Mayor Slay Overestimates Economic Impact of Up in the Air

December 16, 2009

Mayor Slay Overestimates Economic Impact of Up in the Air

In this KMOX article from yesterday, Saint Louis Mayor Francis Slay comments about Missouri’s film tax credit program:

They (filmmakers) spent a lot of money, had about a $50-$60 million dollar economic impact on the St. Louis area.

Hold on — $50–$60 million? Where is he getting this figure? Allow me to crunch some numbers and demonstrate that an impact of this magnitude is unrealistic.

In the comment section of my recent post about film tax credits in Missouri, Econdiva provided an estimate that the producers of Up in the Air spent “just shy of $12 million” in the state. I will grant her estimate for the sake of argument, because she worked on the film and is more likely to know this information.

For an economic multiplier, I’ll reference a fiscal note from Louisiana regarding the estimated economic and fiscal impacts of film and video tax incentives (emphasis added):

[T]he current statewide economic multipliers, supplied by the Bureau of Economic Analysis of the U.S. Department of Commerce, for the motion picture and sound recording industries estimate that each dollar of expenditures in those industries generates about 40¢ of earnings throughout the entire economy (a final demand earnings multiplier of 0.3982).

Using this figure, an expenditure of $12 million for Up in the Air would generate only $4.8 million for Missouri’s economy.

Even if Mayor Slay used the January 2009 prediction of $30 million in the Saint Louis Business Journal, the amount generated for the state’s economy would only be $12 million.

Both numbers fall pretty far short of $50–$60 million. This is just wishful thinking.

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Even Christine Harbin uses a multiplier of 2 in her Show Me Daily article dated December 14, 2009- “Even More on Missouri Film Tax Credits”. Christine Harbin’s article quote: “Additionally, according to “The Economic Impact of the UK Film Industry,” a 2007 study by Oxford Economics, the film industry has a multiplier of only 2.0″- end quote. David Friedman for the Alliance of Motion Picture Arts and Sciences (AMPAS) did a study of the California production industry. In his report, he determined that the economic multiplier for the entertainment industry was 2.12%, and most states use 1.5 to 3 for a multiplier. So while $50- $60 million is in the higher range, $4.8 million on $12 million is definitely way low. Seems the actual impact would be more in the range of $18- $24 million on $12 million spent. This also does not include such factors as increased National Awareness and PR of Missouri, increased tourism, and population inflow. In closing, I still contend any new business is good business right now.

Comment by Scott Clark — December 17, 2009 @ 1:37 a.m.
Let me see if I understand this. A company comes to Missouri and employs $12 million of resources. In the worse case scenario, each of these Missouri resources would have been otherwise unemployed, so that the labor and capital and other inputs would not have otherwise had any market value with the entrance of this company. It seems to my way of thinking that the market value of final goods and services in the Missouri economy increased by $12 million during the year in which resources were employed. It is true that some of those factor payments would be saved, and potentially used to acquire new productive machines and stuff that would yield extra future output for Missouri. My point is to overthrow the notion that there is “magic” multiplier that expands the Missouri economy in this way. I know that simple extrapolation is dangerous, but if the multiplier were true, then we could transfer the entire Missouri economy into film production and we would double the size of our state economy.

Comment by Joe Haslag — December 17, 2009 @ 9:05 a.m.
That figure is wrong.

40 percent of a BUDGET stays within the community…40 percent of the estimated $26 mil from Up in the Air would have stayed within St Louis so nearly $10Mil stayed within St Louis and Missouri…BUT for every dollar spent it reverberates 20 times…I spend One Dollar, you spend it, someone else spends it..It all adds up to a viable measurable Economic Inpact.

Instead of all this Negative Chat about what it doesn’t do look at the bottom line. People are coming to MO to spend their money. And we need the dollars right now. You have to spend money to make money kids. That’s how you attract new business to a flagging economy.

Comment by Pam Garrett — December 17, 2009 @ 9:09 a.m.
Let me add…Mr. Clark’s point is a good one. No one is pooh-poohing the employment of Missouri resources. The question is whether film tax credits–resources collected by the state government from Missourians–will generate a flow of future movie activity in Missouri that justify the expenditure. Ms. Harbin at least asked the right economic development question. Serious people should offer quantitative evidence demonstrating the return to Missouri taxpayers. I look forward to the transparent answers generated by such folks. My prior belief is that the value of National Awareness and Missouri PR is small. I hope someone can prove me wrong.

