On Sunday night, Hollywood producers and movie stars will walk the red carpet at the Academy Awards. But the hosts of the Oscars aren’t the only ones who roll out the red carpet for this crowd. Many states offer substantial tax credits to entice the motion picture industry to film in their states.
States including New York, Louisiana, Georgia, Massachusetts and North Carolina offer refundable or transferable production tax credits in excess of 25 percent of production expenses. These tax credits ignore box office profit and instead are determined by how much the filmmakers spent on qualified expenses during production. Production tax credits differ from the income tax deductions most people are familiar with.
Credits are more valuable than deductions because, while deductions lower taxable income, credits directly reduce tax bills. When these credits are refundable, states actually pay production companies the differences if their tax liabilities are under their credited amounts.
Breaking down the tax incentives received by films nominated for best picture by the Academy, we calculate that the Oscar for best tax break goes to “The Wolf of Wall Street.” New York State's 30 percent, fully refundable tax credit, combined with the film's $100 million production budget, means New York State taxpayers may have paid up to $30 million for the honor of having Leonardo DiCaprio in their state. It is not yet clear exactly how big the movie's tax break was, but New York allocates $420 million each year to its credit.
Film production tax credits do not generate long-term economic benefits for states and support for these credits has recently waned as the associated costs have become clearer. At their peak in 2010, these incentives cost 40 states a total of $1.4 billion.
California is refusing to follow the trend of declining film tax credits. The state is working to increase its “limited” incentives -- tax credits are capped at $100 million a year and 20 to 25 percent of production expenses-- to better compete with other states. Mike Gatto, a State Assembly member from Los Angeles (unsurprisingly), said he wanted the tax break to be “[big] enough of a break to incentivize productions to stay here, to locate here, to incentivize long-term health of the industry.”
How about the health of the overall economy? Gatto admits that lower tax burdens create incentives for firms to locate in the state and expand. A far better policy would be to lower tax rates for everyone — not just Hollywood. This would lead to more equal treatment and sustainable economic growth. Fixing potholes, maintaining parks and staffing fire departments are better uses of taxpayer money than subsidizing Hollywood, which just had its most profitable year.
State lawmakers are given a free pass to issue special treatment to the film industry, but imagine the public outcry if these credits applied to the oil producers. Lawmakers present the outcome as win-win, but the studies they tout are deeply flawed and often supported by Hollywood funding.
Tax Foundation economist Joseph Henchman points out that if the fanciful projections were taken seriously, the United States could solve its long-term budget situation by simply giving the film industry $1 trillion. One study assumes that every dollar in tax credits creates $17.75 in economic activity, which leads to $1.88 in new tax revenue for the state. These claims are less realistic than the science-fiction films the credits support.
Whoever wins at the Oscars on Sunday, it is clear who the real losers are: American taxpayers. Star-struck legislators should come back to reality and stop subsidizing Hollywood producers.Jared Meyer is a policy analyst at Economics21, a center of the Manhattan Institute for Policy Research. Jason Russell is a research associate at Economics21, a center of the Manhattan Institute for Policy Research.