Results for New York point to a
The influence of corporate tax expenditures similar trade-off. While the industry’s highly
on employment elsewhere was mixed. Like transitory nature makes it likely wage and
Connecticut, expenditures in New York had employment changes occur in close time
no statistically significant relationship with proximity, both of these findings were robust
employment. Although statistically significant, to lagging wages by one year.
coefficients for Georgia (b ¼ 0.507) and Mas- Second, the models do not indicate any
sachusetts (b ¼ 0.144) indicate that employ- domestic employment sensitivity to Canadian
ment there was inelastic to tax expenditures— tax incentives. The associated variable merged
a 1 percentage point change in tax expenditures Canadian federal incentives with those offered
did not propel a comparable change in employ- in two provinces, but the finding was robust
ment. There is no clear pattern between these to estimating each model to control for federal
findings and whether the tax credit was refund- and provincial incentives separately. Null
able (New York), transferrable (Connecticut effects were mostly robust to expanding the
Thom 9
model to include competing incentives in Stogel 2010; Murray and Bruce 2017). And
California and in the United Kingdom.2 they further reinforce the existing literature’s
Third, employment changes in four states general conclusion that, as an economic
showed no association with motion picture development strategy, targeted incentive pro-
employment changes nationally. The sole grams that carry large tax expenditures fail to
exception is New York, which had the largest encourage meaningful job creation.
preexisting motion picture industry labor force. This study’s results should encourage policy
It is to be expected that as the industry’s makers to exercise caution before pursuing tar-
employment rose and fell nationwide, the effect geted economic development programs, espe-
would be mirrored in New York regardless of cially those that incent creative industries.
the presence or absence of an MPI program. When the output is intellectual property, pro-
Finally, the findings reported in Table 3 duction can occur anywhere, and the jobs cre-
were robust to several alternative model speci- ated as a result of incentives—if any—are far
fications. These are described and reported in from long term. In a competitive market, the
Text 2 Supplement, Table 3 Supplement, Text only hope to retain those jobs is to increase tax
3 Supplement, Table 4 Supplement, Text 4 and other incentives, the very same “race to the
Supplement, and Table 5 Supplement. top” observed when state and local govern-
ments try to outbid each other for the latest pur-
ported engine of economic growth (e.g., Tesla,
Conclusions Foxconn, Amazon, or a professional sports
State and local governments in the United franchise). That inevitably creates a bubble in
States allocate tens of billions of dollars annu- which policy makers have overinvested in a
ally to economic development incentives that program relative to the program’s ability to
target specific firms and industries. In recent yield a return on investment (Maor 2014).
years, policy makers have shown a preference This study has some limitations. It does not
for conferring corporate tax incentives and provide a direct assessment of MPI cost-
other supports on the creative sector in the effectiveness, yet a separate analysis may not
hopes of creating stable, high-wage jobs. That be required. Comparing the tax expenditures
trend has occurred despite academic research reported in Table 1 against the scarcity of
that questions whether targeting is an effective employment gains attributable to that invest-
strategy. ment suggests MPI programs are anything but
This study contributes to that literature by a prudent use of taxpayer dollars. This study also
reporting the impact of MPI programs, a bundle does not thoroughly investigate the relationship
of corporate tax incentives and other services between MPI programs and industry wages.
for the motion picture industry. Its objective However, some evidence points toward a
was to determine whether MPI programs trade-off between employment gains and wage
impacted employment in the five states with the gains, particularly in New York and Louisiana.
highest cumulative tax expenditures. Instead of This study also highlights avenues of future
a panel analysis, this study utilized a quasi- research. The employment dynamics consid-
experimental, interrupted time series model. ered here state level, not local. Whether MPI
Results showed that in most cases, MPI programs facilitate job creation at the city or
programs had no statistically significant county level remains understudied, and so does
employment impact. Findings that achieved whether those gains—if any—are real increases
statistical significance nevertheless failed to or merely a relocation of jobs from one locality
show practical significance. These uninspir- to another. The motion picture industry also has
ing employment effects reiterate those in specific characteristics, such as relatively short
other econometric (e.g., Swenson 2017; production time frames, that differentiate it
Thom 2018) and state-specific MPI program from other creative industries that have a higher
assessments (e.g., Adkisson 2013; Gross and likelihood of remaining in one location for
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12 State and Local Government Review XX(X)