Comment by Joe Haslag — December 17, 2009 @ 9:12 a.m.
Christine,

Forgive my lack of economic knowledge, but why are you only including the “40¢ of earnings throughout the entire economy” as your measure of the economic impact instead of those earnings PLUS whatever the movie makers spent directly?

Maybe I’m misunderstanding this; you may have to give me a quick money multiplier primer. But if the money multiplier is 1.4, then a $30 million dollar project would generate $42 million throughout the state, which is close enough to 50 if you are a politician writing in the paper. Go ahead and assume away $8 million in PR and future movie making.

(To go off on a small tangent, this argument that the benefits from good PR and people moving to the state are unmeasurable but probably gigantic is insane to me. I don’t imagine the CEO of an engineering firm sitting in the audience of Up in the Air and then immediately phoning the board of directors to change the company HQ. No one watches George Clooney getting off a plane and says “I want to go to there” and hops in the car.)

If your point is that the greater economy only makes a ‘profit’ of 40¢ per dollar spent in making the movie, then this works out to $12 million. You don’t get to count the $30 million, because the caterers would have brewed coffee for other people, the carpenters making sets would have built furniture elsewhere, etc., etc. So to calculate the viability of the project, you need to see if this $12 million in additional revenue is offset by $12 million in tax credits or deductions or whatever. Is this the correct calculation to make? A 40% ROI seems ridiculous to me, but whatever.

But my overall point is that the mayor and you may be talking about completely different things. Imagine, if you will, that the mayor institutes a new program where the City of St. Louis pays $50 million to buy 25 million $2 bills. It would be correct (but silly) for the mayor to claim that the program had a $50 million benefit. You are right to point out that this is not the correct number for evaluating the success of the program, but you can’t blame the mayor for putting that spin on it. It’s what mayors do. Weaselly, but typical.

Comment by David C. Miller — December 17, 2009 @ 11:33 a.m.
I don’t mean to imply that Mayor Slay is weaselly, just that my hypothetical one is. I think it’s cool that you people in St. Louis have elected a mayor with the last name of ‘Slay’. It’s easier to spell, say, and imagine as a movie villain than ‘Cieslewicz’.

Comment by David C. Miller — December 17, 2009 @ 12:13 p.m.
Pam,
Let’s take your figures and logic and look at them again. Let’s say that 40% of the budget (which was actually $12 million, according to the producers) stayed in StL, like you said. And let’s even pretend that it “reverberates 20 times” (which has been empirically shown to be untrue, and more likely to have only a 1.5-3 times effect.)

But EVEN accepting all that as fact, what about this similar scenario, using the same logic:
I own a company called Sui Generis Inc. I plan to spend $12 million to open a new branch of my company, and I’m looking for a place to do that. I’m going to look at the permanent tax structures of the states in order to find a good place to maximize profits and attract more people to work for me. (If MO or another state doesn’t have an income tax, my employees essentially have a 6% raise without me having to pay a dime more.)

In my alternate scenario, where taxes are lower for all businesses (as opposed to targeted just at the film industry) St. Louisans are employed and spend their money on goods in Missouri. If one believes there are “reverberations” then obviously the permanent businesses are far better, as they are permanent and fixed in the community… meaning the money is spent even more within Missouri. Even with your own logic, permanent tax cuts are far better than film tax credits for the economy of Missouri. Tax credits to just one industry are at the expense of all other industries. A tax credit to the film industry means that my hypothetical business, and all others like it, do not get a tax cut. It artificially distorts the marketplace.

Let the market decide which jobs should be brought to Missouri with overall tax cuts, instead of allowing the government favoring one industry at the expense of the rest.

Comment by Caitlin Hartsell — December 17, 2009 @ 12:14 p.m.
I’m having a hard time getting past the fact that you either haven’t read the statute pertaining to Missouri Film Tax credits or that you (and I’m having a hard time believing this is true)truly don’t understand how it works. There is not question about the direct impact. It’s the indirect or induced spending that you are questioning. The

Once again, the “just under $12 million” direct spend isn’t something that I hypothesized or pulled out of thin air. The amount of money spent in Missouri has to be verified before tax credits are issued. The tax credits are a percentage of the Missouri spend.

