Wednesday, April 09, 2008

Tax Credit Nightmare

MassBudget created a brief the film tax credit bill just passed through the state. It doesn't look good. I'm not opposed to offering incentives to help bring companies into Massachusetts - but tax credits don't seem to be the way to go. First off, what normal citizen gets tax credits for anything? No one does. We get tax deductions. MassBudget explains the difference quite well in the link above, but suffice it to say a tax deduction just reduces the overall taxable income, while a credit is a government check sent right to Steven Spielberg. There's a few things that stink about that, but mainly this: the film industry can get tax credits even if they don't pay a dime in Massachusetts taxes. To be eligible for the tax credit, all film companies have to do is film part of a movie in Massachusetts and send the Commonwealth the bill for their time spent here - and, in these difficult economic times, we'll credit the film industry 25% of their total costs, without any guarantee of making even a fraction of the costs back. 25%, by the way, is way beyond what normal Massachusetts tax credits go for - others are far more reasonable, at around 3-5%.

None of this would be a big deal, of course, if this were going to be a net-positive for the state of Massachusetts - if we'd earn enough in new taxes to at least break even. We won't.
But could the tax credit pay for itself by increasing economic activity and associated state tax revenue? A recent report by the state Department of Revenue examined this possibility. The report estimated that the total tax revenue forgone in 2006 to 2008 would be 137.7 to 238.7 million. It then examined how much of this loss could be offset by new tax revenue. The findings... suggest that it is u nlikely that more than a small portion of the forgone revenue would be offset by new revenue. This analysis is consistent with other studies on film tax credits.
Again, this all stinks. This bill is going to cost this state tens of millions a year, without even keeping an industry inside Massachusetts. Outrageous. If we want to spend this kind of money to spur economic growth, can't we be more intelligent about it? More tax credits for local businesses would help new, often middle-class entrepreneurs deal with upfront costs and grow the economy in every region we want in Massachusetts. Those incentives could be set up for certain industries, as well, giving incentives not only for new startups, but also for new startups all across the state, naturally located for where they could do well.

If Beacon Hill wants Massachusetts to become a Little Hollywood - fine. But, my god, this kind of a tax credit isn't the way to do it. A tax deduction, on the other hand, makes sense for a number of reasons, even if it was up to 25% or more. First, we're not resorting to corporate welfare by giving a government handout to Hollywood, while we would never do anything so kind to the people struggling to get by in this state. Second, if a company actually wanted that 25% deduction - and I'm sure some out there would - then it would have to come to Massachusetts and build their studio here to get it. In other words, it would have to pay Massachusetts taxes.

Maybe if the times weren't so dire, we could afford to give free government handouts to large corporations that aren't even pretending they'll locate here. But, the fact of the matter is times haven't been worse, probably in the 23 years and 11 months I've been on this Earth. That doesn't mean we shut down our efforts to create economic growth and new opportunity - between the Life Sciences bill and the Renewable Energy bill, it's clear this state is making good on its promises to promote economic growth. The Film Tax bill is another decent idea to attracting a broader economy to Massachusetts - but we need permanent business, not just an extra film or two to do their shooting here, so they can write off their expenses and bill the good people of Massachusetts. If film studios are willing to locate serious assets here and pay taxes toward Massachusetts, and hire Massachusetts employees who will pay Massachusetts income taxes, then it's worth giving a tax break - but even then, not a massive giveaway.


Ari Fertig said...

"MassBudget explains the difference quite well in the link above, but suffice it to say a tax credit just reduces the overall taxable income, while a credit is a government check sent right to Steven Spielberg."

Come again?

Ryan Adams said...

ooops - tax deductable was what i meant to say the first time =p

Peter Porcupine said...

Ryan - we've had a couple of movies made on cape recently. One was called 'Chatham' with David Carradine, Rip torn, bruce Dern and Mariel Hemenway. This film company hired extras, rented properties, ate out constantly, and so on. The outer Cape economy got a nice boost from the film, and from the tourists who came to watch the shooting, too.

These economic benefits aren't easily quantifiable, but they are very real, and reflected in the cash drawers of locals.

Ryan Adams said...

No doubt, PP, but I don't see why we can't have our cake and eat it too. We can't just dole out tax dollars when there's nothing coming in - I know movies make a difference to the local economy (a great many have been made where I live - Swampscott, Marblehead and Salem frequently get movies), but certainly not 25% of the filming's cost in those locations.

Now, if we offered a hefty tax deduction for studios to be built (25% or even more) - especially outside the beltway - that would still bring businesses here, and likely keep jobs here for good. There would be more projects that way, hopefully, and we'd be able to receive taxes from them that would contribute to our state's revenue.

I'm not averse to investing tax dollars into the economy, but it should be something that has a real and quantifiable return - or it should be something that directly improves lives for a sustained period of time (ie education, health care and infrastructure). Heck, if Beacon Hill were desperate to give tax credits to movie studios, at the very least they could be tax credits for these companies to build permanent locations in Massachusetts... it's still kind of corporate welfare, but at least it would a) grow permanent jobs and b) create companies that will stay here for at least a decade, and pay taxes.

Anonymous said...

