by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
Time Magazine’s Aug. 6 special issue focuses on the American South. One of the articles is about Georgia’s film production incentives, entitled “How Georgia Became the Hollywood of the South.”
The Twitter account G.H. Davey asked me about it. “Having seen some of you criticism re film incentives in other states, what about GA, where it helped bring in an estimated 7 billion in 2016?”
It’s a fair question, especially because advocates for greater film incentives in North Carolina point to Georgia as the model state for incentives. Remember when North Carolina policymakers juiced up the state’s film production incentives after Georgia got “our” Miley Cyrus movie?
So where does that figure of $7 billion come from? From the Georgia Film, Music and Digital Entertainment Office.
Do they have proof of so much additional economic activity? Well, that’s where it gets interesting.
Unlike many other states with programs to incentive film productions within their borders, Georgia has avoided rigorous review of its program. In May 2017, Pew Charitable Trusts released a report that identified Georgia as a “trailing” state in evaluating tax incentives. The report noted that although Georgia has one of the most generous program in the country, “Georgia lacks a process for evaluating the film tax credit and other incentives.”
Georgia officials could have a very good reason to skip review. States that review their film production incentives programs tend to find their returns on investment are poor. Each dollar of state revenue they give up returns only pennies to state coffers. Some states have ended their programs for that reason, the most recent being West Virginia earlier this year.
Furthermore, a proper study of the effects of such a program is rather difficult. Industry and advocate reports make assumptions that generate headlines but give economists headaches. (This is a problem not at all unique to incentives for film productions.) The papers are often structured on several assumptions, usually unstated:
The raw numbers are these: In 2016, Georgia issued $338 million in tax credits for which film production companies reported $2 billion in spending.
A proper review would have to disaggregate incentives-induced behavior from activity that would already have taken place regardless and try to determine if, all things considered, the state’s economy is marginally better or worse off with the film production incentives in place. Economists for the Fiscal Research Center at Georgia State University explained those difficulties in the conclusion of their February 2016 paper discussing Georgia’s program:
Notwithstanding, the relative costs and benefits of Georgia’s film tax credit are uncertain. Conducting an overall cost-benefit analysis of the incentive program requires the ability to isolate the costs and benefits that derive solely from the film tax credit from other factors, such as overall growth in the economy or the film industry, that may also influence the level of activity occurring in the state. Furthermore, determining the degree to which the incentive is effective in bringing projects to the state that would not have otherwise occurred is challenging.
Many factors, in addition to financial incentives, influence the locational choice of a film project, including climate, suitable landscapes, availability of skilled labor and accessibility to a major airport. Discerning the impact of the financial incentives relative to the presence of the Hartsfield-Jackson Atlanta International Airport or the cooperating climate, for example, is not a trivial task.
Lastly, there’s a larger question of whether the economic benefits associated with increased film industry activity represent a larger return on the state’s investment than other policy choices, such as lowering the income tax rate for all individuals or allocating additional funds to education. These are important questions requiring more data and research on the nature of the film activities in the state.
That’s not what the film office does, however. Instead, it simply takes the amount of spending reporting by film production companies in Georgia and multiplies it by 3.57. That’s how it arrives at the “economic impact” number. Really.
Where does that 3.57 multiplier come from? The answer is: We don’t know, but we’ve been doing it this way since 1973.
Kid you not. Lee Thomas, head of the film office, told Politifact Georgia, “the state doesn’t know what sorts of spending that multiplier originally counted, or why the 3.57 estimate was used. But keeping the same multiplier allows to track progress over time, comparing apples to apples, she said.”
The Atlanta Business Chronicle reported that “Thomas said it’s the same formula the film office has used since it opened in 1973.”
It’s hard to believe, but Georgia uses an even shoddier system of projecting economic impact than off-the-shelf, proprietary input-output (I-O) modeling software like IMPLAN. With no accounting for opportunity costs built into the I-O model, the multiplier can only be greater than one. Any endeavor examined in such a way will report out to be a surefire moneymaker. How much depends on the size of the multiplier chosen.
Politifact Georgia reports that the standard IMPLAN multiplier for the film industry is 1.83. 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.” Since 1973, however, Georgia has assumed twice the “impact” without even being able to say why.
(For a detailed discussion of multipliers and the problems with using input-output models like IMPLAN to project economic impact, see Dr. Roy Cordato’s report, “Economic Impact Studies: The Missing Ingredient Is Economics.”)
The policy question is: Was there a better use of $338 million in Georgia than chasing some unknown portion of $2 billion in spending from film productions? That’s a question Georgia officials don’t dare ask, and North Carolina film incentives advocates hope they won’t. They’d rather take that $2 billion, assume it only happened because of the film incentives, multiply it by 3.57 the way they’ve always done, and put out a glowing press release.
But even summer blockbusters don’t rely on that many special effects.