The Lesson Applied to Film Production Incentives

March 4, 2010

The Lesson Applied to Film Production Incentives

In the beginning of Economics in One Lesson, Henry Hazlitt describes classic rent-seeking behavior:

While certain public policies would in the long run benefit everybody, other policies would benefit one group only at the expense of all other groups. The group that would benefit by such policies, having such a direct interest in them, will argue for them plausibly and persistently. It will hire the best buyable minds to devote their whole time to presenting its case. And it will finally either convince the general public that its case is sound, or so befuddle it that clear thinking on the subject becomes next to impossible.

To see this lesson applied, check out the personal blog of Jason P. Hunt, a film and television producer in Kansas City. He uses it to voice support for H.B. 1587, which would increase the cap of film production tax rebates from $4.5 million to $10 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 Letter to the Missouri Senate”:

I understand several in the legislative branch would question why we need to increase this cap.

I question this, too, especially since only one single production in Missouri has ever come close to the $4.5 million cap during the last 10 years. (That production was Up in the Air, which was awarded $4.13 million.) The second-highest amount ever awarded was $786,800. The “Show Me: Tax Credits” web tool shows that the average amount awarded is only $369,347.

I suppose Hunt’s implicit argument is that glamorous, large-scale productions won’t be motivated to film in Missouri unless the state coughs up even more cash. If Missouri awards more money to an activity in which it has a comparative disadvantage, it faces an increasing opportunity cost. This is money that the state could otherwise devote to other programs and/or return to the pockets of taxpayers.

Consider that for every dollar allowed as a tax credit under the program, three have to be spent within the state.

From what I understand, an economic multiplier of 3 is unrealistic. In estimating the activity generated from its film incentive program, Louisiana uses a demand earnings multiplier of 0.3982. Here’s a math problem: How much wealth do a $61,000 Range Rover and a $68,000 Mercedes generate in a state? Using Hunt’s logic, they would create $387,000 of economic activity within the state’s borders. I disagree that this is realistic.

That’s found money.

That money comes from other states. If a person is walking to her car in a parking lot and finds $20 lying on the ground, she may consider herself to be $20 richer. However, the person who dropped the $20 on the ground in the first place is $20 poorer. No wealth was generated. When a production company from another state spends $1,000 in Missouri, the money is not created out of thin air; it’s $1,000 that the company would have otherwise spent in a different state.

When states regard each other as antagonistic economies, it is a mutually detrimental situation. Targeted incentive programs result in dead-weight loss and restrict overall growth. In order to increase overall economic growth and prosperity, Missouri should focus on the activities for which it has a comparative advantage, and then trade amicably with the states that have a comparative advantage in producing films.

There’s another reason it’s a bad idea to regard this out-of-state spending as “found money”: Missouri doesn’t get to keep 100 percent of it. States that offer film production incentives get a raw deal, because they are poorer by the amount of money that they allocate in tax credits. For every $1,000 that a film production company spends in Missouri (up to the cap), the state economy only keeps $650. In other words, Missouri government pays the film company $350 for every $1,000 that it spends here. Raising the cap, as Hunt supports, would exacerbate this loss.

« Read Previous Entry Read Next Entry »

5 Comments »

I think that any economic argument that relies on “found money” is spurious at best. Great post!

Comment by David Stokes — March 4, 2010 @ 11:37 p.m.
While you make good points, some of your arguments are focused on the semantics of my original post.

By “found money”, I mean this is revenue generated within the state’s economy that would otherwise NOT be here because productions went somewhere else. In point of fact, many states ARE competing for film production business, so to argue that this creates “antagonistic economies” ignores the fact that this kind of thing happens all the time. States and municipalities compete for the Olympics, world headquarters for companies like Sprint and JCPenney, and other business ventures because of the direct benefit to that local economy, not because it takes away from someone else.

Also, my “found money” argument is based on the fact that this extra revenue is not planned for in the state’s budget, so it’s a “windfall” or whatever other classification you’d like to give it. It’s extra, on top of whatever the state has planned in its budget every fiscal year.

“Up in the Air” was the only major film to take advantage of the program, yes, but consider that other productions knew the credits had been used up and looked elsewhere. I know of at least one that ended up going to Canada because Missouri had reached the cap.

