State tax incentives and credits are a hot topic on the
minds of all filmmakers these days. A
war wages between two perspectives: entitlement and excess, with each side
arguing their views on incongruent grounds.
One side argues the tax credit is a waste of resources, calling for the
elimination of film incentives all together.
The other side says without state incentives, film production would move
out of state or out of the country – taking jobs with them. Films take flight elsewhere for two reasons:
artistic and economic. Nobody can help
the artistic factor of flight. But if
the states were to eliminate film incentives all together, the production would
go to where the benefits are: other countries.
There is definitely an unhealthy “race to the bottom” between states
vying for the filmmakers’ attention. But
because tax incentives are prevalent throughout the world, it would behoove the
United States to create programs that encourage homegrown films. After all, according to Select
USA, the U.S. leads the world in film and music recording revenue.
However, there are
some sustainable truths to the arguments against film tax incentives. Mark Robyn, Staff Economist for the Tax Foundation wrote
that, in some states, a film tax credit is an excess expense. “Though
there are embarrassingly few of them, the studies that use more realistic
assumptions and take into account more economic effects have always showed that
states lose money on film tax credits. “
One of the main arguments for
incentives is that they draw production business to states that would otherwise
never see a film crew. Robyn argues that whether there is a
credit or not, films will still be made - especially in places like
California. Therefore, California should
not be spending state funds on film incentives – especially in the economic
position the state is in. Another
argument states that film productions should receive credits based on their being
an economic multiplier. This is a
one-sided argument, seeing how economic stimulation from new business is not
unique to the film industry. So why
shouldn’t new companies, based on this comparison, receive similar credit?
I argue that they do.
From the Small Business Development Center’s website:
“America’s entrepreneurs and small business owners
continue to grow their businesses and create jobs due to unprecedented tax cuts
that have been signed into law over the past two years. This includes billions
of dollars in tax relief from laws such as the Recovery Act, the Small Business
Jobs Act, the HIRE Act, the Affordable Care Act, and the Tax Relief and Job
Creation Act.
Zero Capital Gains Taxes on Key Investments in Small Businesses
• Capital gains taxes have been fully eliminated on certain small
business stock – providing an incentive for key investments in small businesses.
The Recovery Act excluded
75 percent of capital gains from the sale of certain small business investments
held more than five years. The Small Business Jobs Act went one step further –
excluding all capital gains from these investments in 2010 after the passage of
the Small Business Jobs Act from taxes.” (SBDC.gov)
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The
site page continues in listing nine other tax break or credit benefits as part
of its “Fact Sheet: Tax Breaks for Small Businesses.” So what’s the correlation? Filmmaking is a business. Each new film is, in essence, a brand new
start-up small business, with the producer acting as lead entrepreneur. Both take risk, and both suffer from a high
rate of failure. According to
statistics, 96% of small business start-ups fail
within the first year. Only half of the
left over 4% survive more than four years.
Alexander Malyshev,
Former editor of Media Law & Policy wrote,
“Put simply, most films lose money,
but nevertheless hundreds of films are produced each year – almost in defiance
of the laws of supply and demand.” He’s
referring to the roughly 600 films of which only a handful generates big-ticket
success. A little over 500,000 small
businesses are registered every year.
96% of that is… 480,000, leaving a ‘handful’ still in existence. Wisconsin Commerce Deputy Secretary Aaron
Oliver says the number of jobs generated by film production is finite. “[It is
the] ‘least effective’ economic tool… if we had to choose, we could get one
full-time job on a film for one year or we could get twenty factory jobs that
might last for 20 years.” Our present
economic reality says different. To
argue that the opportunity
cost for government spending on film tax credits is a non-productive use
can be applied just the same to small business ventures, given the rate of
failure. When 96% of start-ups fail
after the first year, why shouldn’t the same employees of those failed
businesses join up with a film crew that comes into town? Their ‘job security’ will be about the same.
Still… there are more accountability measures that keep
small businesses responsible than there are for film productions. I agree with Robyn in that the budgetary
treatments of film incentives should be more transparent. However, I do not
agree with Robyn that film credits should be lumped into education and public
health spending categories. Instead,
registrations and answerability measures should be emplaced if filmmakers are
to seek tax breaks. I think a major factor
in film revenue failures is that filmmakers do not treat the production as a
business. They do not value it enough as
a product by which money is made. A
major factor of success in business includes not only money and crew, but also
education, experience and a reason – or purpose. Filmmakers would do well to learn something
about business and how to plan for long term revenue goals in addition to cinematography, casting
and craft service. But how do you
measure the intangible, or as OCU’s economist Kyle Dean says, “an inexact science?” Implement tax liabilities and assign risk premiums
based on track records of producers and production companies. Then maybe filmmakers will think twice about
pouring state money into a love-child film.
There is nothing wrong with taking risk when creating art, just
like there is nothing wrong with giving your best shot at starting your own
business. It’s the American Dream. But there is
something wrong with misusing taxpayers’ dollars. That I can agree on. It doesn’t help anybody to fuel the growing
assumption that all film producers are solely interested in chasing the biggest
and most lucrative tax incentive. It
also doesn’t help to argue predominantly on the ‘glamour’ factor that films
bring to varying states. In my opinion,
that comes from a weak and condescending attitude. Argue instead that you, as a filmmaker, are an
entrepreneur. Therein lies the
entitlement to state and government support – just like a small business. The clout and respect will come – only if you
treat it like a business.
