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Expanded film credit would drain more N.C. taxpayer dollars

JLF analysts expose flaws in study used to justify change

Contact: Joseph Coletti
919-828-3876
jcoletti@johnlocke.org

July 22, 2009

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RALEIGH -- North Carolina's money-losing tax credit for film production would hit taxpayers' wallets even harder if it's expanded this year. That's the conclusion of a new John Locke Foundation Spotlight report.

Click here to view and here to listen to Joseph Coletti discussing this Spotlight report.

"Some legislators think North Carolina's loss of a Miley Cyrus movie to Georgia is a good excuse to expand this state's tax credit for movie production, but they're wrong," said report co-author Joseph Coletti, JLF Fiscal Policy Analyst. "State government already loses $11.2 million on its existing film tax credit. The proposed expansion would increase the cost to $74.5 million."

Studies that paint film tax credits in a favorable light still show North Carolina's credit draining taxpayer dollars, Coletti said. "With unrealistic assumptions and questionable methodology that overestimate the benefits of film tax credits, a study from auditors Ernst & Young showed that state government already loses $0.02 on each dollar in film subsidies," he said. "The state would lose $0.33 on each dollar with a larger credit."

"As legislators are looking at raising taxes, they are considering an unnecessary film credit expansion that would increase the drain on the state budget from $11 million to $20 million in the first budget year alone," Coletti added. "That's the estimate from the General Assembly's own fiscal research staff, which pegs the loss at $74.5 million per year by 2013."

Beyond the numbers, the film tax credit raises a question of fairness, Coletti said. "These tax credits take money from taxpayers across the state for the benefit of a select industry with a very localized impact," he said. "There's no noticeable impact on the state economy or state revenue."

Since 2006, North Carolina has offered a 15 percent business income tax credit to companies that spend at least $250,000 on a film production for in-state goods, services, or compensation. The maximum credit is $7.5 million. That tax credit replaced a film grant program started in 2000.

Lawmakers are considering proposals now to increase the credit to 25 percent of qualifying expenses, Coletti said. "Supporters claim the movie credit creates new jobs and economic activity, but a close look at the numbers doesn't back up those claims," he said. "There is no evidence that North Carolina's film industry experienced a significant increase as a result of the tax credit."

Coletti and JLF policy research intern Jacob Burgdorf examined the evidence. "We found that in 2005, before the existing tax credit took effect, North Carolina was home to 64 movie and television show productions," Coletti said. "That was the fifth-highest total in the nation, but those projects generated just $300 million in economic activity, less than one-tenth of 1 percent of state Gross Domestic Product."

The 2006 income tax credit has not increased those numbers substantially, Coletti said. "When looking at motion pictures and sound recording combined, the industry's contribution to state GDP is one of the lowest among neighboring states, and it has remained relatively flat between 1997 and 2007 despite expanding incentives."

Those who want to expand the tax credit rely too heavily on the Ernst & Young study, Coletti said. "Ernst & Young studies of state film tax credits have consistently estimated much more positive fiscal effects than other private and government studies," he said. "In the case of the North Carolina study, Ernst & Young assumed any movies shot in this state since 2005 resulted directly from the state film credit, though North Carolina had a film industry long before that credit started."

Other problems plague the Ernst & Young study, Coletti said. "The authors did not make clear how many new jobs associated with the film tax credit would be permanent and how many would be short-term," he said. "In addition, the authors offer no justification for assuming that half of the wages would be spent in North Carolina, especially after recognizing that almost 40 percent of those wages would go to out-of-state residents. Plus the study offers a weak, unsubstantiated case that film production generates additional tourism dollars."

Even with the inflated Ernst & Young numbers, recent studies of film tax credits across the United States show tax collections of just $0.37 for every dollar of tax credits, Coletti said. "In other words, the average state loses 63 cents -- 63 percent -- of what it provides in tax credits," he said. "Factor out the questionable Ernst & Young numbers, and states lose about 83 percent of the tax credits they offer."

North Carolina risks losing a "race to the bottom" as other states expand film incentives, Coletti said. "At least 40 states offer some form of film incentive now, with 28 of those states offering larger credits than North Carolina," he said. "There's no evidence that North Carolina would gain by chasing those other states."

The bottom line is clear, Coletti said. "Estimates of the fiscal and economic impacts of film production overstate the positives and likely impact, but they still show that an expanded program in North Carolina would lose more money for taxpayers," he said. "Expanding the tax credit would cost more with little, if any, net economic benefit."

Joseph Coletti and Jacob Burgdorf's Spotlight report, "Not the Best of Both Worlds: Tax credit will not save movies but will lose money," is available at the JLF Web site. For more information, please contact Coletti at (919) 828-3876 or jcoletti@johnlocke.org. To arrange an interview, contact Mitch Kokai at (919) 306-8736 or mkokai@johnlocke.org.

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