My analogy of three dollars here for every one that goes out is based on the tax credit rate of 35%. In order for film productions to qualify, they have to pay local (state & city) vendors first. This amounts to a large influx of revenue in the form of wages, sales taxes, and retail revenue. “Up in the Air” spent $12M on the production itself, and another $12M ended up coming into the St. Louis economy in the form of induced revenue – entertainment, restaurants, shopping, etc.

Your use of the words “the state coughs up even more cash” also seems to imply that the state comes up with the money first, when that’s not the case. As I understand it, the tax credits are only awarded AFTER a production spends what it spends and then files paperwork to prove they qualify for the rebate. So they’re actually getting some of their own money back, not taking it from the state (taxpayers).

And I wouldn’t say Missouri is at a comparative disadvantage. Our tax credit rate of 35% is highly competitive with Kansas, Louisiana, Massachusetts, and New Mexico – all at 30% – but the disadvantage comes by the legislature limiting how much work we as an industry can do in the state. We have trained labor, which Michigan does not have, we have a program not bogged down in corruption scandals like Iowa, and we have great locations throughout the state.

Increasing the cap (or removing it completely, as Louisiana has done) will result in a film boom. Consider that LA has almost a dozen productions going up between now and summer. That’s jobs. And the salaries that go with those jobs stay in the state, and get spent, thus driving the overall state economy.

There are plenty of reasons to film in Missouri, but in the end, it’s a business. And film productions are going to go where it makes good business sense to go.

Comment by Jason P Hunt — March 5, 2010 @ 10:58 a.m.
Jason,

As a native Michiganian, I take offense at your characterization of the state’s labor force.

But, more seriously, I wanted to address this point:
“In point of fact, many states ARE competing for film production business, so to argue that this creates “antagonistic economies” ignores the fact that this kind of thing happens all the time. States and municipalities compete for the Olympics, world headquarters for companies like Sprint and JCPenney, and other business ventures because of the direct benefit to that local economy, not because it takes away from someone else.”

Just because something harmful happens all the time doesn’t make it okay. And state tax credits and other location-based tax incentives are simply taking money from us all to give to politically connected or preferred businesses.

A perfect example of this situation happened in January in St. Ann. A Walmart store (http://tinyurl.com/y9xl2sx), realizing that there better tax incentives to be had in Bridgeton, moved two miles west for $23 million in tax incentives. St. Ann residents will likely still shop at the Walmart, but just drive an additional two miles. Bridgeton residents were likely already shopping at the store, but will now capture the tax revenues that St. Ann lost.

Who benefited? Walmart, at the expense of St. Ann and Bridgeton taxpayers.

I spent an afternoon speaking with the head of the St. Charles County Council about tax incentives, and he has horror stories about, say, a Bass Pro Shop being awarded a 15-year-long tax reduction, and then moving 14 years later to a different area. There were other examples, such as the WingHaven Development, which, he said, is pushing hard to use tax incentives to build a hockey rink for a local team (which already has a rink) in its development, instead of the team’s current nearby location.

Both of these examples show that no new economic activity was created, but that the location of the activity changed. Again, who benefits?

I submit to you that Up in the Air would have been filmed and produced even without Missouri tax credits. Maybe it wouldn’t have been filmed here, but we wouldn’t be out $4 million.

Furthermore, using an economic multiplier to justify awards to preferred industries ignores the other economic activity (and corresponding multiplier) that could have been generated simply by letting taxpayers keep their individual share of the $4 million.

Finally, I don’t know that Missouri needs a film boom. Just last weekend, I attended the True/False Film Festival in Columbia, watched at least 13 documentaries, and spent all sorts of money to eat out. And, I loved it, not because it was subsidized activity that otherwise wouldn’t occur in this state, but because it was central Missouri doing something central Missouri does well: Hosting an intimate film festival to screen documentaries about such disparate subjects as tween NASCAR, the war in Afghanistan, and the inventor of the floppy disk.

And, for clarification, I called Paul Sturtz, one of the founders of the festival. True/False, which is run by a nonprofit organization, does not receive any state tax credits or local tax incentives.

