Pennsylvania’s Flawed Film Tax Credit: What the ERA study won’t tell you

EXECUTIVE SUMMARY

The Pennsylvania Legislative Budget and Finance Committee contracted with Economics Research Associates (ERA)1 to analyze Pennsylvania’s Film Tax Credit (FTC).  In general, the ERA report, “Pennsylvania’s Film Production Tax Credit and Industry Analysis,” fails to provide legislators and citizens with a reliable assessment of the program by not counting all the costs associated with the film tax credit and falling short in its tax revenue claims.  

This critique addresses the flaws in the ERA report in order to foster a more educated debate on Pennsylvania’s FTC initiative.  Among the problems with the report include:

• The ERA report has not established a causal link between larger tax credits and higher film production in Pennsylvania. It is just as plausible that the causality could be reversed—that greater film production in the state fosters lobbying for more favorable tax policies.

• The ERA report claim that a significant portion of film production would be lost if not for the $75 million tax credit incentive is purely speculative given that no tax elasticity estimates are provided.  Furthermore, ERA’s admission that the majority of film productions have not applied for film tax credits suggests an inelastic response, meaning that the benefits are likely overstated.

• The $58 million in tax credits awarded to film producers is estimated to be offset by an $18 million gain in additional state and local tax revenues.  This $40 million differential means that the film tax credit did not “pay for itself” in terms of tax revenue.

• The FTC program is unlikely to have a significant positive effect on employment and incomes in Pennsylvania.  Numerous economic studies find that tax incentives for professional sports teams and facilities create no positive net gains in income and employment.2  The film industry, with its temporary or seasonal employment, is no different.  This means that the estimated net benefits are not likely to materialize once all of the opportunity costs are understood.

• ERA estimates the $58 million of lost revenue from actual tax credits taken by filmmakers is estimated to generate about $525 million in additional industry output (11% revenue loss as a share of the benefit).  But ERA’s admission that the majority of film productions have not applied for film tax credits suggests an inelastic response, meaning that the actual response to the tax credit is likely well below the estimated benefit of $525 million.

• ERA’s cost-benefit analysis ignores the opportunity costs of the FTC program, which means that the actual benefits are lower than they estimate.  Proponents of the FTC ignore the fact that this tax credit comes at the expense of alternative tax cuts or credits that could create income and employment elsewhere outside of the film industry.  Additionally, the state would have to make up for $58 million in lost revenue by raising other taxes or reducing other spending.

• The structure of the film tax credit is such that it is unlikely to attract the studios that have less than 60 percent of their productions in Pennsylvania. This requirement is more likely to favor films that would have been produced in Pennsylvania even without the tax credit.

• The FTC program violates the principles of sound tax policy by giving arbitrary preferential treatment to the film industry at the expense of other industries in Pennsylvania that can generate more benefit for the state from a similar tax credit.  The film industry should not be favored over other industries or over taxpayers with preferential tax treatment. While the film industry generates higher paying jobs than some other industries, it is difficult to justify giving away tax credits to wealthy movie stars and industry professionals who may not reside in Pennsylvania, while withholding the same benefit from working class Pennsylvanians in other industries.

• Due to the ongoing economic downturn, the state is experiencing a significant shortfall in tax revenues. It is inappropriate to offer tax credits to the film industry while raising taxes on working Pennsylvanians and other industries.  Even if the film tax credit was sound economic policy, it might be prudent to ask the film industry to make the same sacrifices as the rest of Pennsylvania during these tough economic times.