And now I have some new research support for my conclusions. In a new article published in the Journal of Economic Geography (sorry I don't see an ungated version online), Mark Owens (Penn State University Erie) and Adam Renhoff (Middle Tennessee State University) look at movie production incentives granted by U.S. states. They constructed a dataset of all movie productions in the U.S. over the period from 1999 to 2013 (some 16,725 movies), including filming locations and their characteristics, as well as the characteristics of the movies. They also collected data on four types of movie production incentives (emphasis mine):
A refundable tax credit allows the production studio to receive cash back when the value of the tax credit exceeds their state tax liability. A transferable tax credit allows the movie studio to sell their outstanding tax credits to a third party if the value of their tax credits exceeds their state tax liability. Standard non-refundable, nontransferable tax credits, which are not very common, offer movie producers significantly less financial flexibility. Cash grants or rebates are cash transfers (treated in this research as a percentage of the qualified production spending) from the state to the movie production studio. They are not tied to the company’s tax liability.
They also collected data on the minimum spend required to qualify for incentives. Using a reasonably sophisticated discrete choice modelling approach, they find that:
...movie production incentives vary in their ability to attract films, and vary with respect to firm size. The magnitude of the effect of incentives is the largest for mid-sized studios (the so-called ‘mini-major’ studios) where each incentive has a positive and significant impact on location choice. None of the production incentives significantly impact the location choice for independent studios, the smallest firms with smaller budgets, possibly because independent movies are less likely to meet minimum requirements and/or because they are less likely to be profitable. Consistent with intuition, we find that major producers respond more favorably to refundable and transferable tax credits than to standard (non-transferable, non-refundable) tax credits. Refundable tax credits are more effective than transferable tax credits in attracting major studios.
In other words, movie production incentives are effective in attracting movie productions. No surprises there - the studios are simply responding to incentives - if a particular location offers greater benefits than another location (including in the form of tax credits or other incentives), then the studio is more likely to want to produce their movies in that location.
However, Owens and Renhoff then conduct a back-of-the-envelope calculation weighing up the costs and benefits of movie production incentives for U.S. states. They have to make a number of assumptions here, because they don't have complete data on movie production spending, etc., but their results can be taken as indicative:
Based on our estimates, the movie production incentive programs are all revenue-negative, implying that a dollar awarded in tax credits leads to an increase in tax revenues, that is, less than a dollar. In this sense, the efforts to attract film production to a state do not ‘pay for themselves’ with higher resulting state tax revenues.
In other words, costs are greater than benefits. Movie production incentives do not pay back the taxpayer. However, if a state government's is simply to increase employment, Owens and Renhoff do offer some hope:
The tax incentive programs appear to increase employment at a lower cost to the state than the cost of directly increasing the number of state employees.
Of course, that doesn't mean that there aren't more cost-effective ways of increasing employment. Asking if a policy increases employment at a lower cost than if the government employed people to dig holes in the ground and then fill them in, is setting a very low bar.
Unfortunately, while this research provides justification to get New Zealand out of the Tiebout competition that is providing large movie production incentives, I fear that it will fall on deaf ears.
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