Tax Breaks for Hollywood

A Parade article this past Sunday titled Tax Breaks for Films Gets Mixed Reviews, discusses the argument of whether states should offer tax breaks and other incentives in order to get production companies to shoot movies and TV shows within their borders.

In 2002, just five states offered such discounts; today, that number has grown to 44. Michigan offers one of the most generous tax credits in the nation, equaling 42% of production costs. In 2009 the state gave away $48 million, and this year is expected to pay out $198 million. (Keep in mind that Michigan is facing an overall estimated budget shortfall of $700 million.) In an analysis by the Associated Press, all states gave away a total of $1.8 billion in incentives to Hollywood between 2006 and 2008.

Those arguing against these tax credits say that money should be spent on areas where the budget is being cut back, such as education and roads. Supporters of the tax breaks say that they help boost local and create jobs. A few states, such as New Mexico, have been able to turn a profit, but the majority of states do seem to lose money with these incentives.

So, do you think that states should continue to offer such tax breaks for Hollywood? Should these programs be restructured? Or do you think they should just be done away with altogether?

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5 Comments »

 
  • It seems like a problem of collective action, or critical mass, zero-sum games, pyramid schemes, first-mover advantages, pluralities… or somesuch. I’m sure the first few states that did it profited handsomely by playing host to tons of productions, and as more and more states began competing to slice up the limited amount of film productions available, while it remained a good deal for the film companies, no individual states were getting quite enough “work” anymore to make an impact.

    (Of course, I could be stating the obvious because I didn’t click through to the Parade article.)

    If enough states shut down their programs, production companies will just flock to the states that are left over. Those states will do well again, and over time, the states that discontinued their programs will start eyeing the states that kept theirs going “hmm, maybe we should get in on that action…”

    It also kind of reminds me of the peril of newspapers. There are enough paying readers out there to support large news organizations as we know it… just not enough to support all the papers currently in business! If every paper but the New York times did away with their printed product, everyone interested in paying for news would flock to the Times and they’d be raking in the cash both from subscriptions as well as advertisers looking to get their stuff in front of the eyeballs of those who pay for stuff. Newspapers should easily be able to make a profit these days! It’s just that, uh, to do so, most of their peers need to hurry up and die already.

    • Allison Guerny says:

      I was actually thinking along very similar lines as you! No matter what the states decide to do individually, Hollywood will continue to get a good deal, so it seems they will try to continue this state competition as long as they can.

      The newspaper analogy is quite good! (Of course, if they really want to succeed, they should tailor to their readers more. :)

  • Joao Pedro Afonso says:

    “all states gave away a total of $1.8 billion in incentives to Hollywood”

    I have a little trouble with the statement above and others similar, not only here but also in the Parade article. Isn’t most of the incentives discussed, tax breaks or discounts over what the movie companies would have to pay to the states? If that’s the case, then the values we are talking about are opportunity costs, not real ones but what states are forgiving the companies from paying relative to normal operations… but if the fiscal environment was the normal, the companies wouldn’t likely be there, for a start, paying that. To claim the money is been given to Hollywood and could have be better employed in other missions like education or health, is to embark in the wishful thinking that, if the taxes breaks weren’t there, the states would have received the correspondent money.

    Ironically, this is the same argument used by the same media companies to claim huge loses due to media piracy (when they equal pirated works to lost sells in a 1 to 1 correspondence… nothing is that simple as acknowledged in a recent assessment from the support services to the Congress), and more irony in it, by accepting it, it offers partial legitimacy to the same piracy (if the public is funding the media production, can we blame it if it takes liberties with it in pursuing the access to media culture?).

    Returning to the original opinion asked, I understand why the situation came to be as it is: initially, certain states won the media industries because of technical factors (proximity to the public, scenarios they could provide, light hours conditions, film professionals, etc). The media industries grew up to be one of the most profitable, and of course all the states wanted to have a slice of the pie against the states who monopolized it by sheer inertia. So they offered incentives to attract the industry, and of course, ended in a inter-state competition. Is is funny to compare the incentives given by Michigan with their expected shortfall because,… Michigan is not diverting money from its needs to the movies! What it’s doing is diverting money but from the needs of the OTHER states, the ones from which they are trying to keep away those industries and which are not enough fiscally “aggressive” (in a seller sense) to keep them. Reading Mark Robyn in the parade’s article ““Filmmakers bid states against one another and reap the benefit,””, we can think the filmmakers are to blame for the situation but, I think we can experiment here another interpretation too: the situation sprang from the appetite of the states in prey other states (because they are trying to divert the industries from those, and not produce their ones). Either way, the result is the same: ““States are engaged in this escalating bidding war to win over a marginal amount of business. It’s a race to the bottom.””