Comment by Audrey — March 5, 2010 @ 12:07 p.m.
Audrey, my comment on the Michigan labor force was specific to the fact that there aren’t enough people trained in film production. It wasn’t a snipe at their particular work ethic or such…I have no doubt that there are plenty of people up there ready and willing to work. But for film productions, the trained labor force just isn’t there yet, from what I hear.

This is really not the same as other “tax credits” in the traditional sense. It’s more of a rebate in its process. Money has to be spent first before a portion of it gets put back. This is not like a TIF or bond issue relying on future tax revenues. This is not money being taken from taxpayers. Think of it as giving the production company change for buying time and labor in the state. Taxpayers do not have to front any of this money. It’s credited back at the end of the process.

Yes, “Up in the Air” would have filmed somewhere. But I disagree that we’re “out $4 million”. For that money to go out to the production, $12 million stayed in the state. And another $12 million came in as the result of ancillary spending. The St. Louis economy benefits.

And using film festival activity to argue the merits of bringing film productions into the state is like saying we need more grocery stores to attract hardware suppliers. They’re completely different animals.

Comment by Jason P Hunt — March 5, 2010 @ 12:18 p.m.
Economies expand or shrink. They are never static. Creating a creative-friendly economic and cultural environment for filmmakers and other arts has many long-term benefits to the locality where movies are shot. One of these is the possibility to change how we see ourselves, as well as how others from other regions perceive us. Rightly or wrongly, perception often becomes reality, economic as well as cultural. As one of the leading influences in modern civilization, film has been proven to have cultural value, cultural association and cultural impact.

Not only do we need to continue to change the perception of being mere “flyover country” for the bicoastals to belittle, but we need to continue proactive measures so that our own talented young professionals in every industry have an increasingly positive view of their home region and themselves. Our talented younger generations need continued encouragement and reinforcement for staying here to contribute here, and not to move off to either the West or East Coasts or the Sunbelt.

Seeing our region as the setting for major and independent film is a great psychological reinforcement to our collective self-esteem. Otherwise, we risk “a talent drain” and the loss of many dollars in a variety of industries if our best and brightest decide rightly or wrongly that we are second-rate. Again, it’s about perception, and perception eventually becomes reality.

The irony of film is that while it is all pretend, it still has very real impact in the real world of dollars and cents, and not just where the creation of the film is concerned. Because economics and film both deal with psychology, because ultimately wealth is not just the possession of dollar bills, but an expression of psychological value that we assign to various goods and services, film and economics are related. And in a greater and more profound way than has been discussed here heretofore.

Choices have consequences, and this includes our economic choices, our emotional and economic support or lack thereof. And this includes our tax incentives or disincentives. The old axiom is again indeed true in the film industry as with any and all industries, “If you want less of something, tax it. If you want more of something, subsidize it.”

Having been born in Missouri, and having lived in Los Angeles and worked at Disney, I understand something of both cultures and environments concerning life in general and film in particular. It’s a lesson that Walt himself had to learn the hard way. One of the pleasures I had while working at Disney was to be able to investigate the Disney Archives at Disney Studios. It was amazing to me to see old black and white photographs of Walt and Lillian in the 1920s visiting Swope Park and what is now called the Kansas City zoo.

As many of us who study film history know, Walt invented Mickey Mouse right here in Missouri, in Kansas City. . But Disney had to leave Kansas City (and in very bad economic shape too) in order to finally succeed in Los Angeles on a global scale.

Why Los Angeles, California and not Marceline or Kansas City, Missouri? The two cities had very different attitudes and views of the film industry then, and evidently now too. In the age of the internet and global social networking, our local Heartland filmmakers now have more ability and opportunity to make connections, build community, learn and improve their craft, and succeed while spending more time at home. Walt had little of these advantages while living in Missouri. And so he took off for Hollywood.

And while we on the subject of vision or the lack thereof, why did our own world-famous Mark Twain who wrote such enduring classics of life in the Heartland and on the Mississippi end up living in Connecticut.

And suppose the founders of Branson had taken the attitude that Nashville had an “comparative advantage” in the creation and marketing of country music and that Missouri had a permanent “comparative disadvantage”? Where would all those jobs currently in Branson be right now? Certainly not in Missouri. Goodness knows a lot of Tennesseans initially claimed this as absolute fact in order to try to discourage the development and eventually success of Branson. But now, fact is, Branson is an incredible success story and attraction not only benefiting Missouri identity but also Missouri economic growth!