Film Production Tax Credit Guidelines (Section 135.750, RSMo)
(The capitalization below is mine – for emphasis)

Effective January 1, 2008, the Missouri Department of Economic Development (DED) may issue a film production company a state income tax credit equaling up to 35% OF THE COMPANY’S EXPENDITURES IN MISSOURI necessary for the making of a film.

Missouri Expenditure: An expense for a product or service provided in Missouri that is a necessary cost for the production of a qualifying film production, for which remuneration is received by a business entity, organization or individual located in Missouri. Such expenditures may include, but are not limited to, the costs for labor, services, materials, equipment rental, lodging, food, location fees and property rental. Interstate travel expenses and any other expenses incurred outside of Missouri are not Missouri expenditures.

DED must be able to verify all items listed on the expenditures form that are to be applied to the tax credit program. The production company shall provide a spreadsheet of detailed Missouri expenditures along with the proof of purchases and proof of payments demonstrating that all expenditures were bought and paid to Missouri companies, organizations, or individuals. In addition, DED verifies that all expenditures were necessary costs incurred in the production of the project. A call sheet showing the number of people who worked on the film, the number of days those individuals worked, the rate at which they where paid, and the hours per day that they worked will need to be submitted along with the Film Production Expenditure Report.

Please take a moment (all who read the blog) to look at the some of film industry related economic development occuring in Louisiana. http://gov.louisiana.gov/index.cfm md=newsroom&tmp=detail&articleID=1748

This should be the end-goal of the film tax credit program: Attracting film related businesses that create high paying, long-term jobs.

P.S.: I didn’t work on the film.

Comment by Econdiva — December 17, 2009 @ 4:20 p.m.
Econdiva,

According to the Missouri Film Commission website, the credit is described as the following:

State Tax Credits are issued to a qualified film production company for up to 35 percent of the amount expended in Missouri (or up to 30 percent for qualifying out-of-state cast and crew when Missouri income taxes are withheld) for production or production-related activities to facilitate film production in Missouri.

In my previous post, I used this number 30% to say the following:

To an out-of-state production crew like Reitman’s, Missouri issues a tax credit to for up to 30 percent of the amount that they spend in state. This means that they get $3 million back if they spend $10 million in Missouri (which they can turn around and sell, because these tax credits are fungible). Given the low multiplier for the film industry (described herein), there is no way that the state would be able to recover that amount of money, whether it be through sales taxes (4.225 percent) or personal income taxes.

Also, I am not disputing the $12 million figure for expenditures that you cited previously. In this post, I used your number to demonstrate that the multiplier for the film industry (assuming that you believe that economic multipliers even exist) would not result in the $50-60 million that Mayor Slay touted.

Comment by Christine Harbin — December 17, 2009 @ 7:15 p.m.
I still say that $12 million spent is more than $0 million and “number crunching” with figures like- quote- “Using this figure, an expenditure of $12 million for Up in the Air would generate only $4.8 million for Missouri’s economy.”-end quote- is very misleading to justify not supporting the incentives. Developing business is key to recovery, hiring people, and bringing new business is paramount. Many studies are now showing that incentives can return $1.50 for every tax dollar spent once they are up and running. The film business is like no other business, and cannot be lumped in with normal industry specs. Please have some consistency in figures if you are going to try to use data to prove a point.

Comment by Scott Clark — December 18, 2009 @ 10:51 p.m.
I realize that we all want our friends and neighbors to be employed, rather than unemployed — even when they work in the film industry and often have to travel outside Missouri to maintain work. Let us take a wider view of this tax credit, instead.

If we did not “outbid” other states in terms of film tax credits, they would not film the movie here. Would it still get filmed? Yes. Would the man-hours and other resources purchased by the filmmakers still get purchased? In all likelihood, yes. To say that they wouldn’t is to assume that any other state vying for this production is losing the same amount we are gaining. Those people have families and an economy to look after, too.

