State tax incentives and credits are a hot topic on the minds of all filmmakers these days. A war wages between two perspectives: entitlement and excess, with each side arguing their views on incongruent grounds. One side argues the tax credit is a waste of resources, calling for the elimination of film incentives all together. The other side says without state incentives, film production would move out of state or out of the country – taking jobs with them. Films take flight elsewhere for two reasons: artistic and economic. Nobody can help the artistic factor of flight. But if the states were to eliminate film incentives all together, the production would go to where the benefits are: other countries. There is definitely an unhealthy “race to the bottom” between states vying for the filmmakers’ attention. But because tax incentives are prevalent throughout the world, it would behoove the United States to create programs that encourage homegrown films. After all, according to Select USA, the U.S. leads the world in film and music recording revenue.
However, there are some sustainable truths to the arguments against film tax incentives. Mark Robyn, Staff Economist for the Tax Foundation wrote that, in some states, a film tax credit is an excess expense. “Though there are embarrassingly few of them, the studies that use more realistic assumptions and take into account more economic effects have always showed that states lose money on film tax credits. “ One of the main arguments for incentives is that they draw production business to states that would otherwise never see a film crew. Robyn argues that whether there is a credit or not, films will still be made – especially in places like California. Therefore, California should not be spending state funds on film incentives – especially in the economic position the state is in. Another argument states that film productions should receive credits based on their being an economic multiplier. This is a one-sided argument, seeing how economic stimulation from new business is not unique to the film industry. So why shouldn’t new companies, based on this comparison, receive similar credit?
I argue that they do. From the Small Business Development Center’s website:
“America’s entrepreneurs and small business owners continue to grow their businesses and create jobs due to unprecedented tax cuts that have been signed into law over the past two years. This includes billions of dollars in tax relief from laws such as the Recovery Act, the Small Business Jobs Act, the HIRE Act, the Affordable Care Act, and the Tax Relief and Job Creation Act.
Zero Capital Gains Taxes on Key Investments in Small Businesses
- Capital gains taxes have been fully eliminated on certain small business stock – providing an incentive for key investments in small businesses.
The Recovery Act excluded 75 percent of capital gains from the sale of certain small business investments held more than five years. The Small Business Jobs Act went one step further – excluding all capital gains from these investments in 2010 after the passage of the Small Business Jobs Act from taxes.” (SBDC.gov)
The site page continues in listing nine other tax break or credit benefits as part of its “Fact Sheet: Tax Breaks for Small Businesses.” So what’s the correlation? Filmmaking is a business. Each new film is, in essence, a brand new start-up small business, with the producer acting as lead entrepreneur. Both take risk, and both suffer from a high rate of failure. According to statistics, 96% of small business start-ups fail within the first year. Only half of the left over 4% survive more than four years. Alexander Malyshev, Former editor of Media Law & Policy wrote, “Put simply, most films lose money, but nevertheless hundreds of films are produced each year – almost in defiance of the laws of supply and demand.” He’s referring to the roughly 600 films of which only a handful generates big-ticket success. A little over 500,000 small businesses are registered every year. 96% of that is… 480,000, leaving a ‘handful’ still in existence. Wisconsin Commerce Deputy Secretary Aaron Oliver says the number of jobs generated by film production is finite. “[It is the] ‘least effective’ economic tool… if we had to choose, we could get one full-time job on a film for one year or we could get twenty factory jobs that might last for 20 years.” Our present economic reality says different. To argue that the opportunity cost for government spending on film tax credits is a non-productive use can be applied just the same to small business ventures, given the rate of failure. When 96% of start-ups fail after the first year, why shouldn’t the same employees of those failed businesses join up with a film crew that comes into town? Their ‘job security’ will be about the same.
Still… there are more accountability measures that keep small businesses responsiblethan there are for film productions. I agree with Robyn in that the budgetary treatments of film incentives should be more transparent. However, I do not agree with Robyn that film credits should be lumped into education and public health spending categories. Instead, registrations and answerability measures should be emplaced if filmmakers are to seek tax breaks. I think a major factor in film revenue failures is that filmmakers do not treat the production as a business. They do not value it enough as a product by which money is made. A major factor of success in business includes not only money and crew, but also education, experience and a reason – or purpose. Filmmakers would do well to learn something about business and how to plan for long term revenue goals in addition to cinematography, casting and craft service. But how do you measure the intangible, or as OCU’s economist Kyle Dean says, “an inexact science?” Implement tax liabilities and assign risk premiums based on track records of producers and production companies. Then maybe filmmakers will think twice about pouring state money into a love-child film.
There is nothing wrong with taking risk when creating art, just like there is nothing wrong with giving your best shot at starting your own business. It’s the American Dream. But there is something wrong with misusing taxpayers’ dollars. That I can agree on. It doesn’t help anybody to fuel the growing assumption that all film producers are solely interested in chasing the biggest and most lucrative tax incentive. It also doesn’t help to argue predominantly on the ‘glamour’ factor that films bring to varying states. In my opinion, that comes from a weak and condescending attitude. Argue instead that you, as a filmmaker, are an entrepreneur. Therein lies the entitlement to state and government support – just like a small business. The clout and respect will come – only if you treat it like a business.