Expanding Kentucky’s Film Tax Credits Not a Strategy that Will Pay Off

Despite their cultural appeal, generous film tax credits—like the one in Kentucky that HB 340 in the 2015 General Assembly proposes to expand—aren’t a cost effective strategy to generate jobs, tax revenue and tourism in our state.

Film tax credits tend to cost more than they return to a state and take resources that could otherwise be invested in education, health, infrastructure and other proven building blocks of a stronger economy. A study from the Center on Budget and Policy Priorities (CBPP), “State Film Subsidies: Not Much Bang for Too Many Bucks,” enumerates the problems with film tax credits:

  • The tax revenue they generate does not offset their cost. Estimates of the revenue return to states range from seven to 28 cents for every dollar spent. The remaining cost—from about 70 to 90 percent—has to be paid for by raising other taxes or by cutting state budgets.
  • The jobs created for state residents tend to be short-term, part-time and low-wage, compared to high-paying jobs for celebrities and other out-of-state industry employees. A study by the Massachusetts Department of Revenue found that every dollar spent on film tax credits generated less than 69 cents in income for residents.
  • In some cases, the credits are awarded to producers who would film in-state without the benefit.
  • The idea that film tax credits draw tourism to states is based on flawed, exaggerated evidence. For example, in New Mexico, support for this idea came from surveys emailed to tourists who stopped at visitor centers, only four percent of whom even responded.

Proposed changes would further expand Kentucky’s already too-generous film tax credit

Kentucky’s film tax credit was created in 2009, allowing companies to receive an income tax credit valued at up to 20 percent of costs for those spending at least $50,000 for documentaries; $200,000 for commercials; and $500,000 for full length film and television.

The credit is refundable, meaning that even if a company’s tax liability has been reduced to zero by the credit, if a portion remains, they receive the difference as a cash grant. For example, a company awarded a $30,000 credit that owes $20,000 in state taxes will receive a $10,000 check.

In 2014, legislators removed the program’s sunset date, meaning it never has to be reauthorized again by the legislature but exists in perpetuity. In so doing, they eliminated the opportunity to periodically decide whether the credit is worth the lost revenue. Also, the legislature did not continue the practice of capping the total credits that can be claimed each year, which had been set at $5 million in 2011 and $7.5 million in 2012. So the program’s cost to the state budget cannot be controlled.

House Bill 340 would expand film tax credits further and make them more costly by:

  • Lowering the threshold at which projects qualify for the credit: for out-of-state companies to $20,000 for documentaries; $100,000 for commercials; and $250,000 for full length film and television;
  • Providing the credit to in-state companies at the following lower thresholds: $10,000 for documentaries; $20,000 for shows that tour on Broadway; $100,000 for commercials and $125,000 for full length films or television.
  • Increasing the award amount to 35 percent of approved expenditures and payroll for projects in economically depressed counties; and increasing it to 35 percent of payroll for residents and to 30 percent of other qualifying expenditures in all other counties.

HB 340 would increase the cost of the program: the fiscal note accompanying the bill projects a $5.5 million annual cost. And the note says that the lack of a spending cap poses a real risk, saying that “to the extent Kentucky is successful in attracting new film production to the state, an uncapped program could have a significant and serious detrimental fiscal impact.” The analysis says the cost from attracting just one big budget film could be $30 million. Costs can expand rapidly as seen in other states; film incentives cost Louisiana $251 million and North Carolina $61.2 million in 2013, and cost Illinois $46 million in 2012.

Expanding Kentucky’s film credit does not ultimately serve state in unwinnable race to the bottom

As of March of 2014, 39 states were awarding film production incentives to attract the industry. There has been a growing effort among states continuously raising the stakes of already-generous credits (some are even transferable, meaning film companies can sell them to other companies) in hopes they will gain a competitive edge. But expanding credits lowers their cost-effectiveness even further, such that the winners in this race to the bottom are wealthy film production companies, not states’ economies. Given rising concerns about costs, some states are beginning to opt out of the race. Arizona, Idaho, Indiana, Iowa, Kansas, Missouri and Wisconsin have eliminated their programs or not included funding for them in upcoming budgets, and other states like North Carolina have scaled them back.

Advocates of the subsidies claim that once a state has established a strong industry center including a local labor pool with relevant skills, tax credits will no longer be necessary to attract film projects and generate jobs, revenue and tourism. But as CBPP points out, the pressure on producers to keep costs down, paired with the geographically mobile nature of film work, means that production companies are incentivized to stay flexible and locate where subsidies are highest.