$12 million is a lot of money, obviously. But it is not created out of thin air. It is invested by the film’s producers, and will ultimately return to them with interest. Will they spend that money in Missouri? That depends on whether we are producing things that they want to buy. That means we need a healthy economy within the state producing things, not because they provide a lot of immediate, up-front spending; but because they provide lasting jobs and productivity for the state.

Let us not deny to whichever state would be most effective the opportunity to make this film. Let us not introduce distortions into our own economy that favor this business over that one, and retard overall economic growth. One-time, eight-figure windfalls are not growth.

Comment by Josh Smith — December 21, 2009 @ 10:43 a.m.
[...] million. Although I’m getting bored of blogging about the production incentives program in Missouri, I want to refute the specific points that Hunt made in his most recent post, “An Open [...]

Pingback by State Policy Blog » Blog Archive » The Lesson Applied to Film Production Incentives — March 4, 2010 @ 5:48 p.m.

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Even Christine Harbin uses a multiplier of 2 in her Show Me Daily article dated December 14, 2009- “Even More on Missouri Film Tax Credits”. Christine Harbin’s article quote: “Additionally, according to “The Economic Impact of the UK Film Industry,” a 2007 study by Oxford Economics, the film industry has a multiplier of only 2.0″- end quote. David Friedman for the Alliance of Motion Picture Arts and Sciences (AMPAS) did a study of the California production industry. In his report, he determined that the economic multiplier for the entertainment industry was 2.12%, and most states use 1.5 to 3 for a multiplier. So while $50- $60 million is in the higher range, $4.8 million on $12 million is definitely way low. Seems the actual impact would be more in the range of $18- $24 million on $12 million spent. This also does not include such factors as increased National Awareness and PR of Missouri, increased tourism, and population inflow. In closing, I still contend any new business is good business right now.

Comment by Scott Clark — December 17, 2009 @ 1:37 a.m.

Let me see if I understand this. A company comes to Missouri and employs $12 million of resources. In the worse case scenario, each of these Missouri resources would have been otherwise unemployed, so that the labor and capital and other inputs would not have otherwise had any market value with the entrance of this company. It seems to my way of thinking that the market value of final goods and services in the Missouri economy increased by $12 million during the year in which resources were employed. It is true that some of those factor payments would be saved, and potentially used to acquire new productive machines and stuff that would yield extra future output for Missouri. My point is to overthrow the notion that there is “magic” multiplier that expands the Missouri economy in this way. I know that simple extrapolation is dangerous, but if the multiplier were true, then we could transfer the entire Missouri economy into film production and we would double the size of our state economy.

Comment by Joe Haslag — December 17, 2009 @ 9:05 a.m.

That figure is wrong.

40 percent of a BUDGET stays within the community…40 percent of the estimated $26 mil from Up in the Air would have stayed within St Louis so nearly $10Mil stayed within St Louis and Missouri…BUT for every dollar spent it reverberates 20 times…I spend One Dollar, you spend it, someone else spends it..It all adds up to a viable measurable Economic Inpact.

Instead of all this Negative Chat about what it doesn’t do look at the bottom line. People are coming to MO to spend their money. And we need the dollars right now. You have to spend money to make money kids. That’s how you attract new business to a flagging economy.

Comment by Pam Garrett — December 17, 2009 @ 9:09 a.m.

Let me add…Mr. Clark’s point is a good one. No one is pooh-poohing the employment of Missouri resources. The question is whether film tax credits–resources collected by the state government from Missourians–will generate a flow of future movie activity in Missouri that justify the expenditure. Ms. Harbin at least asked the right economic development question. Serious people should offer quantitative evidence demonstrating the return to Missouri taxpayers. I look forward to the transparent answers generated by such folks. My prior belief is that the value of National Awareness and Missouri PR is small. I hope someone can prove me wrong.

Comment by Joe Haslag — December 17, 2009 @ 9:12 a.m.

Christine,

Forgive my lack of economic knowledge, but why are you only including the “40¢ of earnings throughout the entire economy” as your measure of the economic impact instead of those earnings PLUS whatever the movie makers spent directly?

Maybe I’m misunderstanding this; you may have to give me a quick money multiplier primer. But if the money multiplier is 1.4, then a $30 million dollar project would generate $42 million throughout the state, which is close enough to 50 if you are a politician writing in the paper. Go ahead and assume away $8 million in PR and future movie making.