Despite dire predictions from my friends and associates that my creative life would be over, I moved home from Hollywood years ago because I knew that my best work and my best self was rooted deeply in who we are here in the Heartland not in Hollywood. The end of the Dark Ages and the flowering of the Renaissance occurs, not by accident, but when the great merchant and banking families of Florence, the Medici and the Borgia, having grown wealthy in the rich spice trade with Asia that Marco Polo opened up, made an intentional decision to spend a certain amount of that wealth as patrons of the arts.

I have stood on the site of the old Laugh-O-Grams at 1127 East 31st in Kansas City and wondered why there wasn’t a bigger vision and greater efforts locally to raise the necessary films to restore it and to appeal to Diane Disney Miller and others in the Disney family to establish a Disney Museum in Kansas City, where to my mind and others it rightfully belongs.

Apparently, despite the best efforts of many talented people in the film communities in Kansas City and St. Louis, there is still much work to be done for us to, at last, close the gap of awareness and appreciation for film that Walt had to face and overcome by moving geographically, and to make the 21st century an era in the Heartland where future Walt Disneys won’t have to move away and bless other regions in order to success financially as they bless the entire world with their creative spirit and genius.

Again, economics and economic decisions do have consequences. A new 21st century Heartland Renaissance is possible IF we have the vision, the courage, the deliberate intention and the right economic formulas and incentives to make it possible!

Comment by E. J. Irish — March 5, 2010 @ 9:03 p.m.

RSS feed for comments on this post. TrackBack URL

Categories

I think that any economic argument that relies on “found money” is spurious at best. Great post!

Comment by David Stokes — March 4, 2010 @ 11:37 p.m.

While you make good points, some of your arguments are focused on the semantics of my original post.

By “found money”, I mean this is revenue generated within the state’s economy that would otherwise NOT be here because productions went somewhere else. In point of fact, many states ARE competing for film production business, so to argue that this creates “antagonistic economies” ignores the fact that this kind of thing happens all the time. States and municipalities compete for the Olympics, world headquarters for companies like Sprint and JCPenney, and other business ventures because of the direct benefit to that local economy, not because it takes away from someone else.

Also, my “found money” argument is based on the fact that this extra revenue is not planned for in the state’s budget, so it’s a “windfall” or whatever other classification you’d like to give it. It’s extra, on top of whatever the state has planned in its budget every fiscal year.

“Up in the Air” was the only major film to take advantage of the program, yes, but consider that other productions knew the credits had been used up and looked elsewhere. I know of at least one that ended up going to Canada because Missouri had reached the cap.

My analogy of three dollars here for every one that goes out is based on the tax credit rate of 35%. In order for film productions to qualify, they have to pay local (state & city) vendors first. This amounts to a large influx of revenue in the form of wages, sales taxes, and retail revenue. “Up in the Air” spent $12M on the production itself, and another $12M ended up coming into the St. Louis economy in the form of induced revenue – entertainment, restaurants, shopping, etc.

Your use of the words “the state coughs up even more cash” also seems to imply that the state comes up with the money first, when that’s not the case. As I understand it, the tax credits are only awarded AFTER a production spends what it spends and then files paperwork to prove they qualify for the rebate. So they’re actually getting some of their own money back, not taking it from the state (taxpayers).

And I wouldn’t say Missouri is at a comparative disadvantage. Our tax credit rate of 35% is highly competitive with Kansas, Louisiana, Massachusetts, and New Mexico – all at 30% – but the disadvantage comes by the legislature limiting how much work we as an industry can do in the state. We have trained labor, which Michigan does not have, we have a program not bogged down in corruption scandals like Iowa, and we have great locations throughout the state.

Increasing the cap (or removing it completely, as Louisiana has done) will result in a film boom. Consider that LA has almost a dozen productions going up between now and summer. That’s jobs. And the salaries that go with those jobs stay in the state, and get spent, thus driving the overall state economy.

There are plenty of reasons to film in Missouri, but in the end, it’s a business. And film productions are going to go where it makes good business sense to go.

Comment by Jason P Hunt — March 5, 2010 @ 10:58 a.m.

