Opinion: Daily Journal

Iron Man? No, the Real Hero is the Super Multiplier

So which is it? Is North Carolina’s Film Credit responsible for only 55 to 70 new jobs (“290 to 350 fewer jobs than would have been created though an across-the-board tax reduction of the same magnitude”), as a Fiscal Research study by fiscal analyst Patrick McHugh found, or is it responsible for over 2,000 jobs (PDF) in 2012 just for the “Iron Man 3” production, as a Motion Pictures Association of America Inc. study proclaims?

That’s a question legislators are asking as they consider House Bill 994, a bill to tweak the Film Credit by ending its refundability. Under current law, if a production company qualifies for a greater amount of tax credits than its total tax liability, the state pays it the difference. H.B. 994 would instead allow credits beyond a production company’s tax liability to carry forward for up to five years.

That would seem a modest change with a generous concession, but to hear the film industry lobby wail, it would be more apocalyptic than an Al Gore stump speech. And who is hearing the film industry wail? Legislators considering H.B. 994, who are being treated as if they wield the power of life and death over an entire industry, like some mad Commodus amid shouts of “Are you not entertained?”

Consistent vs. sensationalized findings; cost and benefits vs. just benefits

The findings by Fiscal Research are consistent with findings by several other state legislatures over the years in studying their own film incentives, that the things are net revenue losers on a grand scale, returning pennies on the dollar. Studies compiled by Robert Tannenwald of the Center on Budget and Policy Priorities in his report “State Film Subsidies: Not Much Bang for Too Many Bucks” include:

  • A 2008 study conducted for the Connecticut Department of Community and Economic Development found $33,400 in net revenue forgone per net job created and only 7 cents in revenue gained per dollar of film subsidy claimed
  • A 2008 study conducted for the New Mexico Legislative Finance Committee: $13,400 in net revenue forgone per net job created; only 14 cents in revenue gained per dollar of film subsidy claimed
  • A 2009 study conducted for the Louisiana legislature: $16,100 in net revenue forgone per net job created; only 13 cents in revenue gained per dollar of film subsidy claimed
  • A 2009 study conducted for the Pennsylvania legislature: $13,000 in net revenue forgone per net job created; only 24 cents in revenue gained per dollar of film subsidy claimed
  • A 2009 study conducted for the Arizona legislature: $23,676 in net revenue forgone per net job created; only 28 cents in revenue gained per dollar of film subsidy claimed
  • A 2010 study conducted for the Michigan legislature: $44,561 in net revenue forgone per net job created; only 11 cents in revenue gained per dollar of film subsidy claimed

Very recently, in March 2013, the Massachusetts Department of Revenue released a report (PDF) on its film tax incentives that found, among other things:

  • From 2006 to 2011, the incentives’ cost per net new Massachusetts-resident job created was $128,575
  • From 2006 to 2011, the incentives returned only 13 cents in offsetting revenue for each dollar spent

Industry studies, meanwhile, are notorious for promoting the idea of a greater return on investment, mainly by ignoring opportunity costs and assuming that any job in the industry exists because of the subsidies. Even so, the figures reported by MPAA are rather sensationalized. A close reading of the report methodology, which used the IMPLAN input-output model, clues us in (emphasis added):

This film, like other productions, has an amount of direct expenditure, such as equipment rentals, which in turn stimulates so-called indirect impacts across the supply chain of the equipment rental industry. These expenditures also create new jobs as firms add labor to meet rising demand, which in turn raises incomes and stimulates what are known as induced impacts as higher incomes flow through to consumption. The total economic impact of the production expenditures is the sum of each of these direct, indirect, and induced impacts.

In short, this is a model of sums — it is all plus signs. Despite what it says, it doesn’t measure the total economic impact; it measures only benefits expanded by whatever multipliers it used (more on that below). It doesn’t take costs into account.

Lobbyists’ model of choice for impressing politicians

IMPLAN is the model of choice for special interests seeking public largesse. It’s a favorite of studies promoting supposed win-win scenarios of public construction of new sports stadiums, for example. Most recently in North Carolina, the recent trade association study (PDF) supporting North Carolina’s mandated renewable energy portfolio standard also used IMPLAN and also generated sensational results. They, too, are all benefit and lack any accounting for real opportunity costs.

Of the solar study, a peer review by economists at the Beacon Hill Institute exploded the methodology and explained the folly of focusing only on benefits. This passage could well apply to the MPAA’s conception of “total economic impact” (emphasis added):

The authors do in fact provide traditional “secondary” multiplier effects, but what they seem to fail to understand is that the multiplier is the way by which total spending increases in the economy. Except for those “secondary” effects, any one dollar of investment in the green energy sector must come at the expense of a dollar spent elsewhere.

In other words, they are robbing Peter to pay Paul, and claiming the program increased total spending because now Paul spends more, but they ignore accounting for Peter. There are potential ways by which transferring the money increases total spending, and that’s where the multipliers come in. The headline spending and jobs estimates the authors make are based on myopically accounting only for Paul.

The fundamental economic concept of “opportunity cost” postulates that there are alternative uses of scarce resources, and the picture is incomplete if we ignore the path not taken.

