Critics say cut film tax credit as costs erase gains

By Stephen Beale | February 23, 2016, 5:00 EST

On the scene in Cambridge, actors Jon Hamm and Ben Affleck chat in between takes for “The Town.” (Photo courtesy of WIkipedia.org)

BOSTON – They can bring Hollywood A-listers like Denzel Washington and Mark Wahlberg, put Boston and other Bay State communities on the silver screen and pump millions of dollars into the local economy, but critics say the cost of film tax credits makes them a bad deal for Massachusetts.

“Every independent analysis of the economic effectiveness of film credits has found that the costs exceed the benefits,” Joseph Henchman, a vice president at the Tax Foundation in Washington, said in an interview. As of last year, more than three dozen states offered film tax credits, according to Governing magazine. Nationwide, those credits total $1.8 billion annually, Henchman said.

From 2006 through 2012, the state issued $411 in film tax credits generating about $261 million in net economic activity, meaning that the lost revenue was greater than the economic benefit, according to a 2014 report from the state Department of Revenue. During the same period, two thirds of the money that production companies spent on wages, set construction, and other expenses went to out-of-state businesses, according to the report.

Last year, Gov. Charlie Baker attempted to scrap the tax credit program, but was rebuffed by the Legislature. This year, he has proposed scaling back the credits by capping the amount that can be spent on individual projects at $7 million. The reform would effectively roll back changes that expanded the original incentive program in 2007.

“Governor Baker’s proposal to restore the film tax credit to its original structure will provide savings that allow the commonwealth to invest in new opportunities for job growth and affordable housing for Massachusetts’ residents,” said Billy Pitman, a spokesman for Baker.

By administration estimates, the change would save the state about $43 million, although it wasn’t clear over what period of time.

A spokeswoman for Speaker Robert DeLeo, the Winthrop Democrat who leads the House of Representatives and supports the credits, didn’t respond to a request for comment on Baker’s proposal.

In their simplest form, film tax credits let production companies claim a credit in their tax filings with the state. In more expansive versions, states have increased the amount of credit so high that it often exceeds what a production would owe in taxes. When that occurs in Massachusetts, production companies can receive cash payments from the state equivalent to as much as 90 percent of the unused credit. Also, in most states that offer the tax break, companies sometimes can sell credits, either directly or through a broker, to another taxpayer, and the credits can be used to reduce what’s owed to the issuing state. That often happens in Massachusetts.

The Massachusetts Production Coalition, an organization representing movie and television producers, has touted the many benefits of the program. In a statement last month, the group noted that in 2006, the last year before the credit cap rose, there were two major films produced in the state. In 2007, after the cap had been lifted, there were seven. In 2008, there were eight. Money from film and television productions has flowed into local businesses in more than 225 cities and towns across the state – almost 70 percent of the total, according to the coalition.

“The money generated by the production incentive program helps thousands of businesses, including diners, caterers, hardware stores, lumber yards, printing companies, cleaning companies, hotels, and countless others,” the coalition said after Baker reiterated his call to roll back the credit in his State of the State speech last month. Bake has proposed using the money saved to increase the annual low-income housing tax credit by $5 million as well as for broader corporate tax breaks.

The benefits of the film credits also extend to job creation, the industry group said. In a video posted on its website, the coalition says that between 2006 and 2012, nearly 10,000 jobs were created, with an average salary of $64,000. An estimated 74 percent of those went to residents.

But in the state revenue department report, the number of net new full-time or equivalent jobs created by the credit was estimated at about 3,000 from 2006 through 2012. The report said that the credit resulted in the creation of 730 net new jobs in 2012, and 10 percent of them went to Bay State residents working in other states. It said that one new job for a Massachusetts resident was created for every $118,873 in issued tax credits.

“The question is, is that the best use of that money? Is the cost that you’re paying out worth the benefit?” Henchman said. Henchman and others question industry claims about some of the benefits, especially the new jobs created.

The revenue department raised the same issue in its 2014 report, which estimated the median wage of credit-created jobs for Bay State residents at almost $65,000 annually in 2012. In describing wage estimates for the new jobs, the report cautioned that most if not all were temporary positions:

“It should be noted that these annualized wage calculations are considerably higher than the amounts actually paid to employees on film productions, as those employees were generally employed for periods of three months or less, since all film productions are by their nature short-term projects. In many cases, workers on film productions are employed only for a few weeks, or even days.”

The film industry group declined to comment on the state report when contacted by the New Boston Post this month.

The revenue department is updating the report, with a goal of releasing it in March, a spokeswoman said.

Film tax credit programs often fail because most of the available business was cornered by the few states that offered them first, said Henchman of the Tax Foundation. “In order to get this industry, you need to pay out so much money that it just dwarfs the economic return that you’re going to get from it,” he said.

In 2002, just five states offered a tax credit or other incentives for television or movie production companies. By 2010, all but six states had such a program, according to the Tax Foundation.

But as attention has shift to the high cost, the honeymoon with Hollywood may be coming to an end. Several states canceled their programs, leaving 39 with ongoing incentives by early 2014, down from 44 four years earlier. Other states still offer curtailed versions, according to Governing.

While critics question the bottom line for the Massachusetts, local businesses welcome the work that they attribute to the credits. The local industry group recently highlighted the economic benefits from “The Finest Hours,” a Walt Disney production that stars Star Trek’s Chris Pine and tells the story of a Coast Guard rescue off the shore of Cape Cod.

The production crew and actors in “The Finest Hours,” filmed in Chatham, Cohasset, Duxbury, Marshfield, Norwell, and Quincy during the summer and fall of 2014, “bought or rented goods and services from more than 1,300 Massachusetts businesses in 155 cities and towns during the time it filmed in Massachusetts,” the coalition said.

One local business owner quoted by the coalition suggested that the film steered nearly a year’s worth of activity to his company, Turner Steel, in West Bridgewater. The firm provided steel for ships built for the production, the industry group said.

“We’ve done a lot of business with movies over the last few years, but ‘The Finest Hours’ was one of the biggest,” Steve Turner said in the industry group’s statement. “We were on set almost every day for close to a year – it certainly kept us busy, and having that steady business helps out a lot.”

Still, the state report shows that the average monthly employment tied to the film and TV industry had risen by just 6.4 percent in 2012 compared with 2001, adding just 363 jobs in more than a decade on that basis. Meanwhile, from 2006 through 2012, production companies claimed just 12 percent, or $50 million, of the credits issued. The companies sold almost $336 million of the credits to other taxpayers, mostly insurance and financial companies and other corporations.