Jason,

As a native Michiganian, I take offense at your characterization of the state’s labor force.

But, more seriously, I wanted to address this point:
“In point of fact, many states ARE competing for film production business, so to argue that this creates “antagonistic economies” ignores the fact that this kind of thing happens all the time. States and municipalities compete for the Olympics, world headquarters for companies like Sprint and JCPenney, and other business ventures because of the direct benefit to that local economy, not because it takes away from someone else.”

Just because something harmful happens all the time doesn’t make it okay. And state tax credits and other location-based tax incentives are simply taking money from us all to give to politically connected or preferred businesses.

A perfect example of this situation happened in January in St. Ann. A Walmart store (http://tinyurl.com/y9xl2sx), realizing that there better tax incentives to be had in Bridgeton, moved two miles west for $23 million in tax incentives. St. Ann residents will likely still shop at the Walmart, but just drive an additional two miles. Bridgeton residents were likely already shopping at the store, but will now capture the tax revenues that St. Ann lost.

Who benefited? Walmart, at the expense of St. Ann and Bridgeton taxpayers.

I spent an afternoon speaking with the head of the St. Charles County Council about tax incentives, and he has horror stories about, say, a Bass Pro Shop being awarded a 15-year-long tax reduction, and then moving 14 years later to a different area. There were other examples, such as the WingHaven Development, which, he said, is pushing hard to use tax incentives to build a hockey rink for a local team (which already has a rink) in its development, instead of the team’s current nearby location.

Both of these examples show that no new economic activity was created, but that the location of the activity changed. Again, who benefits?

I submit to you that Up in the Air would have been filmed and produced even without Missouri tax credits. Maybe it wouldn’t have been filmed here, but we wouldn’t be out $4 million.

Furthermore, using an economic multiplier to justify awards to preferred industries ignores the other economic activity (and corresponding multiplier) that could have been generated simply by letting taxpayers keep their individual share of the $4 million.

Finally, I don’t know that Missouri needs a film boom. Just last weekend, I attended the True/False Film Festival in Columbia, watched at least 13 documentaries, and spent all sorts of money to eat out. And, I loved it, not because it was subsidized activity that otherwise wouldn’t occur in this state, but because it was central Missouri doing something central Missouri does well: Hosting an intimate film festival to screen documentaries about such disparate subjects as tween NASCAR, the war in Afghanistan, and the inventor of the floppy disk.

And, for clarification, I called Paul Sturtz, one of the founders of the festival. True/False, which is run by a nonprofit organization, does not receive any state tax credits or local tax incentives.

Comment by Audrey — March 5, 2010 @ 12:07 p.m.

Audrey, my comment on the Michigan labor force was specific to the fact that there aren’t enough people trained in film production. It wasn’t a snipe at their particular work ethic or such…I have no doubt that there are plenty of people up there ready and willing to work. But for film productions, the trained labor force just isn’t there yet, from what I hear.

This is really not the same as other “tax credits” in the traditional sense. It’s more of a rebate in its process. Money has to be spent first before a portion of it gets put back. This is not like a TIF or bond issue relying on future tax revenues. This is not money being taken from taxpayers. Think of it as giving the production company change for buying time and labor in the state. Taxpayers do not have to front any of this money. It’s credited back at the end of the process.

Yes, “Up in the Air” would have filmed somewhere. But I disagree that we’re “out $4 million”. For that money to go out to the production, $12 million stayed in the state. And another $12 million came in as the result of ancillary spending. The St. Louis economy benefits.

And using film festival activity to argue the merits of bringing film productions into the state is like saying we need more grocery stores to attract hardware suppliers. They’re completely different animals.

Comment by Jason P Hunt — March 5, 2010 @ 12:18 p.m.

Economies expand or shrink. They are never static. Creating a creative-friendly economic and cultural environment for filmmakers and other arts has many long-term benefits to the locality where movies are shot. One of these is the possibility to change how we see ourselves, as well as how others from other regions perceive us. Rightly or wrongly, perception often becomes reality, economic as well as cultural. As one of the leading influences in modern civilization, film has been proven to have cultural value, cultural association and cultural impact.