Kentucky should be working to nurture in-state filmmakers, but a much better approach than expanding the film credit would be to restore funding to programs like the Kentucky Arts Council, whose state funding has been cut by 33 percent since 2008. But that would take revenue currently being eroded by an expanding array of tax breaks and other holes in the tax code.

Kentucky’s efforts to out-spend other states in order to attract movie-makers may be a glamorous strategy, but it’s not a winning one.

Blog updated February 20, 2015.

Closing Corporate Tax Loopholes to Fund Investments in Kentucky Families

EITC graphic 10House Bill 374 would close several corporate tax loopholes that allow some profitable corporations to avoid paying their fair share of taxes, and use the resources to fund a tax credit for Kentucky’s working families. The bill targets strategies that major corporations use to artificially shift profits to subsidiaries in no- or low-tax states or foreign tax havens. It would generate $66 million to fund a state Earned Income Tax Credit (EITC), a proven tool to help lift working families out of poverty. HB 374 is a step toward the kind of tax reform Kentucky needs.

Corporate Loopholes EITC

Missing Workers Problem Dampens Drop in Unemployment Rate

Kentucky’s economy has garnered headlines for the decline in the state’s unemployment rate, which fell sharply from 7.9 percent in December 2013 to just 5.7 percent in December 2014. However, that number overstates how good the job situation is in Kentucky because of who it leaves out.

It’s true that the state’s job growth has picked up over the last year. After averaging just about 1,400 new jobs a month in 2013, the state added around 2,700 new jobs a month in 2014.

But growth in jobs only partially explains the drop in Kentucky’s unemployment rate. Unless a jobless adult is actively seeking work, they aren’t counted as unemployed or factored in the unemployment rate. And there is evidence that these unaccounted for “missing workers” are a large and even growing share of people still in need of employment.

Kentucky’s missing worker problem can be seen in the state’s declining labor force participation rate, a measure of the share of adults who either have a job or are seeking work. Participation has dropped in the years since 2000, as seen in the graph below, and fell a statistically significant 2.2 percentage points between 2013 and 2014.

labor force participation 1Source: Economic Policy Institute analysis of Current Population Survey data

The rate also fell for the nation as a whole since 2000, in part because the early 2000s recession and the Great Recession created a shortage of available jobs. As the weak economy has dragged on, some discouraged workers have given up looking for work, while other young people have never entered the labor force to begin with. Men are especially represented among missing workers, as are those with a high school degree or less.

Although a baby boomer population aging out of the workforce plays a role in this trend nationally, the problem can’t be attributed simply to that. As shown in the graph below, the decline in the labor force participation rate also applies to prime-age workers, those ages 25 to 54. In 2014, that number dropped by a statistically significant 2.6 percentage points in Kentucky to the worst recorded rate in the last 35 years. Kentucky’s rate in 2014 is the third-worst in the country, behind only West Virginia and Mississippi.

labor force participationSource: Economic Policy Institute analysis of Current Population Survey data

The net effect of the growth in jobs and the drop in the labor force can be seen by looking at another measure: the share of the adult population with a job, or the employment-to-population ratio. That number also fell in Kentucky between 2013 and 2014 by 1.1 percentage points, and by 0.8 percentage points for prime-age workers (though that decline was not statistically significant). So while the unemployment rate went down in 2014, a smaller share of adult workers is employed than in the previous year.

employment to populationSource: Economic Policy Institute analysis of Current Population Survey data

This trend means that Kentucky needs many more jobs to fully recover from the recession than the falling unemployment rate implies. To have the same employment-to-population ratio in 2014 than the state had back in 2000, when the economy was particularly strong, would mean that 230,000 more Kentuckians had jobs. To put that in context, Kentucky has created only 130,000 jobs since the recovery began in 2010.

While Kentuckians’ health and education also contribute to our low labor force participation rate, our much-higher rate in 2000 suggests that if more jobs were available in a generally stronger economy, a lot more people would enter the workforce.

Kentucky’s persistent missing workers problem should add urgency to efforts to create jobs in the short-term and spur a faster recovery, including through investments across the Commonwealth in areas like infrastructure and land remediation. It should also mean that state and national leaders avoid further budget cuts and interest rate increases that would choke off the fledgling recovery.

 

Aspects of Heroin Bills Would Increase State Costs But Have Little Expected Impact on Crime

Amid Kentucky’s heroin crisis, a number of bills have been filed for the 2015 legislative session to address the problem. However, some aspects of what is being proposed would work against the corrections reforms passed in 2011—increasing the state’s prison population and costs while having little expected impact on crime.