(To go off on a small tangent, this argument that the benefits from good PR and people moving to the state are unmeasurable but probably gigantic is insane to me. I don’t imagine the CEO of an engineering firm sitting in the audience of Up in the Air and then immediately phoning the board of directors to change the company HQ. No one watches George Clooney getting off a plane and says “I want to go to there” and hops in the car.)

If your point is that the greater economy only makes a ‘profit’ of 40¢ per dollar spent in making the movie, then this works out to $12 million. You don’t get to count the $30 million, because the caterers would have brewed coffee for other people, the carpenters making sets would have built furniture elsewhere, etc., etc. So to calculate the viability of the project, you need to see if this $12 million in additional revenue is offset by $12 million in tax credits or deductions or whatever. Is this the correct calculation to make? A 40% ROI seems ridiculous to me, but whatever.

But my overall point is that the mayor and you may be talking about completely different things. Imagine, if you will, that the mayor institutes a new program where the City of St. Louis pays $50 million to buy 25 million $2 bills. It would be correct (but silly) for the mayor to claim that the program had a $50 million benefit. You are right to point out that this is not the correct number for evaluating the success of the program, but you can’t blame the mayor for putting that spin on it. It’s what mayors do. Weaselly, but typical.

Comment by David C. Miller — December 17, 2009 @ 11:33 a.m.

I don’t mean to imply that Mayor Slay is weaselly, just that my hypothetical one is. I think it’s cool that you people in St. Louis have elected a mayor with the last name of ‘Slay’. It’s easier to spell, say, and imagine as a movie villain than ‘Cieslewicz’.

Comment by David C. Miller — December 17, 2009 @ 12:13 p.m.

Pam,
Let’s take your figures and logic and look at them again. Let’s say that 40% of the budget (which was actually $12 million, according to the producers) stayed in StL, like you said. And let’s even pretend that it “reverberates 20 times” (which has been empirically shown to be untrue, and more likely to have only a 1.5-3 times effect.)

But EVEN accepting all that as fact, what about this similar scenario, using the same logic:
I own a company called Sui Generis Inc. I plan to spend $12 million to open a new branch of my company, and I’m looking for a place to do that. I’m going to look at the permanent tax structures of the states in order to find a good place to maximize profits and attract more people to work for me. (If MO or another state doesn’t have an income tax, my employees essentially have a 6% raise without me having to pay a dime more.)

In my alternate scenario, where taxes are lower for all businesses (as opposed to targeted just at the film industry) St. Louisans are employed and spend their money on goods in Missouri. If one believes there are “reverberations” then obviously the permanent businesses are far better, as they are permanent and fixed in the community… meaning the money is spent even more within Missouri. Even with your own logic, permanent tax cuts are far better than film tax credits for the economy of Missouri. Tax credits to just one industry are at the expense of all other industries. A tax credit to the film industry means that my hypothetical business, and all others like it, do not get a tax cut. It artificially distorts the marketplace.

Let the market decide which jobs should be brought to Missouri with overall tax cuts, instead of allowing the government favoring one industry at the expense of the rest.

Comment by Caitlin Hartsell — December 17, 2009 @ 12:14 p.m.

I’m having a hard time getting past the fact that you either haven’t read the statute pertaining to Missouri Film Tax credits or that you (and I’m having a hard time believing this is true)truly don’t understand how it works. There is not question about the direct impact. It’s the indirect or induced spending that you are questioning. The

Once again, the “just under $12 million” direct spend isn’t something that I hypothesized or pulled out of thin air. The amount of money spent in Missouri has to be verified before tax credits are issued. The tax credits are a percentage of the Missouri spend.

Film Production Tax Credit Guidelines (Section 135.750, RSMo)
(The capitalization below is mine – for emphasis)

Effective January 1, 2008, the Missouri Department of Economic Development (DED) may issue a film production company a state income tax credit equaling up to 35% OF THE COMPANY’S EXPENDITURES IN MISSOURI necessary for the making of a film.

Missouri Expenditure: An expense for a product or service provided in Missouri that is a necessary cost for the production of a qualifying film production, for which remuneration is received by a business entity, organization or individual located in Missouri. Such expenditures may include, but are not limited to, the costs for labor, services, materials, equipment rental, lodging, food, location fees and property rental. Interstate travel expenses and any other expenses incurred outside of Missouri are not Missouri expenditures.

