North Carolina may soon get to host more blockbuster film productions and high-profile movie stars, but the state’s taxpayers would be paying dearly for the privilege.
On June 17, the state House of Representatives tentatively approved a controversial expansion of incentives for the film industry. House Bill 1973, the “Keep North Carolina Competitive Act,” extends the state’s tax credit for film production at a cost of $166 million over the next four years, according to a study by the General Assembly’s Fiscal Research Division.
While it also renews or creates numerous other refunds, exemptions, and credits to the state’s tax code, more than half of the projected $300 million cost of the bill goes to the tax credit for film productions.
The bill allows those productions to claim a credit equal to 25 percent of their “qualifying expenses.” The tax credit currently allows a 15-percent credit for expenses.
The proposed credit has raised more eyebrows than usual in a General Assembly that has been generous with economic incentives over the past decade. Currently, qualifying expenses for film production cannot include compensation in excess of $1 million to any individual. The bill eliminates that million-dollar cap, while also increasing the maximum credit allowable from $7.5 million to $20 million per production.
Supporters claim that film industry tax breaks are necessary to keep North Carolina attractive as a potential site for job-creating film productions. Tax policy experts and some other legislators, however, deny that the credits are worth the cost. Moreover, the prospect of having North Carolina taxpayers subsidize the likes of Steven Spielberg or James Cameron does not sit well with some lawmakers.
“We’re not being competitive with other states,” Rep. Bill Owens, D-Pasquotank, one of the bill’s primary sponsors, said of North Carolina’s place in the film industry. “Georgia, South Carolina, and others are basically beating us to a punch. This [bill] gets us competitive.”
Rep. David Lewis, R-Harnett, was less sanguine. Lewis particularly was concerned about the elimination of the cap on qualifying compensation for individuals. Since highly paid actors could be subsidized by the expanded credit, said Lewis, producers “can actually tell the actor that, you know, ‘we weren’t going to be able to pay you but $30 million, but since we’re going to go to North Carolina, we can now afford to pay you $35 million, because the taxpayers of North Carolina are going to pick up the extra five.’”
“It is a refundable tax credit,” Rep. Paul Luebke, D-Durham, told the House. “A company that pays no taxes to North Carolina — no taxes at all — nevertheless will receive a tax credit, meaning a check.” Luebke worried that “we’re subsidizing superstars.”
Rep. Marilyn Avila, R-Wake, criticized what she thought was an excessive focus on encouraging film production in North Carolina, pointing out that the film industry accounted for only four hundredths of a percent of the state’s gross domestic product between 1997 and 2007.
“We’re expending a lot of time and energy and discussion when we have industries that make up a much greater part of our GDP in this state that we could be working with,” Avila told the House.
Tax policy experts claim that the credits aren’t worth the cost. Robert Tannenwald, a senior fellow at the Center on Budget and Policy Priorities, a Washington, D.C., think tank, argues that film tax credits are “poor tools of economic development.” He says that states should eliminate them, and focus on economic development strategies that are “more cost-effective than film tax credits,” such as investing in infrastructure and early-childhood education.
Tannenwald says many of the benefits of film tax credits don’t remain in the state. “A large bulk of the benefits go to nonresidents,” he says. “A state’s economic development program should benefit residents. That’s what it’s all about.”
Unfortunately, states are locked in competition for a limited number of film productions, tempting lawmakers to offer ever more generous incentive packages. Mark Robyn, staff economist at the Tax Foundation, a D.C.-based tax research group, said “states are locked in this battle of tax incentives where it just keeps escalating on each side, which we’ve seen with film tax credits and with other credits as well. It’s sort of this endless race to see who can outbid each other.”
The bidding war between states, Robyn argues, forces other taxpayers to provide the revenue lost in film credits. “The revenue,” he said, “has to be made up in other ways that are likely more damaging. Higher tax rates or trying to come up with new, strange tax sources that not enough people even know about.”
The Associated Press reports that film tax credits are offered by 44 states and the District of Columbia. Virginia inaugurated its first such credit earlier this month.
The ailing economy, however, has other state governments rethinking their similar policies. Massachusetts’ Department of Revenue released a study last year showing that their film tax credit — which allows filmmakers to deduct a quarter of their expenses from the production’s tax liability — cost the Commonwealth’s government $113 million, and brought in only $17 million in new tax revenue.
That credit created only about 1,100 full-time jobs in the Commonwealth, prompting Massachusetts state Rep. Steve D’Amico to tell Governing magazine that “our funds are too scarce for us to be wasting money on economic development that has so little impact.” Luebke cited the Massachusetts study on the floor of the North Carolina House during debate last week.
Despite the opposition of Luebke and others, as well as growing evidence of tax credits’ expensive ineffectiveness, the “Keep North Carolina Competitive Act” passed its second reading in the House by a lopsided vote of 76-28. If it passes a third reading, the Senate will take it up.
Tannenwald likes to summarize the case against film tax credits by quoting Mel Brooks, who once told a film crew that their “‘movie is going to make millions. Unfortunately, it cost millions.’” According to Tannenwald, “that could be said of tax credits as well.”
Bill Flanigen is an editorial intern for Carolina Journal.