    I’ll finish noting the relationship of the post’s subject with another Allison wrote before: the prisoner dilemma. Considering those incentives or tax breaks as cheats, being exceptions to the normal fiscal policy, what we are assisting here is the prisoner dilemma when both rats each other. The best global result is for when the prisoners don’t rat but, they might be tempted to cheat the companion and won individually more. In the competitions of the prisoner dilemma I knew, the best strategy was invariably the tit-for-tat (even in the one I made with some friends some years ago): cooperate the first time, and repeat the same play the adversary played the round before. In other words, once someone starts to cheat, the best way is to answer in kind, which explains why everyone is playing the same idea now. The solution is not retreat back unilaterally because that’s not going to put the filmmakers to pay normally, only force them to jump off the ship. The solution is to keep the strategy or if not, to dialog with all states to return to a more healthy fiscal policy where there are no temporary exceptions… which shouldn’t have be there anyway, first time. It needs trust and coordination at a global level, to regain the previous best overall outcome.

    But I’m not sure if the American culture allows that move.

    PS.: The situation is slightly different if the states use negative taxes to promote movie makings, in other words, subsides. In that case, is a war which the more powerful states will win, leaving only some few competitors in the field. Subsides doesn’t exclude indirect profits above what is offered, but that’s harder to account and to defend politically against other choices.

    • Allison Guerny says:

      You bring up a very good point I overlooked. In 2008, according to the Michigan Film Office, productions in the state spent about $65 million. With the incentives being offered, some might argue that that’s $47 million “down the drain.” As you brought up, without the incentives, how many productions would even be there? In 2007, just three large productions were filmed in the state, so it would be better to compare how the profit on those three productions compares to the $65 million Michigan pocketed the following year. (I don’t know the exact numbers, but I doubt it comes close.)

      At the same time though, as Everett pointed out, if a state discontinues their incentive program now, Hollywood productions will simply move to other states where they can get better deals. It seems like no matter how this goes down, it’s a win-win situation for the Hollywood production companies, and as you described it: an “inter-state competition.”

      That’s also very interesting comparison you made to the prisoner’s dilemma. In the Parade article it named several states that have already pulled their programs. Following the prisoner’s dilemma (and just general logic) it seems like they will only make themselves worse off and give other states an advantage. It will be interesting to follow in the future if these states stick with their decisions.

      • Joao Pedro Afonso says:

        I’ll risk to say that the problem of those states (I’m only guessing) is that they account the tax breaks has “expenses”. They account money that never entered by equaling it to money exiting (on the pretext of promoting that kind of economy). They may do it to preserve the idea that all economic activities are in equal foot and to show more transparency.

        But in that case, the state is going to appear as if it is subsidizing frivolous activities, which is always tricky to explain to the voters, particularly when it is already in deficit. So, there’s going to be some pressure to stop that, although, they are not loosing anything (probably), only gaining (maybe). And they stop. There might be good reasons to stop: if they are actually subsidizing productions in a liquid manner, or if the economy is already overheated or in full employment. To continue those programs will likely deviate good professionals and resources from companies which pay more taxes. There are other risks involved: once issued a new favorable fiscal exception regime, money laundering and fiscal frauds became attractive, and likely you’ll have to implement additional services to avoid this. As we can see, there might be plenty of objective reasons to stop the programs. But unless is not one of those, or because they have secured cooperation from all the other states, they have nothing to loose by continuing them. It might be not the rational thing to do, indeed.

        However, as we saw, the wins are not obvious too… that they were able to discussing the stopping means that. The purpose was likely to construct a film industry in the states too and the end of the programs means also they were unable to do it, not to the point of creating a lobby enough powerful to defend them. If they implemented the programs and later stopped then, I don’t think that they’ll reinstate it, not unless a lot of other states do quit them also, promoting a few remaining to new Hollywood’s to be admired… this, simple for sake of the state image (“so they, started, then stopped, now started… are they serious?”).

 

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