State Film Tax Credit Debate Should Focus on Problem-Solving

There is a long-running debate over film tax credits, which aim to draw attention and jobs to states but also tend to be expensive and publicize their presence. With this attention comes much support and opposition. But film credits aren’t going away, and the discussion should evolve from arguing over their existence to deciding how to improve them.

The Debate

Each side of the current debate touts multiple studies supporting it. In 2021, New York’s economic impact study showed that each dollar spent on film credits produced $9 in economic activity within the state. However, the report’s methodology was heavily criticized for being unrealistic and not testable.

Conversely, a 2016 academic review of film credits across 15 years and over 40 states revealed no economic impact from tax waivers and found that job creation or improvements never aligned with the film’s production. A follow-up study in 2018 showed that California’s credit had no significant effect on employment. Like the New York study, the 2016 report’s methodology received criticism.

Two more studies published in December won’t help resolve the argument. One report on Illinois’ credit found that it produced $7 for every dollar of credit. Another found that Georgia’s film credit returned only 18 cents for every dollar spent and highlighted how much it costs the state: $1.35 billion in 2022.

Film Credit Primer

Most film credits follow a common blueprint: Incentivize jobs and productions within the state and promote the state. Each state may change what specific activities qualify, how much credit is available, and how the state is promoted, but the fundamentals are almost always present.

For instance, Georgia provides a 20% credit on expenditures within the state. Eligible expenditures include materials, services, and labor for feature films, television films, pilots, specials, commercials, and music videos. It provides a 10% bonus for including the marketing logo on the project’s website and commercially distributed projects. Every production is now subjected to a mandatory audit.

Puerto Rico’s credit—which has received scrutiny for funding a Corona ad shot in Los Angeles—provides a tax credit of 20% for payments to a foreign person and 40% for other payments related to the cost of production in Puerto Rico. A production project has production or post-production activities in Puerto Rico for showing, distribution, or commercial exhibition to the general public elsewhere.

Less Obvious Benefits

While each study on film credits uses a different methodology, they focus on the economic benefit of the expenditures related to production and post-production. This makes sense, as these activities are incentivized by the credits and the ones that bring money and jobs to the state.

But that doesn’t present a full picture. Film credits also work to market the state to the public.

The marketing aspect is much harder to quantify but shouldn’t be ignored. Who doesn’t want to fight zombies on the outskirts of Atlanta, have a dance-off with the Jets in Paterson, N.J., or age in reverse while in New Orleans? Filming location is valuable in the same way as product placement. Both companies and states find the cost of inclusion worth the long-term benefit.

Unlike a perfectly framed soda can, location often becomes an integral part of the film. Many films also depict their location settings in a positive light, whether through expansive shots of unmarred natural mountains, beautiful skylines, nearly traffic-less streets, or pristine beaches.

Even when productions don’t paint places in the best light, they generate awareness. Google’s reporting shows a steady increase in search terms related to film locations, almost doubling in the last decade. One production may not result in people immediately booking a vacation there. Still, it plants the seed for future tourism expenditures or even attracts new residents and businesses that help the tax base grow for years.

According to one study, Georgia’s 2022 business growth came first in the nation. Is this directly attributable to Georgia’s aggressive film tax credit? Of course not. But the state has made no secret of its desire to attract businesses. Making people, including business leaders, aware of the state is one step in the process.

Outlook

Despite the constant debate about their effectiveness, film credits will likely continue for a while. Many states continue to expand the use of these credits in hopes of attracting attention and jobs. The focus should shift to how they can be improved.

There are 38 states with a film credit, and each one is an experiment on what works and what doesn’t. Feature films might create more short-term jobs, but commercials can generate more interest and discussion.

Credits for commercials get unfairly criticized. The argument goes that commercials will get made regardless of the tax credit. But that argument misses the mark. It isn’t a question of whether a production will happen but a question of where it will happen.

The attention should turn to what can be done to make the credits more beneficial. What measures can help ensure less fraud and misallocation? Metrics on the effectiveness of application processes, mandatory audits, and public reporting are needed to answer such questions.

We need new research methodologies that account for all the benefits derived from production occurring in the state or territory—not just immediate economic benefits.

For instance, in addition to the jobs created for the production, does Puerto Rico generate more future tourism by spending $800,000 for a Corona commercial that features its landscapes? The current research should address such impacts. Otherwise, the debate suffers.

In the meantime, I’m ready to kick back and relax with another movie. Maybe I’ll find where to take my next vacation.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Holland King runs a tax litigation firm focused on credits and incentives in Atlanta. He has 15 years of experience representing clients before the IRS and litigating matters before the US Tax Court.

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