Kentucky passed the “Public Safety and Offender Accountability Act” (HB 463) in 2011 in response to the growing recognition that mandatory minimum sentences for drug crimes have cost Kentucky—and other states—a lot of money and have not necessarily led to decreased crime rates. Kentucky had developed a reputation as having one of the fastest growing prison populations in the nation, and state corrections spending increased from $140 million in 1990 to $440 million in 2010—an increase of 214 percent. HB 463 worked to curb the number of inmates by lessening sentencing for drug offenses and taking measures to reduce recidivism, including by promoting drug treatment for offenders. By decreasing the prison population in Kentucky, HB 463 was designed to save the state money, with savings going primarily to fund substance abuse treatment as well as other programs to reduce recidivism.

While there have been some periods of decline in the prison population as a result of HB 463, the decrease—as well as the savings to the state—is not as much as had been forecast, in part because parole rates have unexpectedly gone down and therefore inmates are staying in prison longer. According to a January 2014 publication, HB 463 had resulted in a total savings of $34.3 million at that point. However, Kentucky’s inmate population has been increasing fairly steadily since mid-2013 and is now nearly back to 2011 levels. Kentucky’s public advocate is recommending criminal justice reforms that would build on HB 463 and save the state additional money—for instance, by creating alternatives to incarceration. As noted in a paper by the Center on Budget and Policy Priorities, criminal justice reforms that reduce incarceration can enable states to make greater investments in education, which is underfunded in Kentucky and other states with large prison populations.

Meanwhile, aspects of the heroin legislation being proposed this session would go against the goals of HB 463—as well as public opinion that supports focusing more on providing treatment for those who use illegal drugs such as heroin and cocaine—by increasing Kentucky’s inmate population.

For instance:

  • SB 5—which already passed the Senate—would require that anyone convicted of trafficking in heroin—including their first offense and regardless of the quantity of heroin, be charged with a Class C felony. Currently trafficking in heroin first degree for less than two grams is a Class D felony for a first offense. If the proposed change is made, incarceration timeframes are expected to increase from 1-5 years (for a Class D felony) to 5-10 years (for a Class C felony). A Class D Felony sentence of 1-5 years costs Kentucky an average of $12,014-$60,072, while a Class C sentence of 5-10 years costs $110,191-$220,382. Those charged with Class D felonies are typically housed in local jails at a cost of $32.92 per person per day, while Class C felony offenders are typically housed in state prisons, which costs the state approximately $60.38 per person per day.
  • SB 5—as well as SB 12 and HB 112—would require that anyone convicted of trafficking in heroin serve 50 percent of their sentence prior to becoming eligible for parole. Currently an inmate with a heroin trafficking conviction has to serve 20 percent of his/her sentence before being considered for parole. According to SB 5’s Corrections Impact Statement, “Increasing the parole eligibility rate from twenty percent to fifty percent could potentially increase costs associated with a longer period of incarceration.”

Some of the state’s heroin bills take more of a public health approach—proposing needle exchange programs as well as addressing substance abuse treatment (i.e., HB 41). However, none of the legislation necessarily expands access to drug treatment. SB 5—as well as HB 61—shifts some of the Department of Corrections (DOC) savings from HB 463 away from DOC programs and to Kentucky’s Agency for Substance Abuse Policy (KY-ASAP) programs in or under the supervision of local jails and to community mental health centers that offer substance abuse treatment for heroin and other opiates; these funds were already going to DOC programs to address substance abuse and other issues related to recidivism. HB 41 would require an annual report to the Legislative Research Commission concerning the status of substance abuse treatment in Kentucky.

Access to drug treatment in Kentucky has been expanded through the Affordable Care Act (ACA), which requires that both Medicaid and the insurance offered through the ACA’s health care exchanges broadly cover substance abuse treatment. However, access remains limited. Medicaid covers outpatient treatment, but many who struggle with substance abuse require intensive in-patient treatment. Unfortunately in order for Medicaid to cover in-patient treatment, a facility must have no more than 16 beds, so many treatment facilities do not qualify. It can also be difficult to access substance abuse treatment in prison, where waiting lists are quite long.

The costs to the state of extending sentences and time served for those who commit heroin-related offenses do not seem to be balanced out by clear benefits as there isn’t strong evidence that such an approach would curb heroin trafficking and overdose deaths. Improving access to drug treatment and the quality of treatment provided—and continuing to reduce the state’s prison population and related costs—would be better strategies for Kentucky.

Tax Reform Likely to Be Deferred