As economist Donald A. Coffin put it in reading criticism of the sports stadium studies and others based on IMPLAN (emphasis added):

Nice to see a good take-down of the IMPLAN modelling approach. Those of us who do sports economics and urban economics seriously are almost constantly having to push back against those kinds of studies. The single most disturbing aspect of the IMPLAN model for local economic analysis is the wildly unreasonable values th[ey] have for multiplier effects (compared, for example, with the BEA’s Regional Input-Output Modeling System). IMPLAN is exactly what you describe it as, a “model” designed to generate large impact numbers to please a client who wants to lobby someone.

Abusing IMPLAN to generate impressive, incredible (meaning not credible) impact numbers to lobby politicians is a recurring criticism. A Politifact report on lobbying efforts for public money to renovate the Miami Dolphins’ stadium gave a “False” ruling to the economic impact studies on that project and included this nugget:

But many independent economists say the benefit is much lower than boosters’ totals. These economists share a joke: take the boosters’ estimates and move the decimal place one point to the left. Economists say boosters dangle the enormous revenue figures as politicians are weighing whether to support public funding. (Emphasis added.)

In 2011, WFAE in Charlotte — a city that is no stranger to eye-popping economic impact studies, or politicians falling for same (cough, cough, NASCAR Hall of Fame) — ran a feature on “Economic Impact Studies: Legitimate or ‘Voodoo’?” WFAE said “these impact studies have become a cottage industry over the last 20 years,” noting that, “To the people who commission these studies, their value is clearly to rally support for public funds.”

It’s all about the multiplier

A lobbying outfit with a vested interest in obtaining public dollars for a client would use a model such as IMPLAN to input an amount of public funding, then apply multipliers to simulate the effect of those dollars trickling through the economy. For public dollars to be (to use the favored lingo) “injected” into the economy, however, they also have to be pulled out of the economy, canceling out their alternative effects of trickling through the economy. (Remember, the canceled-out part isn’t included in the model.)

The multiplier is a Keynesian concept, but what a proper multiplier should be is a topic of serious debate among economists. If politicians replace private spending with public spending that’s just as effective, the multiplier would be one. Harvard economist Robert Barro said the more plausible assumption would be a multiplier closer to zero. On the Keynesian side, Obama economic adviser Christina Romer (who is responsible for the still eminently mockable stimulus predictions) puts it around 1.6, and Obamanomics apologist par excellence Paul Krugman puts it at 1.5.

Scott Lindall, one of the original developers of IMPLAN, told Twin Cities Business that, in general, “you don’t see output multipliers over about 1.3 to 1.8.”

The multiplier being used in the “Iron Man 3” study — while North Carolina’s film incentives are under scrutiny by legislators — is 8.99. The study proclaims “The film generates $8.99 in economic output for every dollar of tax credit received by the production.”

That’s a multiplier six times greater than what even supporters of this approach to public policy find reasonable. (Though to be fair, it’s not quite half the multiplier claimed by the renewable energy industry in North Carolina, which was — don’t laugh — 19.3.)

Beyond the studies: Other concerns

Outside of the competing studies, there are other areas of concern with North Carolina’s film incentives.

  • The constitutionality of the incentives is still highly questionable. They are an open-ended draft on the state Treasury without appropriation; i.e., without action taken by the General Assembly.
  • The nature of film incentives — as our own history has shown — is that they are moving targets. North Carolina expanded our film incentives after losing a Miley Cyrus film to Georgia, even though it was written by North Carolina author Nicholas Sparks and set in Wrightsville Beach. Georgia, in which filming for the next “Hunger Games” movie is taking place, has expanded its incentives after “losing production” to North Carolina and other states. New York, which has more aggressive film incentives than North Carolina, lost Long Island-set “The Great Gatsby” to Australia. So the “sweet spot” level of incentives this year might be portrayed as “too small” next year as states compete with (a) each other and also (b) other nations to see who can pay film production companies the most. It’s what economists call a race to the bottom.
  • Even if we take the MPAA report at face value, those 2,000 jobs would be no more now that the “Iron Man 3” production has left. Supposedly that’s the reason for keeping the incentives in place, because people’s jobs hang in the balance of the legislature paying outside firms to come and employ people in this state. I say “paying” because the outcry over merely ending the refundability of the tax credits has made it clear it’s not just a tax credit; it is a payment. The industry doesn’t even want the five years’ worth of carry-forward; they want the direct check.

Legislators mulling incentives for film productions and other handpicked winners ought to ask themselves: Is this really how North Carolina should conduct business? Tax breaks for a favored few and state leaders at the mercy of threats by those same groups if changes are made, all the while still having to worry that another state will offer them a bigger bribe?

Furthermore, as the benefits-only case for incentives shows that lower taxes and regulations entice industry to come to North Carolina, why offer them to just a few industries? Why not give them across the board?

Cutting taxes, including the corporate income tax, would have a strong stimulating impact on the state’s economy, in terms of permanent job creation, outside investment, and greater economic growth, leading to greater state revenue.

Jon Sanders (@jonpsanders) is the director of regulatory studies at the John Locke Foundation.