Monday, November 28, 2011

Entertainment industry incentives and sacrifice bunts

I've been reading a lot about state incentive programs for the entertainment industry and I've come to feel about them the way I feel about bunting (in the baseball sense).

These incentives take several forms (for instance tax breaks, transferable tax credits, and/or actual production grants). Most states have some form of them. In Texas, the state government will subsidize a certain percentage of a film or television show production's in-state spending or hiring. As this sort of industry incentive goes, we're relatively demure here; some states will actually subsidize spending and hiring in other states or issue refundable tax credits that exceed a production's total tax liability.

It's obviously hard to estimate what would happen in the absence of such incentives, but most states have at least anecdotal evidence to support the position that these incentives result in in-state hiring that may not have happened otherwise. Generally, this is the conclusion of an analysis sponsored by a business association or industry group. In spite of that, it seems fair to assume that, yes, if you bribe an industry well enough they will come to your state.*

(*Proponents of subsidies sound a lot like anti-tax partisans, arguing that a business will always go where it's tax liability is the smallest. This is clearly not the case, though. A whole bunch of states offer industry incentive packages that are much more generous than Texas', yet Texas still attracts a lot of film and television show productions. While productions may well be responsive to incentives, they're clearly not the exclusive factor in deciding where a production will locate.)

While the incentives may result in jobs and spending that otherwise would not have happened, states lose money on them. The entertainment industry tends to produce jobs that are short-term (they just last the length of the production) or that don't necessarily result in a net gain of employed people (like, a person who works as a private hairdresser getting a job as a film set hairdresser, essentially an employed person trading one job for another). In addition, the industry has a relatively low spending mulitplier. The overall economic activity resulting from a film or TV show production is probably less than the overall economic activity you'd get from putting that same amount of money into a different industry subsidy, another part of the state budget, or even a tax cut.

This is where this topic reminds me of baseball and of bunting. In his great book Moneyball (which is explicitly about baseball statistics but implicitly about public policy) Michael Lewis describes the school of thought that bunting is a terrible strategy, one not worth the cost. Basically, each bunt costs a team a limited resource (an out, of which you only get 27 per game) in order to advance a runner into scoring position. Statistically, though, the inning is probably going to ends before that runner scores, or a subsequent batter hits a triple or a home run (which would have scored the runner anyway).

Practically, though, can a baseball team never bunt? Can they really announce that their opponents will never have to play their infield in? That they can always position for a double-play ground ball instead of a single-play bunt?

Likewise, it might make sense for a state to give up a wasteful incentive program and still not be practical. Or, put another way, it's one of those situations where everyone is kind of right. Supporters of the policy can point to jobs the industry says are created by the incentive, opponents can point to the opportunity cost; apples, oranges. The question really isn't of efficiency; it's more a litmus test for government spending priorities.


ryan said...

You're always so even-handed. I never understood why so many states gave so many subsidies. If every state just stopped, would people just stop making movies? I doubt it. It seems like a huge waste of money to me.

As far as Texas goes, though, wasn't there a huge brouhaha a couple years ago about how so many productions were relocating to Michigan because of better incentives (most notably that Drew Barrymore movie that was actually set in Austin but filmed in Michigan)?

bh said...

It seems like a waste of money to me, too, especially while Texas can't even cover it's basic obligations to public education and Medicaid.

Yeah, Whip It did relocate to Michigan, which has an absurdly generous incentive program. Texas still has no shortage of productions wanting money, though. I'm pretty sure Friday Night Lights got production incentives. Kyle Chandler testified in support of them in a committee hearing last session. I don't blame him. Movies seem like a risky investment, so these incentives are good for producers, filmmakers, local actors & crew people. They still seems like one of the least important things to do with taxpayer money, though.

Adrian said...

Balanced post, and you are right on pretty much all points. Your point about there being other factors for deciding on a location is interesting. Just because productions still choose Texas despite better incentives elsewhere, however, does not mean the other factors carry anywhere near as much weight as the incentive Texas has. If Texas eliminated its incentive, the amount of production would plummet. The other factors it has going for it would not be enough to compensate for having no incentive whatsoever.

As for the economic impact of film and television, I would caution the use of blanket statement on the multiplier effect. In California, for example, the industry has a very high multiplier. Also, because of the industry cluster, 92-cents of each dollar spent on local production stays in California. Not bad. California needs an incentive not because they wonderful economic development tools, but rather because it needs a defense from the other states using them.