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A harsh assessment of film tax credits

A harsh assessment of film tax credits

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Every state loves to have movie stars visit, and many, including Missouri and Illinois, are willing to spend money to attract moviemaking activity. Rarely does anyone try to figure out what the state gets for its money.

In Michigan, the Senate Fiscal Agency has just done that. In a recent study, it says the state's two-year old film incentive program did create 355 full-time-equivalent jobs last year, but at a high cost:

The 2009 cost to taxpayers of employment associated with the tax credit ranged from $193,333 to $44,561 per job, depending on whether direct or total employment impacts are examined.

Even the lower figure is more than the average wage in Michigan, so it's hard to argue that these subsidies are efficient. Moreover, economist David Zin concludes that nearly half of the economic benefit of the tax credit flows outside the state:

In 2008, approximately 47.3% of expenditures that qualified for the Media Production Credit did not affect the Michigan economy -- primarily because the expenditures were made to individuals and firms outside of Michigan. The law allows such expenditures to qualify for the credit under a variety of circumstances. As a result, approximately $22.7 million of the $48.0 million in approved credits provided no contribution to the Michigan economy.

Advocates of film tax credits -- as well as other forms of taxpayer subsidies -- often argue that the incentives will pay for themselves by generating a lot of economic activity, and hence new tax revenue. Zin has a blunt assessment of that argument:

The nature of the credit and the resulting activity is such that under current (and any realistic) tax rate the State will never be able to make the credit "pay for itself" from a State revenue standpoint, even when the credit generates additional private activity that would not have otherwise occurred.

Josh Barro expands on the foolishness of the "it pays for itself" argument in an essay at Real Clear Markets.

We're likely to hear versions of that argument often as Missouri examines all of its tax-credit programs, not just the one for moviemakers. It should be discarded out of hand. As much as we'd like to think that politically popular industries can give taxpayers a free lunch, it just isn't so.

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