Expanding Kentucky’s Film Tax Credits Not a Strategy that Will Pay Off
February 10, 2015
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.