Not only do we need to continue to change the perception of being mere “flyover country” for the bicoastals to belittle, but we need to continue proactive measures so that our own talented young professionals in every industry have an increasingly positive view of their home region and themselves. Our talented younger generations need continued encouragement and reinforcement for staying here to contribute here, and not to move off to either the West or East Coasts or the Sunbelt.

Seeing our region as the setting for major and independent film is a great psychological reinforcement to our collective self-esteem. Otherwise, we risk “a talent drain” and the loss of many dollars in a variety of industries if our best and brightest decide rightly or wrongly that we are second-rate. Again, it’s about perception, and perception eventually becomes reality.

The irony of film is that while it is all pretend, it still has very real impact in the real world of dollars and cents, and not just where the creation of the film is concerned. Because economics and film both deal with psychology, because ultimately wealth is not just the possession of dollar bills, but an expression of psychological value that we assign to various goods and services, film and economics are related. And in a greater and more profound way than has been discussed here heretofore.

Choices have consequences, and this includes our economic choices, our emotional and economic support or lack thereof. And this includes our tax incentives or disincentives. The old axiom is again indeed true in the film industry as with any and all industries, “If you want less of something, tax it. If you want more of something, subsidize it.”

Having been born in Missouri, and having lived in Los Angeles and worked at Disney, I understand something of both cultures and environments concerning life in general and film in particular. It’s a lesson that Walt himself had to learn the hard way. One of the pleasures I had while working at Disney was to be able to investigate the Disney Archives at Disney Studios. It was amazing to me to see old black and white photographs of Walt and Lillian in the 1920s visiting Swope Park and what is now called the Kansas City zoo.

As many of us who study film history know, Walt invented Mickey Mouse right here in Missouri, in Kansas City. . But Disney had to leave Kansas City (and in very bad economic shape too) in order to finally succeed in Los Angeles on a global scale.

Why Los Angeles, California and not Marceline or Kansas City, Missouri? The two cities had very different attitudes and views of the film industry then, and evidently now too. In the age of the internet and global social networking, our local Heartland filmmakers now have more ability and opportunity to make connections, build community, learn and improve their craft, and succeed while spending more time at home. Walt had little of these advantages while living in Missouri. And so he took off for Hollywood.

And while we on the subject of vision or the lack thereof, why did our own world-famous Mark Twain who wrote such enduring classics of life in the Heartland and on the Mississippi end up living in Connecticut.

And suppose the founders of Branson had taken the attitude that Nashville had an “comparative advantage” in the creation and marketing of country music and that Missouri had a permanent “comparative disadvantage”? Where would all those jobs currently in Branson be right now? Certainly not in Missouri. Goodness knows a lot of Tennesseans initially claimed this as absolute fact in order to try to discourage the development and eventually success of Branson. But now, fact is, Branson is an incredible success story and attraction not only benefiting Missouri identity but also Missouri economic growth!

Despite dire predictions from my friends and associates that my creative life would be over, I moved home from Hollywood years ago because I knew that my best work and my best self was rooted deeply in who we are here in the Heartland not in Hollywood. The end of the Dark Ages and the flowering of the Renaissance occurs, not by accident, but when the great merchant and banking families of Florence, the Medici and the Borgia, having grown wealthy in the rich spice trade with Asia that Marco Polo opened up, made an intentional decision to spend a certain amount of that wealth as patrons of the arts.

I have stood on the site of the old Laugh-O-Grams at 1127 East 31st in Kansas City and wondered why there wasn’t a bigger vision and greater efforts locally to raise the necessary films to restore it and to appeal to Diane Disney Miller and others in the Disney family to establish a Disney Museum in Kansas City, where to my mind and others it rightfully belongs.

Apparently, despite the best efforts of many talented people in the film communities in Kansas City and St. Louis, there is still much work to be done for us to, at last, close the gap of awareness and appreciation for film that Walt had to face and overcome by moving geographically, and to make the 21st century an era in the Heartland where future Walt Disneys won’t have to move away and bless other regions in order to success financially as they bless the entire world with their creative spirit and genius.

Again, economics and economic decisions do have consequences. A new 21st century Heartland Renaissance is possible IF we have the vision, the courage, the deliberate intention and the right economic formulas and incentives to make it possible!

Comment by E. J. Irish — March 5, 2010 @ 9:03 p.m.

March 4, 2010