DED must be able to verify all items listed on the expenditures form that are to be applied to the tax credit program. The production company shall provide a spreadsheet of detailed Missouri expenditures along with the proof of purchases and proof of payments demonstrating that all expenditures were bought and paid to Missouri companies, organizations, or individuals. In addition, DED verifies that all expenditures were necessary costs incurred in the production of the project. A call sheet showing the number of people who worked on the film, the number of days those individuals worked, the rate at which they where paid, and the hours per day that they worked will need to be submitted along with the Film Production Expenditure Report.

Please take a moment (all who read the blog) to look at the some of film industry related economic development occuring in Louisiana. http://gov.louisiana.gov/index.cfm md=newsroom&tmp=detail&articleID=1748

This should be the end-goal of the film tax credit program: Attracting film related businesses that create high paying, long-term jobs.

P.S.: I didn’t work on the film.

Comment by Econdiva — December 17, 2009 @ 4:20 p.m.

Econdiva,

According to the Missouri Film Commission website, the credit is described as the following:

State Tax Credits are issued to a qualified film production company for up to 35 percent of the amount expended in Missouri (or up to 30 percent for qualifying out-of-state cast and crew when Missouri income taxes are withheld) for production or production-related activities to facilitate film production in Missouri.

In my previous post, I used this number 30% to say the following:

To an out-of-state production crew like Reitman’s, Missouri issues a tax credit to for up to 30 percent of the amount that they spend in state. This means that they get $3 million back if they spend $10 million in Missouri (which they can turn around and sell, because these tax credits are fungible). Given the low multiplier for the film industry (described herein), there is no way that the state would be able to recover that amount of money, whether it be through sales taxes (4.225 percent) or personal income taxes.

Also, I am not disputing the $12 million figure for expenditures that you cited previously. In this post, I used your number to demonstrate that the multiplier for the film industry (assuming that you believe that economic multipliers even exist) would not result in the $50-60 million that Mayor Slay touted.

Comment by Christine Harbin — December 17, 2009 @ 7:15 p.m.

I still say that $12 million spent is more than $0 million and “number crunching” with figures like- quote- “Using this figure, an expenditure of $12 million for Up in the Air would generate only $4.8 million for Missouri’s economy.”-end quote- is very misleading to justify not supporting the incentives. Developing business is key to recovery, hiring people, and bringing new business is paramount. Many studies are now showing that incentives can return $1.50 for every tax dollar spent once they are up and running. The film business is like no other business, and cannot be lumped in with normal industry specs. Please have some consistency in figures if you are going to try to use data to prove a point.

Comment by Scott Clark — December 18, 2009 @ 10:51 p.m.

I realize that we all want our friends and neighbors to be employed, rather than unemployed — even when they work in the film industry and often have to travel outside Missouri to maintain work. Let us take a wider view of this tax credit, instead.

If we did not “outbid” other states in terms of film tax credits, they would not film the movie here. Would it still get filmed? Yes. Would the man-hours and other resources purchased by the filmmakers still get purchased? In all likelihood, yes. To say that they wouldn’t is to assume that any other state vying for this production is losing the same amount we are gaining. Those people have families and an economy to look after, too.

$12 million is a lot of money, obviously. But it is not created out of thin air. It is invested by the film’s producers, and will ultimately return to them with interest. Will they spend that money in Missouri? That depends on whether we are producing things that they want to buy. That means we need a healthy economy within the state producing things, not because they provide a lot of immediate, up-front spending; but because they provide lasting jobs and productivity for the state.

Let us not deny to whichever state would be most effective the opportunity to make this film. Let us not introduce distortions into our own economy that favor this business over that one, and retard overall economic growth. One-time, eight-figure windfalls are not growth.

Comment by Josh Smith — December 21, 2009 @ 10:43 a.m.

[...] million. Although I’m getting bored of blogging about the production incentives program in Missouri, I want to refute the specific points that Hunt made in his most recent post, “An Open [...]

Pingback by State Policy Blog » Blog Archive » The Lesson Applied to Film Production Incentives — March 4, 2010 @ 5:48 p.m.

December 16, 2009