Lights, cameras, corporate welfare!

July 23, 2009 at 5:07 am

| Gabriel |

The current episode of KCRW’s radio show The Business (or as I call it, Production of Culture: The Series) is all about state tax incentives for film production. They talk to Bill Gerber (a producer who chose to shoot in Michigan over Minnesota because of tax breaks) and host a debate between Steve D’Amico (a Massachusetts legislator who killed a local tax break proposal) and Cameron Henry (a Louisiana legislator who has helped build up his state’s program). The first thing to note is that Gerber tells us that he (a) shopped his production between states and (b) imported 70% of the film’s workforce from Los Angeles. From that it’s pretty easy to infer that Representative D’Amico is right and Representative Henry is wrong about whether states benefit from production credits but it’s worth unpacking why.

A few decades ago the Canadians wanted to create a jobs program and were scared of American cultural imperialism so they fostered their domestic film and television industry with tax incentives. At the time (though no longer) the loonie was weak against the greenback so between the tax breaks and the exchange rate a fair amount of production took a two hour flight from LA to Vancouver. Although the commodity boom of 2007 hurt Vancouver production in the last few years (a case of Dutch disease), the city has developed a viable film industry. Largely imitating the Vancouver example, an increasing number of jurisdictions, including most American states have created film incentives of their own. Of course this results in the situation seen in Gerber’s example, where states end up bidding against each other for one or two shoots, with none of them becoming the next Hollywood, or even the next Vancouver.

Throughout this California has refused to match the incentives and only in the last year has the state begun seriously considering offering film incentives of its own. In the meantime, although a lot of film production has left California, a lot of it has not. Why is actually an interesting question since it’s not like the film industry has a lot of big factories that would be difficult to move. We’re talking about a project-based industry with equipment that is routinely moved by truck on a daily basis, so you might expect that if some state offered tax breaks the industry would run for it. The answer is that as the incumbent Los Angeles benefits from cluster economies and so it doesn’t have to match incentives to remain an attractive place to shoot. Some of this is simply because there are so many stage sets, subcontractors, skilled labor, etc within an hour’s drive. (And it actually is fair to say “an hour” because location shoots often have really long days that start before morning rush hour and end after evening rush hour). There’s also the fact that many elite cultural workers live in Los Angeles and prefer not to travel. Most famously, David Duchovny insisted that the X-Files relocate from Vancouver to LA because he wanted to spend more time with his family (why exactly his wife wanted him to stay home so badly became apparent a few years later). Of course it is itself endogenous that most of these elite workers live in Los Angeles. Give it a few years and you may find that elite workers are insisting that shooting stay not in Los Angeles, but in New Orleans, or Austin, or Vancouver, or wherever it may be that is an attractive place for elite film workers to live because it has a critical mass of production (and perhaps personal income tax shelters).

Representative Henry’s favorite talking point on the program was that every dollar the program costs Louisiana is returned to the economy sevenfold. Although this sounds like pure magical thinking, it’s known in the policy literature as the “fiscal impact multiplier.” The idea is that if a local government subsidizes a farm growing magic beans, not only does the local economy get the payroll for the farmhands, but the farmhands buy services and (locally-produced) goods so the local economy gets not just farmhand jobs but jobs serving farmhands. Plus, you may get tourists coming in to gawk at the magic beans and the economy gets their tourism expenditures too. This kind of crap is endemic to policy discussions of things like sports stadiums and academic economists mostly agree that it’s total flim-flam. The way it works is that somebody will propose that the local government use public funds to build a stadium and instead of just saying “because I like sports,” they hire consultants to make a utilitarian case that we can’t afford not to subsidize sports. Typically the argument goes that Magic Beans Stadium will attract thousands of out-of-town visitors, none of whom would have visited anyway, none of whom are displacing other visitors, and all of whom stay at the Ritz and eat nothing but foie gras during their visit.

So here’s how it works for film. If a movie shoots in New Orleans there are basically two things that can occur. One is that they use local labor. However because the volume of film production is extremely variable these workers will have a lot of downtime between shoots, during which the local economy will be underutilizing skilled labor. The other is that the film producers can bring in labor from Los Angeles who will take up an enormous amount of tourism resources (hotel rooms, air travel, restaurant meals, etc) which is serviced by locals. If this tourist infrastructure is to always be available for visiting film production then it means that the rest of the time these hotel rooms, flights, etc will be empty and you have a peak load problem. Now the peak load problem is of hotel rooms (and hotel maids) rather than sound stages (and key assistant grips). Also note that there is a huge deadweight loss involved since it’s cheaper and more comfortable for that key assistant grip to live his wife in Santa Clarita and drive to shooting locations listed by their Thomas Guide grid coordinates than it is for him to fly to Detroit and stay in a motel for three months, go home for a few months, then fly to New Orleans and stay in a motel, etc. On the other hand if the hotels are continuously full, taken up by tourists and non-film business travelers whenever there is no shooting, then the film workers are just displacing these other travelers. This is an important point because fiscal impact multipliers usually fails to factor in the (public and private) opportunity cost of developing the subsidized sector. The only real solution to the deadweight loss of the peak load problem is risk-pooling, but then you’re back to cluster economies and you could have stayed in Los Angeles to get that.

So, aside from simply being mistaken about the merits, why would a politician support tax breaks? Representative D’Amico’s theory is that they are mesmerized by the glamor of Hollywood. This is plausible as Hollywood has always been able to attract (this is a technical term) “sucker money.” However I think equally important is the basic dynamic of public choice theory — note that Representative Henry has three film facilities in his district. The tax breaks may very well be a good thing for his district and yet still be a bad thing for both the state of Louisiana and America as a whole. On the other hand, Representative D’Amico seems to have been arguing against interest as his district is near the proposed film facility in Plymouth and his constituency includes craftworker unions. You might be asking where is my stake in this? Given that I live in LA, it’s in my personal interests for the state of California to give tax breaks to Hollywood as this represents a net transfer of wealth from Northern California to SoCal. Better yet for me if no jurisdictions offer tax incentives and cluster economy dynamics alone keep production in LA so you can consider this post to itself be rent-seeking.

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