25% does seem like quite a bit of money. If someone ever went and filmed another "Star Wars" here the state would go broke. I agree we need to foster jobs which will remain here, the kind that build a permanent middle class structure which is the strength of our society.

Peter Porcupine said...

Ryan - did you know there is a proposal to create an east cost sound studio facility in Plymouth? That may entice even more filmmakers here.

And when you think about it - the people who benefit from having films made in an area are hotels, restaurants, retail stores - EXACTLY the kind of middle class employment that you want to encourage!

Ryan Adams said...

I'm not disagreeing with you in principal, PP, just in how we're going about doing it.

Anonymous said...

Wow, you have your own blog where you enlighten everyone with your tax knowledge. I agree with your basic position on the film credit. Bob Tannenwald wrote a great analysis of the MA film credit, concluding that its costs are speculative at best and outweigh the benefits MA could reap with the money given away to the film industry. However, ordinary and necessary expenditures are a 100% deduction from gross income. Offering only a 25% deduction of MA expenditures would go against the basic concept of taxing net income that our system of tax is based on. Please get informed regarding tax policy before you continue to spout foolishness.

Ryan Adams said...

I don't profess to be an expert in tax policy, but I don't need to be an expert to have an opinion. While many blogs are written by experts of a particular field, I go a little beyond that with Ryan's Take. Yes, I discuss issues that I have knowledge and expertise in that most people don't, but Ryan's Take discusses the full gambit of Massachusetts politics and always has. By discussing policies that I'm interested in and have at least some knowledge in, I'm able to create a great discussion in the comments. If you have better ideas on how Massachusetts could entice film companies to come here, pay taxes and create permanent jobs - without resorting to corporate welfare - please feel free to contribute. If you're an expert in the field, or even if you just have a few good ideas, I'm interesting in what you have to say.

Anonymous said...


I've been a CPA for longer then you have been alive and spreading your lack of knowledge of any tax system, not to mention the complex corporate excise tax system in the Commonwealth. The other anonymous blogger has a far better understanding and I agree with him.

I completely disagree with everything you have claimed. If you had the technical fortitude to hold a conversation on the subject, I would welcome it. Such is not the case!

Doug Kirkpatrick said...

Ryan – you are raining on the parade, when only bright sunny days are in the forecast! You inaccurately conclude that the findings of the 2008 DOR report on the incentives suggest that it is unlikely that more than a small portion of the foregone tax revenue as a result of the motion picture incentives will be offset be new revenue. You also suggest that tax credits for local businesses would be more helpful. I respectfully disagree, and am here to suggest you that you should put away your umbrella – enjoy the sun, and get ready to ride the “wave”.

First, the DOR report is insightful in that it indicates that foregone tax revenue will in part be offset by increase in personal income, business, and other taxes that would not have been generated had the incentives not been in place. Based on the information provided to the DOR on tax credit and sales tax exemption applications, the Commonwealth is looking at collecting 18.6 mil in new income taxes, which, the DOR rightfully points out, does not include increases in employment in ancillary industries. Some call this the “ripple” effect, but I like to call it the production “wave,” as it more accurately describes the economic benefits of these very important incentives – which have an impact on real human lives and spawn hundreds of new businesses! This means jobs and new employment! Smaller tax credits for local businesses would not have the same economic impact as the wave of economic benefits that the incentives are bringing to Massachusetts.

The DOR Report refers to the “wave” as the “multiplier” effect. To understand the economics of the “wave” or the multiplier, it is best to think of it as two “swells”. The first “swell” is the direct revenue spent by the production. For example, a big budget movie spends 100mil in Massachusetts in production. A food vendor or caterer gets paid directly by the production. This expense in included in the direct economic impact figures. The second “swell” is the indirect revenue generated. The food vendor needs to buy supplies and food from stores and local farmers to make meals. The stores or farmers, will, in turn, pay others to provide the needed supplies and materials necessary for the supplies and food. This goes right through the line – a day player get paid and then goes into town and goes out to eat, and buys groceries. Most film commissions use a multiplier between 1.5 to 3 to demonstrate the effect that the money spent by the industry has in the community. David Friedman, in a study for the Alliance of Motion Picture Arts and Sciences determined that the economic impact multiplier for the entertainment industry in California was 2.12, which is an average of what film commissions generally use, which is why I think it is a good measure. On a budget of 100 mil, the ‘wave” is over 200mil in economic impact! This means an increase in small business providing services to the industry, increased employment, and personal, business, and other taxes!

Your other complaint is that the productions come and go in Massachusetts, but you overlook that incentives have spawned the seeds of the development of two separate studio facilities in Massachusetts, one in Weymouth and the other in Plymouth – infrastructure that will be here long after you and I are gone! Together, the two facilities are expected to cost close to 700 mil alone a tremendous boon for jobs and spending in the Commonwealth! The Plymouth studio is projecting the creation of 2,000 jobs alone (which I and others are fortunate to be doing some work for already!).

We need a 6th Industry here in Massachusetts – we have the minds, the skills, the talent, the geography, and one of the finest educational networks in the world. We need to reinvent ourselves for the creation of new industries, and we need to work together to do it!

Anyways, I invite you to grab your board, and get ready to ride the wave! It is pretty nice out here!

Doug Kirkpatrick

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